While the narrative that Bitcoin or all cryptocurrencies are primarily used by organized criminals, money launderers or terrorists has persisted, there are also growing numbers of non-criminals that now use the same financial technology for cross border remittances and online purchases.
The apparently coordinated maligning of cryptocurrencies helps to sustain a negative image, one which inevitably slows a mass adoption of the technology.
When fear is overwhelming, rationality takes a back seat and in that moment, people will believe or endorse any plan to eradicate the underlying cause of the fear.
The power of propaganda
To illustrate, in the lead up to the US and UK’s invasion of Iraq, a typically jingoistic mainstream media magnified the threat posed to the West by Iraq leader Saddam Hussein and his (non-existent) stockpiles of weapons of mass destruction.
About two years earlier, terrorists had struck the World Trade Centre and the Pentagon. The United States just had strike back at one of its enemies and Iraq was logical choice.
Anyone who questioned the wisdom of going to war got attacked or harassed. For example, celebrity singers like Madonna and a then popular all female country band, the Dixie Chicks, were severely criticized for speaking out against the war while those endorsing the march to the war like Britney Spears, were cheered.
However, just a few years into the war, it became apparent that the invasion was based on false intelligence while the fighting itself did not go according to plan. Soon the nationalistic fervor that enabled the US government to justify going to war soon gave way to anger as American causalities mounted while the economy tanked.
It was this anger that proved decisive in propelling Barack Obama to the US presidency. Obama had opposed the war even when it seemed risky for a politician to do so.
He chose not to be swayed by the pro-war propaganda or perceptions that war was the right thing to do. Obama won the 2008 election with a near landslide, partly because he stood up when no one else could. Not even his race was a factor in the minds of most voters.
Wrong perceptions eventually die
Moral of this short story, negative or wrong perceptions can be especially hard to change or manage but with the passage of time this can change. That was the case when the US went to war with Iraq and similarly, it could well be the case with the current negative perception of cryptocurrencies.
The perceptions around cryptocurrencies are largely negative and based on sometimes deliberate misinformation campaigns. Often there is hardly evidence to support such perceptions. Advocates for a greater adoption of cryptocurrencies must take heart and learn from the example illustrated above.
Until recently, the crypto space had to contend with individuals and organizations that were determined to tie tokens like Bitcoin or Ethereum to terror funding or for money laundering.
It matters little that it is now more than ten years since Bitcoin, the first cryptocurrency, was created. Opponents still want everyone to believe their story.
Bitcoin is the first privately issued currency to actually compete against fiat currencies and that has alarmed financial authorities around the world. Even more alarming is the fact that more similar products are being created and many are in the works.
It is therefore not surprising that central banks and those from the financial services industry, who feel threatened by Bitcoin or cryptocurrencies, have led the onslaught against this relatively young but innovative financial technology. Ignorant politicians have also been roped into this fight.
American politicians already shocked by the apparent success of Bitcoin, are unprepared for another privately issued digital currency that could potentially weaken the US dollar’s standing on the global stage.
Facebook’s Libra was/is expected to hasten adoption of other privately issued currencies that is if it is ever allowed to launch. Politicians raised issues of money laundering and terrorism financing as reasons for opposing Libra and indeed all privately created cryptocurrencies.
The facts
But just how true is this assertion that criminals and terrorists are using cryptocurrencies to finance their activities? What proportion of cryptocurrency transactions actually goes into facilitating illegal activities? How do the two, crypto and fiat compare on this issue?
Chainalysis, a tech firm which claims to have the ability to trace Bitcoin and indeed cryptocurrency transactions, recently released a report that provides important new insights about the actual role of this fintech in criminal activities.
In a report titled, The 2020 Crypto Crime, the tech firm makes a very important clarification, which is often missed by opponents of cryptocurrencies. The report states:
“If the last few years have proven anything, it’s that cryptocurrency isn’t just for criminals. Polling shows that adoption is increasing, as 18% of all Americans and 35% of American millennials have purchased cryptocurrency in the last year. Mainstream financial institutions like JP Morgan Chase are getting involved. Popular retailers like Amazon and Starbucks now allow customers to pay in Bitcoin.”
As the graph below clearly shows, the share of cryptocurrency volume that is illicit remains insignificant, about 1.1% of all cryptocurrency activity. Such findings could well support the conclusion reached by Chainalysis that adoption by the generality of people is increasing.
