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Crypto Anxiety: Should you worry about crypto crime?

by Gary M. Shiffman, PhD, on Jun 2, 2022 10:01:24 AM

This article was originally published in The Hill. Click here for the full article.

Crypto currencyAndreanicolini/

Last week’s crypto crash – with more than $300 billion wiped out – heightens public wariness of digital currencies. It’s a wariness that’s justified, but it goes beyond whether or not Bitcoin holds its value. We live in a moment of peak hype around the need for crypto bravery and protections. 

Make $$$ working from home” scams have evolved. Crypto-innovators advertise historic opportunities on prime-time television — allowing clever criminals seeking new ways to lure unsuspecting people (or those willing to look the other way) to clean cash with crypto.

“Bitcoin ATMs” that convert cash into cryptocurrency now exist practically everywhere. In late 2021 there were more than 26,000 across the U.S., from Walmarts to financial districts. In the new scams, cash-intensive businesses bypass cash deposit limits by hiring individuals to deposit cash in cryptocurrency ATMs: Mules take $9,000 cash, deposit $7,000 and keep $2,000 for the trouble. Do this weekly and clear $100,000 in a year. Too good to be true? Probably. Prosecutions are still rare, and most ATM operators implement money laundering countermeasures. But do stories like these attract us? Absolutely.

Like big wave surfing videos that deliver an adrenaline rush without the risks of getting crushed, crypto crime stories are hard to turn away from. Last year, crypto exchange Africryptco-founders disappeared with about $3.6 billion in customers’ money. Headlines read like spoofs, but aren’t: “PancakeBunny suffers $45M attack”; “BurgerSwap loses $7.2 Million”; “Furucombo suffers $14 million ‘evil contract’ hack”; “WhaleFarm Rugpulls with $2.3M.”

To address thieves and anarchists, and to create more efficiency and fairness, some in government argue for regulatory revolution. White House expert Carole House led the drafting of a recent executive order calling for expanding protections to crypto assets. Treasury Secretary Janet Yellen followed in April, calling for “foundational” policy work. New regulations, like storm clouds, gather on the horizon.

As an economist tracking financial crimes innovations, I have followed blockchains for years. I have created RegTech companies, and I have enforced regulations as a government official. And yet, like most people, I am @cryptohesitant. We fear missing out on the next Google or Amazon yet doubt that zealous friends and influencers actually understand the words they say. As Matthew McConaughey’s character says in “The Wolf of Wall Street,” “…Nobody – and I don’t care if you’re Warren Buffet or Jimmy Buffet – nobody knows if a stock’s going up, down or f-ing sideways. …But we have to pretend we know.”

This much I know. Cryptography enabled crypto assets by apparently solving the “double-spending” problem. If I spend a dollar bill at one store, I can’t also spend it at another. Economists say that a dollar bill is “rival” and “scarce”; it can’t be held by multiple people simultaneously (“rival”), and it can’t be easily created (“scarce”). With easy copy-paste computer functions, a virtual currency couldn’t exist. Once online “stuff” becomes rival and scarce, it becomes as-if physical. Like explorers discovering new places, cryptography has enabled real possibilities and risks.

Matt Damon’s fortune favors the brave captures the moment perfectly. As skyrocketing Bitcoin created stories of new riches, entrepreneurs exploded the variety of crypto assets, crypto markets and paths to wealth, both legitimate and exploitative. But the basics remain the key to choosing a path.

Rolling waves of new crypto assets perform only one of two functions, neither of them new: 1) payment or 2) investment. If the asset price remains stable, called a “stablecoin” such as a currency tied to the U.S. dollar (Tether, CBDC, etc.), then the coin is merely a substitute for the dollar. Do with it as you would your bank account. If the price of the asset moves with volatility like stocks and bonds or artworks subject to market pressures and animal spirits, like “Bitcoin” and NFTs such as CryptoPunk, then treat the asset as an investment. 

Cryptography enabled a new form of identity: pseudo-anonymity, and this is where risk arises. All assets lie on a spectrum from anonymous – a $5 bill on the sidewalk has no obvious owner – to a fully diligenced named bank account. In a pseudonymous exchange, mathematical processes replace the need to know another’s physical identity. 

Solving the cut-paste problem created new assets but not new crimes. Money laundering is still money laundering, and theft is still theft. A “rugpull” is the crypto-verse word for pump-and-dump: create an asset, hype it up, sell it on an exchange, then disappear with the funds. An “evil contract,” a name worthy of inclusion in future Marvel movies, describes a crime as old as time: tricking someone to give something to the wrong person. 

Crimes have always been about fakes; we’ve just expanded deception from physical to online. None of us wants to be deceived. Crime has not changed, only identity.

As crypto-markets inevitably expand, many criminals will remain in cash; aspiring kingpins will find exchange-as-a-service in corruptible jurisdictions; but great criminals will happily continue current practices: use fake data and money mules to bank safely within regulated financial institutions. Put aside the hype of coins, blocks and tokens; making markets safe requires confidence that markets can identify people and enforce rules. 

So, the question remains: Be brave or be safe? Super Bowl 2022 crypto commercials, (“fortune favors the brave”; LeBron James telling his younger self to take big risks; laughing at “don’t be Larry”) gave an intoxicating rush of courage. I’d prefer a less stressful decision.  

The work of safe and trusted markets – where bravery is not required – requires establishing known or knowable identities and enforcing rules. Biographic data, biometrics and behavioral patterns all contribute to identity verification, behavioral being the most difficult to steal or fake. With cryptography and privacy-preserving uses of machine learning, public-private partnerships and financial institution crime-fighting collaborations can happen immediately. This is where Secretary Yellen’s “foundational” documents must focus. 

Gary M. Shiffman, a Gulf War veteran, former Pentagon and Senate staffer, former chief of staff of Customs and Border Protection, is the Founder of Giant Oak and Consilient. He authored “The Economics of Violence: How Behavioral Science Can Transform Our View of Crime, Insurgency and Terrorism.”


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