Recent remarks from Christine Lagarde and Janet Yellen on crime and bitcoin has set crypto-twitter aflutter. Several crypto defenders rose up to castigate both of them as old world Central Bankers with no clue about the rise of the new economic order. Ageism and sexism were on full display, these old dames did not understand this emergent and innovative technology and economy was the dominant tone. The defenders of the current state of crypto-regulation use the latest crypto-crime summary. This article goes into both sides of the argument as well as providing another perspective.
Most people defending crypto-currencies refer to the summary of the Chainalysis 2021 crypto-crime report. The full crime report from Chainalysis will be released in February, it is fascinating reading, every year. The report details the different ways people are parted from their money. The report also goes into how relative anonymity is used for the commission of crimes. In addition, the report contains estimates of criminal activity as a percentage of total transactions.
Christine Lagarde & Janet Yellen
First, let us look at Christine Lagarde’s statement about crypto-currency; specifically bitcoin. She said that bitcoin is not a currency, but an asset; a speculative asset. She also said that there has been money-laundering and other “funny business” conducted in bitcoin. The answer, according to her is to create a global response; since bitcoin is a global phenomenon. “Investigations are ongoing”, she said and cited the FATF (Financial Action Task force) as the agency best suited to handle this regulation.
Janet Yellen, newly invested as the US treasury secretary came out with her views as answers during her Senate confirmation hearings. Those remarks have hurt the price of bitcoin in the short term. Ms. Yellen’s unfavorable view of bitcoin is well known from her tenure as the Federal Reserve chair. What she said during her hearing in a question referring to new and emerging technologies and terrorist financing is that “our methods have to evolve with the technology, cryptocurrencies are of particular concern”. She went on to say “many are used at least in a transactional sense for illicit financing” and “let us examine ways in which we can curtail their use “.
Of course she was on zoom from what appeared to be her home, which meant she does not have to worry about a guy holding the BuyBitcoin sign distracting from her message.
Yellen’s views appeared to have softened in her written responses to the Senate. She leads off by citing that cryptocurrencies and other digital assets have “ the potential … to improve the efficiency of the financial system.” She balances that by citing their use “to finance terrorism, facilitate money laundering, and support malign activities” . Yellen also wants to look at how to “encourage their use for legitimate activities while curtailing their use for malign and illegal activities.” Laudable aims. However, it is the digital assets part that catches one’s attention, since the question also contains a reference to the Chinese Central Bank Digital Currency (CBDC). and digital assets in general, that is security tokens.
Contra Lagarde & Yellen
The critics come up with many arguments. Most of them use the data from the crypto-crime report summary which noted that the total amount of criminal activity fell from 2.1 % of all transactions in 2019 to 0.34% of transactions in 2020. From $20B in 2019 to $10B in 2020 is total amount attributable to criminal activity.
The critics noted that 3% to 5% of existing fiat payment system transactions are estimated to be criminal in nature. Clean up that mess before pointing fingers, they say. The other criticism relates to the expansion of monetary supply, as central bankers expand the availability of money; the flight to bitcoin can be taken as a way to create an inflation hedge. They say that a poor job by central bankers is responsible for the rise of bitcoin. Crypto-currency boosters should be thanking the “incompetent” central bankers if the availability of cheap money has fueled speculative investments, including the runup of crypto-currency. People have piled on to bitcoin not as an inflation hedge, but in part to speculate using easy money. This phenomenon has happened in the equity market as well.
The crypto-crime report summary, on more parsing, yields more interesting facts. Of particular concern is the fact that ransomware payments increased 300 plus percent. Even though the total amount is in the range of $350 MM, Ransomware is a particularly destructive crime as the amounts transferred do not reflect the true cost; especially if basic infrastructure like hospitals, electric utilities and small businesses are hit with the attack. Costs cannot be reasonably attributed to these attacks, as they strike at the basic functioning of society and may have caused deaths due to hospital facilities being crippled for weeks due to the attack. Ransomware criminals prefer crypto-currency.
The crypto-crime report also makes it clear that the numbers may not be accurate. The analysis of criminal activity on a public network is not an exact science. For example, last years numbers which now stand at 2.1% were initially estimated to be 1.1%. Even at 2.1% there is no guarantee that 2019 criminal activity is just what Chainalysis estimated. Moreover, ransomware attacks are underreported and numbers were revised upwards for last year. It is possible that this years ransomware numbers are going to be revised upwards as well, so .34% for 2020 is an estimate.
Of course the critics of both Yellen and Lagarde do not go into these details as it does not support their case. Many of these critics have deep conflicts of interest and argue in bad faith. “A peer-to-peer payment system”, the current avatar of bitcoin is not! Lagarde’s primary statement that bitcoin is not a currency but a speculative asset seems valid. However, Yellen’s remarks that “most of them are used for illicit activity”, are made without solid backing data.
Regulation vs. Innovation
The struggle between regulation and innovation is perennial . How much regulation is necessary? What kind of regulation can be applied? Should it be based on surveillance of the system? How does it stifle innovation? Regulators use history to construct models of harm and its mitigation, ultimately based on legislation that is a step further behind. Innovators, regulators and legislators work on different clocks.
Some effects of technology are emergent and revealed as events unfold, often rapidly. Regulators are not setup to check excesses that cannot be foretold. The model is broken, a reimagining of the mechanics of regulation are needed. Ambient technology is a way to align the timescale of change and that of regulation. Ambient is a word that means surrounding or encircling as in an atmosphere or a fluid, transaction activity that exudes information constantly to the regulator in some form. Regulation conducted by a hybrid of human and automation, constantly. However, there have to be guards against predicting crime, lest it leads to the world of “thought crime”.
Regulation is inevitable
As more and more institutional players are drawn into the public crypto-currency space, it is natural that more regulations are going to be applied. The way such regulations come into crypto-currencies is through the edges, the on and off ramps. Exchanges that have KYC/AML regimes are the ones that survive; a host of smaller unregulated exchanges have been hacked or their weaknesses made apparent through unforeseen events such as the case of QuadrigaX. Other ramps are Stablecoins which have regulated wallets.