Today’s world has seen significant changes come up due to innovation from the crypto space. With a torrent of investors, cryptos have become a force to be reckoned with in the global financial sector. However, the potential of cryptos has been overshadowed by the perception that cryptos are a tool for financial crimes. In reality, this perspective is but a remnant of the Silk Road days. Cryptos can become a tool that might help solve crimes that have plagued the financial system. These crimes include fraud, money laundering, terrorist financing, and market abuse. In this guide, we will break down three ways cryptos can solve financial crimes.
The Use of “Paper” Trails to Curb Fraud
Simply said, a paper trail is a collection of records that chronicles an event across time. Typically, a paper trail follows financial activities. In finance, using records is an indispensable method of managing assets while promoting transparency. Simply said, a paper trail is a collection of records that chronicles an event across time.
A paper trail follows financial activities: In a company context, a paper trail often refers to items like receipts, invoices, expense reports, or purchase orders. Additionally, it could contain minutes or notes detailing conferences with your accountant, attorney, directors, or shareholders. Through an audit of these records, it is possible to discern any activities that may be fraudulent.
Through the use of cryptos, the fraud issues plaguing the traditional system can be eliminated. Cryptocurrencies use blockchain technology alongside immutable ledgers that are shared across the network. Thus, for every transaction carried out on a given network, the records are simultaneously updated on every ledger present in the network. This feature makes cryptos a bane for anybody engaging in financial crimes such as fraud and theft.
The success of cryptos in this sector was proven in the case of Bitcoin Savings & Trust (BS&T). Initially a Ponzi scheme, BS&T evolved into one of the most notorious fraud instances involving a false Initial Coin Offering (ICO). However, these fraudulent activities were short-lived as investors took legal action. The individual behind the scheme, Trendon Shavers, was apprehended and ordered to pay over $40 million in fines on top of serving a 2-year jail sentence.
Money laundering is the illicit practice of disguising huge sums of cash obtained via criminal activity, such as the financing of terrorism or drug trafficking, as coming from a legitimate source. The technique “launders” the money, which is thought to be dirty due to the illicit action, to make it appear clean. Both white-collar and low-level criminals have been known to use money laundering, a severe financial crime.
Smurfing, or “structuring,” is a typical type of money laundering. To avoid being caught, the thief divides huge sums of money into several little deposits and frequently disperses them among numerous accounts. This practice is heavily popular in the traditional finance system. As a result, many criminal organizations thrived undetected.
However, steps have been taken to ensure such practices are controlled in the crypto space. These practices include exchange oversight and the introduction of KYC limitations. Through these methods, authorities can monitor accounts and flag transactions that may be fraudulent. The 2016 Bitfinex hack incident is an example of the success of cryptos in eliminating such schemes.
The persons involved sought to use numerous sophisticated laundering strategies to launder almost $4.5 billion in cryptocurrencies. Even so, law enforcement could track the stolen funds through the blockchain and catch the thieves. The law enforcement agencies could also retrieve a sizable chunk of the cash. Cases like this demonstrate that while criminals may attempt to use cryptocurrencies, they will not be successful.
Eliminating Tax Evasion
Tax evasion is a problem facing governments in most countries around the world. Tax evasion is unlawful when a person or organization knowingly fails to pay their actual tax obligations. Tax evaders are often faced with serious fines and criminal prosecution. The Internal Revenue Service (IRS) tax code defines a federal crime as a willful failure to pay taxes. The illegal non-payment or underpayment of actual tax responsibilities owed are examples of tax evasion.
According to Internal Revenue Service commissioner Charles Rettig, the US annually loses $1 trillion in unpaid taxes. With the advent of crypto taxation, this amount is bound to rise. The crypto sector has showcased much dissent following the decision to tax digital assets. In many cases, the dissent translated into blatant refusal and tax evasion.
However, by partnering with exchanges, governments can eliminate tax evasion. Governments can set up the system to ensure that crypto holders pay taxes on their earnings directly from their earnings. This move is set to ensure that taxes are directly removed from trade amounts made by users.
The US government has followed such directives to create several policies. A policy to report all crypto transactions worth over $10000 will be enforced from 2023.
In the financial space, cryptos have been tagged with a dismal title as facilitators of financial crimes. However, from the discussion above, it is evident that this tag is wrong in the digital finance space. Cryptocurrencies have proven to be an asset to governments, users, and security agencies in mitigating financial crimes.
Through crypto use, fraud, tax evasion, money laundering, and other financial crimes can be eliminated. Given that cryptos are still in the early stages of development, they showcase great promise for the future of the finance sector. As a result, it is only a matter of time before the cryptos can fill in the present loopholes. By doing this, the assets will push the whole sector forward, freeing it from financial crimes that have plagued traditional finance.