Financial Crime

The Rise of Cryptocurrency: Benefits, Risks, and Mitigation Strategies

The world transcended from national or regional markets to a global marketplace in the 21st century, placing the impetus on transactions among organizations of all sizes across continents. A small souk owner in the Middle East can source products from Europe, and an e-commerce shop in the U.S. can source products from Asia.

This voluminous global marketplace bore the burden of huge forex charges levied by financial institutions across the globe, and cryptocurrency came as an answer.

Benefits of Cryptocurrency for the Globalized Marketplace

Cryptocurrencies are a modern solution to many traditional banking challenges faced by businesses when transacting across borders. Cross-border trade has its challenges, and with the evolution of product sourcing practices across the globe, it is now a bigger challenge for the banking industry and businesses, especially small and medium enterprises. Here is how cryptocurrencies can help businesses grow with seamless cross-border trades.

1. Low Transaction Charges

Forex charges, currency conversion charges, etc., increase the operational costs of businesses having multi-country operations. Whether a business is offering services or products in another country or procuring materials overseas, forex costs increase operational costs. Cryptocurrencies solve this challenge as their value remains the same across countries with low conversion charges.

2. Transaction Speed

Transfer of cryptocurrency from one wallet to another takes no time. Once the user places a request to transfer crypto to someone, there are no time delays. This solves a major issue faced by businesses during foreign remittances. There are instances where banks take more than 48 hours to remit a foreign transfer.

3. Inflation Protection

One unique offering of cryptocurrency is inflation protection. The changes in global forex rates often create challenges for global businesses as they often increase the procurement costs of goods and services if the value of the currency comes down. However, with cryptocurrency, the user is protected against these sudden fluctuations.

Suggested Read: Cryptocurrency and Money Laundering: An Overview

Cryptocurrencies and Financial Crime Risks

Financial crimes have seen a major transition over the years, and cryptocurrencies are now reportedly becoming the first choice for illicit activities. Whether it is a hacker demanding a ransom or a nefarious element financing terrorism, they nowadays prefer cryptocurrency as their go-to medium to exchange currencies.

This change is not only impacting the number of cybercrime incidents but also enabling cybercriminals to hit larger targets. According to Immunefi, the total number of large-scale cybercrimes rose from 104 reported incidents in 2021 to 134 cases in 2022. The scale of targeting also rose manifolds with the largest successful hack of $625 Million on the Ronin Bridge Crypto Exchange. According to CBS News, in the year 2022, $3.8 Billion were stolen from the crypto market by hackers.

Crime Science Journal did a study with eminent leaders in the financial markets and academic institutions and came to the following conclusions.

  1. There are more than 47 types of financial crimes that can be committed using cryptocurrencies.
  2. Ransomware and Pump and Dump schemes were the most floated and profitable frauds in the crypto markets.
  3. Most of these threats seem harmless small financial crimes but they can be further used for heinous crimes like terror or terrorist financing.

However, these threats and crimes are far less than the total volume of $1.6 trillion (CoinMarketCap, 2021) invested in the Cryptocurrency markets. This huge investment of users across the globe has forced governments to think of regulations rather than a blanket ban on cryptocurrencies.

Suggested Read: Mitigating Financial Crime Risks in the Age of Cryptocurrency – Whitepaper

Financial Crime Risks Posed by Crypto Transactions

Industry experts believe without cryptocurrencies it was neither possible to have such a growth in the number of successful incidents nor it was possible to scale a hack beyond $100 million.

Experts also believe that the misappropriation of funds is not as scary as the result of such funds. These stolen funds might be used for terror financing, child sexual abuse materials, ransomware, human trafficking, scams, dark net markets, election manipulation, stolen funds movement, financing sanctioned entities, and other innumerable similar activities.

Financial watchdogs like Chainalysis have reported that out of 20 billion in illicit transactions, we can trace back almost 44% of them to sanctioned entities.

Boom Bust and Market Manipulations

Cryptocurrency values have soared in the past decade in an unimaginable pattern. The currency is not linked to the performance of any asset, the availability of any resource, or the geopolitics of any region or country. It is free and independent currency and has shown traits that  make it hard to regulate.

During pandemic  while every global currency was on a decline, Crypto showed an astronomical rise but when the global markets became stable it lost 2/3rd of its value. This became a challenging task for financial analysts to understand how cryptocurrencies work. We have seen many cryptocurrencies, exchanges, etc., either lose their value or vanish in a fraction of a second. This adds more volatility to an already volatile financial market.

Another  area of concern is the vulnerability of the crypto exchanges themselves. In 2021, the hackers successfully attacked three crypto exchanges.

