Curbing Crypto Crime is Key to Crypto and Blockchain’s Future
Cryptocurrencies, blockchain technology and cryptocurrency exchanges have found their way into the mainstream of business transactions and traditional banking. And yet, the average person would still be hard pressed to explain what crypto currency is, how blockchain works and the role that crypto exchanges play. So I sought out an expert – my friend Noah Perlman – to help me take on this ambitious topic.
Noah is the Chief Compliance Officer at Binance, the largest cryptocurrency exchange in the world. He previously was the first ever Chief Compliance Officer at Gemini and managing director and global head of financial crimes at Morgan Stanley. Earlier in his career, Noah was division counsel for the US Drug Enforcement Administration’s New York division, and prior to that he was an assistant US attorney in the Eastern District, New York.
I asked Noah to explain virtual currency and why it is an important complement to fiat or paper currency.
Virtual currency or cryptocurrency as it is referred to in the industry, is a decentralized digital currency that uses cryptography for security. It operates independently of a central bank and can be used in peer-to-peer transactions over the internet. Cryptocurrency transactions are made possible by blockchain technology. Like traditional fiat currencies, cryptocurrencies can be used as a medium of exchange. However, the use cases for cryptocurrencies have really expanded significantly over the years. So when you say cryptocurrency, it’s not one thing. It includes things like smart contracts, decentralized finance, stores of value governance and non-fungible tokens. It includes all of these things and different use cases.
Most industry experts like Noah don’t see it as a replacement to traditional fiat currency. Instead, it is viewed as a complement. It allows for in some circumstances faster, more cost efficient, and more secure transactions. This is especially the case when it comes to cross-border transactions, which can be very costly and time consuming when undertaken through traditional banking systems infrastructure. Cryptocurrency also has what has largely been unrealized potential for financial inclusion for unbanked populations for don’t have access to traditional banking products. It represents a real opportunity to revolutionize and simplify the way we do business in certain areas.
Bitcoin is probably still the most widely recognized brand when it and some of the other virtual currencies came into existence, some considered blockchain to be the more compelling technological advancement. I asked Noah to explain what blockchain is, its role in the transfer and storage of crypto and what makes it unique.
Blockchain is the underlying technology behind cryptocurrencies simplifying it. It’s a decentralized digital ledger. It records transactions across many computers in such a way that they become immutable. When something is immutable like blockchain ledger, it can’t be altered retroactively. This primary unique feature and solves the double spend problem. Once a Bitcoin is spent, that same Bitcoin can’t be re-spent. Once the data is recorded on the blockchain, it’s difficult, if not impossible to change. This immutability makes the technology ideally suited for the recording of a wide spectrum of events which should not be altered. Important record categories and events include things like medical records, identity management, transaction processing, provenance of documents or art, food traceability, and voting systems. There are a multitude of potential uses where you can see how revolutionary and impactful it is and can be in the future.
Another benefit in addition to immutability is decentralization. No single centralized body is controlling the information’s transparency. Blockchain has also helped drive efficiency in efforts to mitigate financial crime issues, lower transaction processing fees and helping with counterparty trust since you don’t necessarily need to trust your counterparty because the technology is where the trust is.
While we don’t know of examples in which blockchain has been utilized to lockdown accounting records, it has the potential to limit one’s ability make improper adjusting entries and enforce electronic accounting system identity management that sometimes leads financial statement frauds and the restatement of earnings investigations.
Binance is a cryptocurrency exchange helping investors buy and sell digital currencies, and for many years people have been viewing cryptocurrency as maybe the coin of the realm of the dark web, which is how it first came into the public consciousness. Because of that, crypto still is regarded skeptically by many people, including regulators and legislators. Indeed, the regulatory landscape for crypto is still evolving, and yet cryptocurrencies are bad for criminals because of their traceability. I asked Noah to comment of some of common misconceptions surrounding cryptocurrencies and the role that Binance and that of other crypto exchanges in reducing the prevalence of crypto crime.
In his five years in a cryptocurrency compliance role, he’s noted an evolution in how cryptocurrency is perceived. Yet there’s still a lot of misinformation out there making it very important for the industry to continue to educate. One popular misconception is that cryptocurrencies are primarily used for illicit activities when in fact blockchain’s transparency makes it a very poor choice for criminals. Every transaction is traceable with blockchain technology providing a public ledger for accountability and transparency. He gave an example from when he was in traditional finance at a bank. Back then, he had visibility into flow of funds one stop away. He could see where the funds were coming from into the institution and one stop where they went. In contrast, on the blockchain, it is possible to see the entire history, 2, 3, 4, 5, 6, 7 hops away in both directions. This allows you to really understand the source of funds and how it flows whether you’re talking about placement, layering or any of the stages of money laundering. Blockchain allows for much more visibility because it is immutable. Bad actors cannot readily obscure either the source of funds or their ultimate destination, which of course undercuts what a money launderer is trying to accomplish when transacting criminally-derived funds.
