While governments around the world are increasingly putting some safeguards in place around crypto, the industry still faces fewer regulations than most. In some cases, this has created an opportunity for dubious individuals to leverage crypto for illegal purposes, such as to perpetrate scams or launder ill-gotten funds. In this segment of Backstage Pass, recorded on Jan. 7, Fool contributors Toby Bordelon, Will Healy, and Rachel Warren discuss.
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Toby Bordelon: According to a report from Wall Street Journal cryptocurrency-based crime hit an all-time high in 2021, which actually isn't that surprising because crypto transactions, I think at an all-time high in 2021, illicit transactions totaled about $14 billion, was up 78% from the prior year.
But that sounds like a big number, right? But the other thing to consider was that illicit transactions made up about 0.15% of total crypto transaction volume in 2021, so a pretty small amount of the total.
My question for you guys is, what do you think of this? Do you think crime is a problem for crypto or is it not? Is it just too small on a relative basis to care about? What do you think, Will? What are your thoughts here?
Will Healy: I think 0.15% is a small problem. It's always going to be a problem. It's always going to grow if the volume of crypto grows. Not to trash my own profession.
You'll see a lot of these sensational headlines, "Oh, my God, $14 billion in crime."
But it's a $3.3 trillion market, so while $14 billion is a lot of money, $3.3 trillion is a lot more.
You just have to keep these relative percentages in mind and not necessarily panic just because you see a headline like that.
Toby Bordelon: What do you think, Rachel?
Rachel Warren: Yeah, I think it's, I'm in the middle here. I think that we know that the nature of cryptocurrency makes it a prime choice for people that maybe have less than savory motives.
We know that criminal networks have sometimes used cryptocurrency as a means of laundering funds and how it's been termed the 'Wild Wild West' has made it a really effective medium to do so.
But does that mean that that represents the broader spectrum of cryptocurrency? I don't think that the numbers support that at this point in time. I think it's something to be aware of.
I think we're seeing what's happening both here in the U.S. with recently updated tax regulations about crypto as well as other regulations in other parts of the world is that governments are trying very hard to come down on these more vulnerable points within the crypto market, which not only lends a lot of legitimacy for investors, but I think also makes it safer for investors as well.
I saw an interesting article about this particular topic on CNBC. It was saying that losses from crypto-related crime rose 79% year-over-year and that scamming was the greatest form of cryptocurrency-based crime, followed by theft.
There was a report by Chainalysis, I think is the name of the firm, in their annual crypto crime report that said that "DeFi is one of the most exciting areas of the wider cryptocurrency ecosystem, presenting huge opportunities to entrepreneurs and cryptocurrency users alike, but DeFi is unlikely to realize its full potential if the same de-centralization that makes it so dynamic also allows for widespread scamming and theft".
But like Will was mentioning, it's still a very small aspect of the overall cryptocurrency industry. I don't think it should surprise anyone that you have people that are taking advantage of some of these loopholes.
But I think if anything, it stresses why it is really important to have more regulation in place over crypto, like we've been seeing.
That's not a bad thing for investors. I think that can actually help them. I think it also stresses why if you're going to be investing in this space, investing in some of the DeFi trends. We're seeing, it's really important to understand what you're investing in.
We're seeing that scams are one of the biggest areas where people realize losses, and in this area understandably so can be a little difficult to understand. It's very different from investing in traditional stocks.
I think if you're going to invest in any form of crypto or any other type of digital asset, understand to the extent that you can what you're buying before you dive in. I think that's the big takeaway for me here.
Toby Bordelon: Yeah, great thoughts, Rachel and Will, thanks for that. For me, I think I'm with both of you. Yeah Will, I don't think it's that big a deal given the low volume. It just doesn't seem to be that bigger deal. Right? One early knock right on crypto is that this is a criminal thing.
It's used by the criminal underworld to do nefarious things. But if we're talking about illicit transactions, there're only 0.15%. That message doesn't seem to hold anymore if anything every day. I think when you look at that, it makes it look like a more legitimate thing people are doing.
If 0.15% are ilicit, that means that 99.85% are legit and that seems to me a legitimate mechanism of transferring money and moving money around if that much of it is just totally on board and above the table.
I don't know that I would spend too much time worrying about this, how we are getting the crypto or how we're regulating crypto.
As a regulator, does this tell me I need to get a lot of resources into dealing with this? I don't know that I do. I'm actually getting much return for your buck with that low level of transactions that are not where you them want to be.