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January 17, 2023 – FTX is neither the first nor the last but a recent and huge implosion in the cryptocurrency industry. Previously, we have seen examples of external theft, internal theft, anti-money laundering failures, cybercrime activation, loss of cryptographic keys, and distorted playing fields for investors. More will come, and we should reevaluate whether investing in crypto is a worthwhile development or a zero-sum game where hucksters, charlatans, and the lucky can make money at the expense of others.

The management and regulation of banks and investment firms has evolved over hundreds of years. It will never be perfect, but we have rules and controls to protect against bank robbery, embezzlement, failure and even loss of bank or safe deposit box keys. Basic protections have not been implemented by many crypto organizations.

Put technology and jargon aside

New technologies and jargon generate excitement and confusion, but we can simplify the concepts with this framework:

Currency: an official currency of a government, such as the US dollar.

virtual currency: like a currency but not issued by the government, it can be issued by anyone and is a means of transferring value.

Cryptocurrency: a type of virtual currency on a type of software. Describing it would leave most people dazed and their eyes glazed over. Just think of cryptocurrency as a subset of virtual currency.

virtual asset: The use of virtual currency or cryptocurrency for investment purposes. When people try to “buy low and sell high”.

Value other than currency: A method of storing or transferring value that does not involve official currency (including virtual currency).

Important events in our timeline

Early humans traded and stored value without any currency, including barter and other methods. People gave and received value informally, each performing tasks for the benefit of another person or the community.

Commodity money, such as gold and salt, became useful where direct barter was inconvenient or impossible, and facilitated payments, trade, and the storage of value.

One of the earliest precursors to virtual currency was Hawala, which appeared as early as the 8th century along the original Silk Road and still exists today. It was a method of informally transferring value from a sender in one place to a receiver in another. Each person used a hawala broker (hawaladar) in their respective location, and the hawaladars facilitated the transfer of value by acting as intermediaries.

Eventually governments saw the need for official currencies. They are essential today, but the informal transfer of value is still a part of life and commerce.

More recently, the Internet was born and with it a new twist on value transfer using cyberspace. In 1996, e-gold was created, the first widely used virtual currency, followed by WebMoney in 1998. Illegal uses of these platforms proliferated and were investigated in a groundbreaking case (People v. Western Express International, Inc., et al, or The Western Express Case) by the New York County Attorney’s Office (DANY) under the direction of the legendary Robert M. Morgenthau. (The author, as an assistant prosecutor at the time, led this investigation which revealed how cybercriminals were using these early virtual currencies to conduct business and launder their ill-gotten gains).

Bitcoin was invented around 2008, an evolution of virtual currency and the first “cryptocurrency”. It was a “decentralized” payment platform, that is, no one was officially responsible for it. Technical details are irrelevant here, so we can skip the discussion of “blockchain” and other terms.

The value of Bitcoin eventually rose significantly, a few got richer and others saw an opportunity. Other cryptocurrencies appeared and the crypto investment boom began. Trading platforms proliferated with a lot of hype and ordinary people started investing.

Laws and regulations

Existing laws and regulations apply to these new virtual currencies and cryptocurrencies. But the existence of laws does not mean that everyone respects them. Some have claimed that the old laws do not apply to new cryptos.

But imagine a driver of one of the first electric cars going 100 mph on the highway and stopped by the state trooper. The driver says existing speed laws – enacted decades before – could not apply to his new electric car. This defense fails, the ticket is issued and the judge finally convicts.

The DANY Money Laundering and Cybercrime Inquiry revealed a Wild West of inappropriate activity, not because of an absence of laws, but because of law breakers and limited enforcement.

For example, as established in various court proceedings, guilty pleas and trials, including in the Western Express case, the e-gold platform and early virtual currency exchanges had virtually no anti-money laundering controls. From around 1996 to 2007, users could open e-gold accounts and transact huge amounts of value without customer verification – just an email address. Cybercriminals and identity thieves have been sending illicit funds around the world without any control.

This DANY lawsuit was one of the first to examine cybercrime and virtual currency money laundering. Existing state criminal laws have been applied to this new area of ​​crime, and cybercriminals have been apprehended in the United States and abroad.

e-gold was eventually charged by federal prosecutors and shut down, but the need for virtual currency remained. New ones have appeared including Liberty Reserve, Bitcoin and more.

In 2013, the Financial Crimes Enforcement Network (FinCEN, a branch of our Treasury Department and anti-money laundering regulator) made it clear that virtual currency and cryptocurrency fall under their existing regulations. It took a while for these tips to arrive, but the underlying rules were already there. Subsequent guidance has made it clear that regulatory oversight exists in this space, regardless of technology or jargon.

Other federal and state regulators have weighed in on investor protection and consumer protection.

We shouldn’t blame the rules for the implosions if rules exist but are ignored. Encryption failures happen because of bad deeds, bad actors, bad management, or all three. Law enforcement lags far behind in cyberspace and virtual currency, but we must also remember that it lags (albeit to a lesser extent) everywhere.

We can see the future

After seeing the past, we can see the general future.

FTX won’t be the last crypto firm to make headlines. For example, it was reported about major cryptocurrency player Binance that until August 2021, it allowed users “to open accounts with only an email address.” (“U.S. Justice Department Divided Over Binance Billing As Crypto World Reels,” Reuters Business, December 12, 2022) We see a similarity to e-gold decades before. Prosecutors and regulators today are weighing next steps, equipped with the legal precedent of their predecessors.

Virtual currencies and cryptocurrencies are here to stay, and criminals will continue to use them. Cybercrime is also here to stay, and the government will adapt and catch some offenders, but never all of them. Cybercrime and virtual currencies will remain symbiotic. Investors and consumers will remain fascinated. The rules will be changed and we will continue to debate whether the government should do more or less.

A guide to choosing our destiny

Here is a general direction for moving forward.

In the civil sphere, the government should do more to enforce anti-money laundering and investor protection rules. In the criminal realm, the government needs to do much more to better investigate cybercrime and money laundering, as criminals thrive without enforcement or deterrence.

Organizations must prioritize cybersecurity and protection against cybercrime.

Individuals should be wary of investment hype and always do their due diligence.

Readers should stay tuned to the news because the future will be as interesting as the past.


Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. This is not a solicitation to trade commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage resulting from the use of this publication.



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