But cryptocurrency is no different than other forms of payment in that it’s a tool the primary use of which is by ordinary people for everyday transactions. The goal of any of the whole industry should be to reduce illicit activity. It’s not enough to say, “oh well, it happens in other industries too”. Binance and other players in the crypto industry are very proactive in trying to combat illicit activities. They must be.
Being proactive in trying to combat illicit activities includes being incredibly responsive to law enforcement requests. In 2023, Binanci handled nearly 60,000 requests from law enforcement. They have among the fastest response time in the industry and respond far quicker than even the amount of time allowed for in the subpoena which is typically 30 days. They aim to provide responses in under a week and in emergency situations, as close to real time as possible. In a further effort to curb illicit crime, Binance has provided training to law enforcement including over one hundred training sessions in 2023 more than two per week. Binance is training the industry on how to use the tools to track down and be proactive in combating illicit activities. Noah provided two examples of how Binance’s collaboration with law enforcement led to law enforcement actions. Binance collaborated with the National Bank of Tajikistan and a blockchain analytics firm called TRM labs leading to the arrest of several key members of a terrorist group in Raan Province. They also assisted the Royal Thai Police in dismantling an international criminal network responsible for multi-billion dollar scams.
Noah took a side trip during our discussion to bring up an incredibly important topic, Tigran Gambaryan. Tigran is Binance’s head of financial crimes, a former IRS criminal investigation special agent and one of the original expert investigators in this space. He was profiled in a book by Andy Greenberg called Tracers in the Dark and one of the people responsible for taking down Silk Road. Tigran is being unlawfully detained by the Nigerian government. In February of this year, he went to Nigeria to testify at the Nigerian government’s invitation about finance and crypto has since been detained and charged with crimes that the Nigerian government attributes to Binance. We all feel the agony of that situation and can only imagine how difficult that’s been for him, for his family and for his Binance family. It’s a terrible situation and anytime individuals are caught up in bigger power struggles, you have to take to heart the individual toll that takes. We hope and pray that it gets resolved favorably and quickly.
There’s almost a schadenfreude vibe that seems to hang over the crypto industry by the media much like there is that hangs over law enforcement. The media seems to take great pleasure in reporting when law enforcement stumbles. The crypto companies and exchanges who have are involved in fraud and the fact that many recent investment schemes have exploiting crypto’s popularity to defraud would be investors in traditional pump and dump schemes only adds to that negativity.
Noah said there are definitely crypto haters. There are also Binance haters. Without question, there is a cohort of people who want the industry to fail, who think it will fail, and who think Binance will fail. These negative externalities are outweighed by the current and future benefits of this technology. The bottom line crypto is not immune to fraud. No industry is, and the crypto industry has had its share of missteps in the past, including Binance.
Binance resolved some issues with the US last year and as part of those resolutions, they have a regulator-imposed monitor. The monitor’s duties are to ensure that Binance complies with its regulatory settlement and that they have a robust compliance program. Some of those same media outlets reported their predictions that “Binance is done. They’ll never survive the monitorship. It’s too hard to comply”. These dire predictions seem to have ignored the fact that financial services firms have had monitors for years and years and none have caused those institutions to fail. They certainly pose challenges. But not only do they survive, they tend to become better, more compliant and resilient institutions as a result of having to operate under the oversight of a monitor.
Noah concluded our discussion by stating. Whether it is KYC, AML or other security measures, Binance is trying to help shape regulations that protect consumers. This is through proactive engagement and dialogue with regulators, policymakers, industry associations, and players across the globe. Binance has 18 registrations globally and is working very closely across the entire globe to try and advance this dialogue. Binance believes that part of what’s driving the advancement of the crypto industry is the regulatory enforcement actions which have been shaping the crypto industry. They drive out bad actors, establish guidelines for legitimate operations and reinforce the benefit of good regulations.
This article is based on a podcast interview of Noah Perlman entitled – Curbing Crypto Crime: The Role of Crypto Exchanges in Helping Enforce the Rules of the Road. To listen to the full podcast discussion with Noah, click here.
