Cash, not cryptocurrency, remains the tool of choice for criminals

A new report from HSI debunks myths about the use of cryptocurrencies for criminal purposes, instead highlighting their role in preventing illegal activity.

Cash, not cryptocurrency, remains the tool of choice for criminals

In the illicit finance debate, cryptocurrencies often bear the brunt of criticism, despite cash being the tool of choice for criminals.


A new report released by Homeland Security Investigations (HSI) Special Agent in Charge Robert Whitaker and Crypto ISAC finds that regulated cryptocurrency platforms provide valuable support to law enforcement by using the transparency of blockchain to combat crime and enhance national security, despite persistent misconceptions about their role in illicit finance.


Cash, not cryptocurrency, remains the tool of choice for criminals

The share of illicit activity in total cryptocurrency transactions is surprisingly small. According to the report, Merkle Science’s analysis shows that only 0.61% of USDT transactions between July 2021 and June 2024 were flagged as potentially illicit, while USDC fared even better, with just 0.22% flagged and less than 0.005% associated with sanctioned entities.


Meanwhile, Chainalysis reported that illicit activity accounted for just 0.34% of total on-chain transaction volume in 2023, down from 0.42% in 2022. These figures are far below the estimated volume of illicit activity in traditional finance, as outlined in the Treasury Department’s 2024 National Money Laundering Risk Assessment.


Cryptocurrency and traditional finance (TradFi) systems are facing increasing regulatory scrutiny to combat illicit finance. However, they vary in their transparency. TradFi does not have publicly available blockchain technology that allows crypto transactions to be tracked.


In traditional finance, law enforcement must obtain financial records from institutions, often by subpoenaing a grand jury. This process involves a team of people and gathering substantial evidence before funds can be traced.


KYC or KYT?

In the report, Agent Whitaker said that blockchain transaction traceability is a game changer for law enforcement and regulators in their fight against illegal cash-based crimes such as money laundering, terrorist financing, and other forms of financial crime because it provides the ability to “follow the money” in real time and across borders. This is done through tools called Know Your Transaction, or KYT, to track criminals.


While traditional finance relies on Know-Your-Customer (KYC) processes, KYT uses the transparency of blockchain to provide real-time transaction information. This allows crypto companies and agencies to continuously assess risks and adds a layer of security unmatched by traditional systems, providing a safer platform for users.


The report highlights that integrating KYT with traditional compliance tools can potentially help create a more robust risk assessment framework that is continually updated based on new blockchain data to stay ahead of emerging threats. It also claims that KYT improves sanctions compliance by allowing exchanges to verify and block transactions associated with high-risk addresses identified by agencies such as the Office of Foreign Assets Control (OFAC) and member-led organizations such as Crypto ISAC.


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