Speaking at a Senate Finance Committee hearing today, Janet Yellen, President-elect Joe Biden’s pick for Secretary of the Treasury, stated cryptocurrencies are “a particular concern” when it comes to criminal activity and terrorist financing.
Yellen continued, “I think many (cryptocurrencies) are used, at least in a transaction sense, mainly for illicit financing. And I think we really need to examine ways in which we can curtail their use, and make sure that anti-money laundering (sic) doesn’t occur through those channels.”
This isn’t the first time the cryptocurrency industry has heard this misconception and done a collective eye roll. Yellen may believe cryptocurrencies are used “mainly for illicit financing” but the data shows otherwise.
A False Narrative
The majority of cryptocurrency is not used for criminal activity. According to an excerpt from Chainalysis’s 2021 Report, in 2019, criminal activity represented 2.1% of all cryptocurrency transaction volume (roughly $21.4 billion worth of transfers). In 2020, the criminal share of all cryptocurrency activity fell to just 0.34% ($10.0 billion in transaction volume).
According to the UN, it is estimated that between 2% and 5% of global GDP ($1.6 to $4 trillion) annually is connected with money laundering and illicit activity. This means that criminal activity using cryptocurrency transactions is much smaller than fiat currency and its use is going down year by year.
Jake Chervinsky, General Counsel, Compound Labs told me “It’s disappointing to hear Dr. Yellen repeat the mistaken view that crypto is mainly used for illicit activities. Her statement is demonstrably false . . .That said, it’s important to remember that crypto is a relatively small issue compared to everything else the Treasury Department is responsible for, so she likely hasn’t spent time deeply considering it yet.”
Still, some regulators may point to Zcash and other “anonymous” privacy coins as the source of money laundering concern. Privacy coins often use the zero-knowledge protocol to shield customer information from another party in a transaction. For example, Zcash operates in an ‘opt-in’ privacy feature where users can decide if funds information is transparent or shielded.
Last year Rand Corporation, a not-for-profit research organization that helps to improve policy and decision making through research and analysis, conducted a study on use cases for cryptocurrency and privacy coins. The report noted that despite the “perceived attractiveness of cryptocurrencies for money laundering purposes . . . an estimated 99 percent of cryptocurrency transactions are performed through centralized exchanges, which can be subject to AML/CFT regulation similar to traditional banks or exchanges.”
The report concluded, “Zcash is a cryptocurrency that uses zero-knowledge proofs to provide enhanced privacy for its users, however, there is little evidence that this is exploited by malicious actors.” The report pointed back to Bitcoin as more of a concern than privacy coins, only noting that criminals choose to “go where the money is.”
Physical Cash & Traditional Methods of Payment
But if we really want to focus on where the money is, we should look at government-backed, physical fiat. According to a 2020 report by SWIFT (Society for Worldwide Interbank Financial Telecommunication), “cases of laundering through cryptocurrencies remain relatively small compared to the volumes of cash laundered through traditional methods,” the report states.
Just last week FinCEN announced a $390,000,000 Enforcement Action against Capital One COF +0.3% for engaging in both willful and negligent violations of the Bank Secrecy Act (BSA) and its implementing regulations.
Capital One admitted to willfully failing to implement and maintain an effective Anti-Money Laundering (AML) program to guard against money laundering. Capital One also admitted that it willfully failed to file thousands of suspicious activity reports (SARs), and negligently failed to file thousands of Currency Transaction Reports (CTRs), with respect to a particular business unit known as the Check Cashing Group. The violations occurred from at least 2008 through 2014 and caused millions of dollars in suspicious transactions to go unreported in a timely and accurate manner, including proceeds connected to organized crime, tax evasion, fraud, and other financial crimes laundered through the bank into the U.S. financial system.
“The failures outlined in this enforcement action are egregious,” said FinCEN Director Kenneth Blanco in a statement. “Capital One willfully disregarded its obligations under the law in a high-risk business unit.”
The Treasury is tasked with promulgating rules that are effective in combating money laundering and terrorist finance. To say cryptocurrency is “a particular concern” is not looking at the bigger picture.