Does Blockchain Combat Financial Crime, or Fuel it?

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It’s been said that money is like water: it always takes the fastest route downhill. If blockchain makes the transfer of funds easier and circumvents the restrictions on sovereign currencies in the process, is it just as likely that it will lead to greater financial malfeasance, not less?

Blockchain is a transparent, trustworthy distributed ledger technology (DLT) that streamlines financial and other types of transactions and provides robust protection against tampering and theft.

As such, its backers say it is an effective tool against fraud, money laundering, and other financial crimes.

But is this necessarily true? Or does it just change the playing field a little?

It’s been said that money is like water: it always takes the fastest route downhill. If blockchain makes the transfer of funds easier and circumvents the restrictions on sovereign currencies in the process, is it just as likely that it will lead to greater financial malfeasance, not less?

Blockchain Busts

If recent history is any guide, blockchain, and cryptocurrencies are no more impervious to financial chicanery than normal currency. At the same time, however, they appear to be no better at hiding these activities from authorities either.

As Institutional Investor revealed recently, multiple crypto exchanges have collapsed recently, in part because law enforcement traced the money to popular tax havens in the U.S., the Bahamas, South Korea, and elsewhere.


If anything, it seems that the crypto industry didn’t create a whole new way to skirt the law, it merely upped the scale of financial activity, both licit and illicit, to a new level.

Investigators unraveling some of the latest collapses are sifting through terabytes of data representing billions of transactions across the globe. And the investigation teams consist of not just accountants and financial experts but data scientists, cybersecurity professionals, and forensic analysts.

One of the primary appeals of crypto, after all, is the fact that it can be moved from jurisdiction to jurisdiction outside the normal banking system, that is, without the tough regulatory oversight of sovereign currencies.

This makes it easier to support legitimate activities, like disaster recovery and charitable giving, but it also provides more leeway for darker purposes, like tax avoidance and sanctions evasion.

When Crypto Goes Rogue

The Center for Strategic and International Studies notes that states like Russia, Iran, and North Korea all have active crypto-mining operations that serve to undermine sanctions in two ways: buying imports of prohibited goods and making up lost revenues from exports that are no longer being bought with other currencies, namely the U.S. dollar.

And despite blockchain’s resilience against tampering, crypto wallets can still be hacked and their assets stolen.

At the moment, these activities are still too small to make a significant dent in sanctions regimes or provide a meaningful boost to national incomes.

But given time, this could prove to be a troublesome thorn in the side of the world financial order and the ability to combat the use of force in a non-combative way.

Regulatory Challenge

The temptation, of course, is to clamp down on crypto and DLT technologies to ensure that everything remains on the up and up.

Seamus Rocca, CEO of global private bank custodian Xapo, argues that common-sense regulations are one thing, but it would be a mistake for the nations of the world to treat crypto as an enemy of their own currencies.

Indeed, crypto can act as an effective hedge against volatility in currency markets, and this can be a boon to private investors as well as countries whose currencies are under duress.

Rocca goes on to say that the recent spate of exchange failures has been a wake-up call for the industry and is effectively weeding out the “reckless cowboys” who took too many risks in the early, heady days of the market.

Those who remain well-provisioned, well-structured, and are exercising adequate caution and foresight will become stronger during the current “Crypto Winter”, provided governments around the world do not panic and push through unwise laws and regulations.

Shining Light

In fact, says Abhishek Thommandru and Dr. Benarji Chakka of VIT-AP University, India, implementing DLT further into traditional currency markets can do a lot to expose some of its darker corners.

For one thing, blockchain can help with what is known as the “Know Your Customer” (KYC) problem, in which payments and other transactions are made between parties without proper identification and/or verification.

This can help crack down on money-laundering and illegal transfers. At the same time, blockchain can be used to enforce compliance rules, streamline the currency exchange process and bring much-needed transparency to global financial markets in general.

A global solution requires global acceptance of the rules, however. Neither private industry or nations are capable of implementing a unified framework for DLT operations, which means world leaders must establish one by consensus.

Numerous conventions already exist for financial crimes, environmental cooperation, anti-terrorism, and other global issues, so there is no reason the same cannot be done for cryptocurrency.

The Bottom Line

Technology itself is neither good nor evil. That difference only emerges when people use it for their own ends. Blockchain is no different, despite its unique trust and transparency capabilities.

While laws and regulations can do much to ensure it strengthens and secures the global financial structure, they must be continuously updated and improved as new developments and new use cases emerge from the natural evolution of business models.

And this is where both the opportunities and the dangers lie – the tricky dance between establishing regulations that enhance markets and wealth-creation/distribution and those that stifle innovation and creativity.


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Arthur Cole
Technology Writer
Arthur Cole
Technology Writer

Arthur Cole is a freelance technology journalist who has been covering IT and enterprise developments for more than 20 years. He contributes to a wide variety of leading technology web sites, including IT Business Edge, Enterprise Networking Planet, Point B and Beyond and multiple vendor services.