  1. $625 Million lost by Axie Infinity to hackers.
  2. $570 Million lost by Binance to a hacker in October’21.
  3. $477 Million lost by FTX which resulted in its total collapse.

Apart from the above given real threats, the crypto markets showed random upward and downward movements as well. These rises and falls cannot be attributed to any real-world situations.

Many crypto exchanges were seeing a great market response and were observing a great volume of trades getting destroyed by a few tweets or a market hoax as well.

Investors in these cryptocurrencies have lost millions while some have gained in these turbulent conditions. This poses a great question in terms of market integrity and user protection.

Cryptocurrency Regulation in Banking and Financial Services

The banking sector was always in the fray with the crypto market, and the major talking point till 2021 was to bring in a blanket ban on cryptocurrency, as it posed a threat to the banking sector. However, with law enforcement agencies catching up, the banking sector has shown the first signs of trust in the crypto market.

The 2022 update of the Basel framework has incorporated the guidelines for banks to handle crypto-asset risks. This is the first formal recognition of cryptocurrencies as an asset in the banking industry.

Government Responses to Crypto

Governments across the globe are taking proactive measures to formulate a framework to regulate these largely unregulated transactions. Liechtenstein Blockchain Act was the first action brought by a government to regulate crypto transactions.

The “Comprehensive Framework for Responsible Development of Digital Assets” of the U.S. government was a careful step taken by the U.S. government to bring in regulations followed by the EU and others.

Law Enforcement Catchup

Law enforcement agencies across the globe have finally caught up on Bitcoin agencies and organizations. The year 2022 has been the most successful year in the Bitcoin history to bring new hope among Bitcoin investors.

  1. $3.6 Billion was seized from two individuals involved in the 2016 Bitfinex hack.
  2. $3.36 Billion was seized from hackers who stole it from the Darknet market Silk Road.
  3. $30 Million seized from the North Korean hacking syndicate Lazarus Group stolen from Ronin Bridge.
  4. Seizure of Hydra Dark Web Marketplace’s infrastructure by German authorities.
  5. Popular Bitcoin exchanges and others have started to work closely with law enforcement agencies. Binance alone has responded to 47,000 law enforcement requests, has increased its security staff by 500%, and has joined the National Cyber-Forensics and Training Alliance (NCFTA).

This catchup by the agencies in 2022 has significantly brought down the total holdings of illicit cryptocurrencies to almost a quarter of what it was in 2021.

This is a good news for cryptocurrencies at large as it brings positive vibes back into the crypto domain.

Suggested Read: How Money Laundering Schemes Changed in the Digital Age

Mitigating Financial Crime Risks Due to Cryptocurrency – Potential Approaches

There is an immediate need to formulate a global cryptocurrency regulatory body just like various other U.N. bodies working in their respective areas. This body will have to formulate a global guideline emphasizing these factors:

1. Segregation of Assets

All cryptocurrencies and exchanges should have a clear distinction between the assets owned by them and the assets of the investors or traders. This clear demarcation will help the authorities stop any misappropriation of the investor-pooled resources by the exchanges.

2. Currency Backing

Every currency on the planet is backed by a government or a reserve. There should be a global framework that should ensure the cryptocurrencies are backed by some kind of collateral real-world asset.

3. Prudential Requirements

Every cryptocurrency should stand by the global standards of prudential requirements. There should be a well-defined process of customer KYC, licensing of exchanges, etc., to bring more trust to these exchanges.

4. Ban on DeFi, Mixers, etc.

A few platforms like wallets, mixers, DeFi, etc., have become anonymizers for criminals. Criminals send their currencies to these exchanges which mix them with fairly deposited funds of other users and give back a mix of both legal and illegal currencies to every depositor. Hence, this makes it impossible for the authorities to trace back the source, as the wallet becomes the source for every member of this pool.


Cryptocurrencies are here to stay, and banks now need to think of them as assets owned by their investors. The Basel 2022 updates have given clear guidelines to banks to start working in this direction and develop  a mechanism that  coexists with the current  system.

There are a large number of threats associated with the crypto market. However, if banks and government agencies work hand in hand with major crypto exchanges, the world can leverage a new form of currency that works across borders offering seamless transactions in the global marketplaces.

To learn more, read the whitepaper on how banks and financial institutions can

mitigate financial crime risks in the age of cryptocurrency.

Tasneem Abdulrahman

Manager - AML Compliance

Tasneem is an accomplished professional with 15+ years of experience in the global financial crime compliance industry. Her expertise spans Regulatory Compliance, AML Risk and Governance, Project Management, and Control Testing and Remediation, including audits and strategic management of operational risk events.

Leave a Reply

Your email address will not be published. Required fields are marked *

Save my name, email, and website in this browser for the next time I comment.