Chainalysis’ conclusion is also supported by earlier findings from a study conducted by the European Union Agency for Law Enforcement Cooperation, better known under the name Europol. This study estimates that a total of about ‘£3-4 billion (USD$ 4.5-6 billion) is laundered using cryptocurrencies each year in Europe. This remains a relatively small proportion of total funds estimated to be laundered in Europe, however, which stands at £100 billion.’
Given such facts, it is a mystery how then many come to the conclusion that cryptocurrencies are now the primary medium of exchange for bad actors.
Association with get rich quickly scams
It would seem cryptocurrencies are unfairly targeted but the question is why? The Chainalysis report does provide a clue. According to the same report, it was observed that in 2019, scams made up the overwhelming majority of cryptocurrency-related crime, accounting for a whopping $8.6 billion in transactions.
In fact, were it not for just three separate large-scale Ponzi schemes, this type of crime would account for just 0.46% of all cryptocurrency activity, a very insignificant amount that should not warrant all the attention.
However, Pyramid and Ponzi schemes, which predate cryptocurrencies, often cause losses and suffering of large groups of mostly poor people. When that happens, the poor whose votes can prove decisive during national elections, will petition their elected representatives to take action against the bad actors.
Elected politicians, who are less knowledgeable of this financial technology but are too eager to be seen doing something, will pursue a politically convenient course of action. This might include an outright ban on cryptocurrency trading or refusing to endorse cryptocurrencies.
Of course, banning cryptocurrencies is not going to solve the scourge of Ponzi schemes because bad actors will always adapt and find new ways to fleece unsuspecting investors. The key to fighting scams is basic education about investing not only in cryptocurrencies but everything about them.
People need to learn that any investment proposition that promises very high returns means the chances of losing everything are very high as well. Unfortunately, not enough is being done by key players in the crypto/blockchain to educate and raise awareness about this fact. Legitimate technology companies are too concerned with the bottom line but still expect someone else to pick up the tab.
What to do
Unfortunately, this lack of education opens the door for bad actors to exploit. That was the case in with one Ponzi scheme out of China, the PlusToken, an elaborate scam that successfully fleeced hundreds of millions of dollars from its victims.
According to Chainalysis, PlusToken spent lots of energy promoting not just its product, but also beginner-level materials teaching users how to purchase their first Bitcoin. That strategy speaks to the low levels of cryptocurrency sophistication amongst victims that the scammers were able to exploit.
The PlusToken scammers convinced millions of people to invest — mostly in China, Korea, and Japan — but even some as far away as Germany and Canada. Such a reach meant that when it collapsesd, the contagion will be far and wide. It could be for this reason that some in Asia now associate Bitcoin with Ponzi scheme.
With such a tag, it is easy to blame Bitcoin for a host of other things and the millions that have lost money to this sophisticated crypto fraud scheme will simply nod in agreement.
Perhaps there is something that the industry can still do to help change this negative reputation. Chainalysis suggests the following:
The money laundering infrastructure driven by OTC brokers enables nearly every other type of crime we cover in this report. After all, if there were no way for bad actors to cash out cryptocurrency they’ve received through illegal means, there’d be far less incentive for them to commit crimes in the first place. That would mean not only fewer victims affected by crimes, but would also help improve cryptocurrency’s reputation as the industry seeks to work with regulators and traditional financial institutions and drive increased adoption.
Furthermore, exchanges may want to consider preventing payment to known scam-affiliated addresses, or pushing warnings to users if they are going to send funds to an address owned by an entity that resembles a scam such as a Ponzi scheme .This could feasibly be implemented with a blockchain analysis tool like Chainalysis KYT.
On the government side, regulators need to be aware of how these scams function and how players like over the counter (OTC) brokers fit in so that they can craft more effective consumer protection laws. Law enforcement needs to be a part of that conversation as well, and should also encourage victims of these scams — especially the Ponzi schemes and sextortion scams that affect so many — to come forward with the Bitcoin addresses of those who have victimized them.
Agents may be able to track down scammers who make transfers to compliant exchanges, and if victims come forward fast enough, they may even be able to recover funds.
If all parties act in unison, then this negative stereotyping of cryptocurrencies will eventually subside.
