We need to introduce more ‘friction’ in cryptocurrency transactions The exchange of cryptocurrencies via blockchains has opened up unprecedented opportunities for investing and digital transformation, promising a new era of efficiency and expanded access for the global financial system.But every new innovation has a “dark side” of potential misuse and abuse, as we learned from news reports that the recent [ attack by Hamas against Israel](https://www.americanbanker.com/payments/news/everybody-is-on-edge-how-israels-fintech-workers-are-enduring-war) [ was likely funded via digital wallets](https://www.americanbanker.com/news/treasury-enlists-banks-to-root-out-hamas-financing) [This risk is as unacceptable as it is unnecessary](https://www.americanbanker.com/news/scott-to-introduce-anti-iran-funding-bill-amid-violence-in-middle-east) [Wall Street Journal](https://www.wsj.com/articles/cryptocurrency-feeds-hamass-terrorism-e0db54f5) I couldn’t agree more.The same aspect that makes digital (blockchain) assets attractive to all users — decentralization — unfortunately also makes them attractive to those inclined to cover their tracks.When money flows in large volumes between countries, such as aid money following a large-scale natural disaster, crypto is a valuable medium, bypassing the “friction” of scrutiny at financial interface points for the sake of expediency.But in the case of malicious actors, that’s a liability.Regulations require banks to create friction by scrutinizing both sides of international money transfers.This is good friction; friction that promotes safety and doesn’t necessarily come with any negative consequences.On the blockchain, conversely, there is currently no one guarding the gate.
For now, the essence of how the rails of the crypto industry work makes sanction checks on the transfer of wealth nearly impossible.Here is where the crypto enthusiasts say, “but anonymity of transaction parties is central to the blockchain.” I agree, and we do not need to change this dynamic.An alternative would be to assess sanctions controls at the point of entry into the crypto ecosystem, not the point of transaction.As we know, once you’re on-chain, the risk has evaporated, making it an excellent tool to avoid sanctions.
And don’t expect the industry to come to its senses on its own.Key players have hired a [lobbyist ](https://www.cnbc.com/2022/04/29/cryptocurrency-group-lobbies-congress-against-bills-that-target-russian-oligarchs-.html) [estimated $20 billion](https://www.coindesk.com/business/2023/02/27/crypto-crime-hit-all-time-high-of-206b-in-2022-chainalysis/) Brighton Bank entered a consent agreement with the regulator regarding violations of anti-money-laundering laws.Informed observers have warned for years that crypto could enable bad actors, which makes the recent attack all the more concerning.But this is by no means an inevitable outcome.
We in the compliance technology industry know how easily artificial intelligence and machine learning can aid human regulators by flagging suspect transactions to detect money laundering and sanctions evasion, bringing that friction to parity with the traditional financial system.The solution lies in firms’ willingness to invest in software tools to change that dynamic, and that can only come about when regulators make crypto providers take the risks seriously, by regulating every crypto currency the way they regulate dollars, and taking the same tough enforcement stance against crypto firms as they do other financial intermediaries.A bipartisan Senate bill introduced by Warren and Marshall, the [Digital Asset Anti-Money Laundering Act,](https://www.warren.senate.gov/imo/media/doc/Crypto%20AML%20One-Pager_7.26.23.pdf) Rather than resist change, the crypto providers must get with the program and build world-class compliance systems, powered by the latest iterations of AI, scrutinizing every asset that is tokenized, from dollars to yachts, jewelry, antiquities.Given the powerful capabilities of AI — and we’re only at the beginning — these measures need not be an overly cumbersome burden.Even firms with the noblest goals must have robust controls to ensure that they are not complicit in the types of horrendous acts we saw on October 7, particularly affecting the most innocent of all victims, children.
Doing it right would send shock waves and cut into crypto profits, but there could be an upside in competitive advantage for those who do the right thing.It won’t happen on its own.It’s up to our legislators and regulators to make the penalties for getting it wrong higher than the cost of the systems needed to get it right..
