Panelists Call for Regulatory Reform to Prevent Crypto Fraud

The United States lacks a comprehensive regulatory framework to tackle rampant fraud in the crypto world and is fast falling behind other countries that are setting clear rules to stop criminals from exploiting the new technology. That at least was the opinion of several panelists discussing crypto assets at the opening session of the 34th Annual ACFE Global Fraud Conference in Seattle on Monday.  

But panelists also expressed hope that the U.S. could soon catch up if a draft bill to regulate cryptocurrencies gains momentum in the U.S. Congress, a move that among other things would help clearly define which regulatory agencies are responsible for clamping down on wrongdoing in this space.  

“If we set our minds to it, we could have something done in six months,” said Hester M. Peirce, commissioner at the U.S. Securities and Exchange Commission (SEC). “It is a question of whether Congress does the first pass and regulators work from there. But if we all sat down and worked together it wouldn’t be that hard.” 

No Clear Rules

Up until now, a lack of clear rules regarding the use of crypto assets, such as bitcoin and digital tokens, has left regulators either taking a hands-off approach or more recently enforcing existing laws to prosecute these types of crimes, often years after they have taken place. That retroactive approach to enforcement is broadly seen as a failure amid an explosion of complex fraud cases that culminated last year in the downfall of crypto exchange FTX and its CEO Sam Bankman-Fried.  

“Regulation by enforcement approach means that you wait until the harm has happened and then you try to fix it after the fact,” said Sheila Warren, CEO of Crypto Council of Innovation, speaking to over 5,000 attendees who listened to the panel in person and virtually. “That just means that consumers and average people are left holding the bag, and that’s shameful.” 

And by clamping down now on potential crypto fraud that occurred as far back as 2017 – when there was little to no real enforcement – the SEC has caused considerable confusion. “In the intervening years, people have relied on that fact that there hasn’t been enforcement, so everyone is very confused,” said Pierce. “Lawyers don’t know how to advise (their clients). Good lawyers are saying ‘I really don’t know what to tell you to do.’ So, people go down the street to a bad lawyer who says, ‘I guess you can do anything you want.’ So, the regulatory void leads to bad activity.”  

Crypto Tracing

Even so, the blockchain technology has already proven to be a useful tool for U.S. law enforcement officials who have come to realize that tracking bitcoin and other crypto assets used by fraudsters is much easier than originally thought. Andy Greenberg is a writer whose latest book has chronicled how a band of law enforcement officials, academics and technologists brought about some of the biggest busts in cyber history after destroying the myth that bitcoin movements were untraceable. He said that most recently cyber experts have been watching blockchain movements in millions of dollars of crypto stolen at FTX following its bankruptcy in November last year.  

“It’s almost like watching the getaway car and following its every turn as they look for somewhere to hide the money or cash it out,” said Greenberg. “This is the crazy thing about blockchains, we can all see this happening. We don’t know still if it was a FTX insider or opportunistic hackers, but it will be very difficult to cash out or liquidate that money without being identified.”  

Falling Behind

FTX is a good example of how the U.S. remains a global laggard in the race to erect regulatory barriers to prevent crypto fraud, said Warren. Notwithstanding FTX’s more scandalous aspects, most countries are less obsessed with the crypto exchange’s problems, not least because they already have rules in place to either prevent or lessen the damage caused by this kind of fraud. “The impact [of FTX] both optically and practically on consumers in other parts of the world is just not the same as here because they had more robust rules in place,” she said. 

The U.K. is moving fast to get in crypto rules in place by the end of the year, while Japan and Singapore already have established this kind of regulation, said Warren. And the European parliament just this year passed its first piece of legislation that regulated crypto trading across the continent. Markets in Crypto Assets Regulation (MiCAR) will require anyone trading crypto to get regulatory authorization first and allow for the tracing of digital asset transfers in an effort to stop money laundering and terrorist financing.  

MiCAR is a “comprehensive, massive legislation that had to get a buy-in from all the different countries in Europe, from different agencies and parties, and was incredibly complicated,” said Warren. If that is achievable, she added, U.S. law makers should have little trouble putting together similar legislation that would not only prevent crime but allow fraud examiners to work with standards that clearly distinguish between when someone is committing crypto fraud and when a person is simply carrying out normal business activity. “I am really hopeful that we will get it together and really look out for American consumers,” she said. 

An Important New Tool

Whether the U.S. Congress passes such legislation soon or not, learning how to use crypto tracing, or at least understanding how the technology works, is becoming increasingly important for anyone working in the anti-fraud profession. “If you don’t already have those skills, I would strongly recommend familiarizing yourself with what it is,” said Warren. 

That’s important, said Greenberg, because law enforcement often lacks sufficient people with the skills to catch many of the lower-level fraudsters who may not be part of the high-profile cases but nonetheless cause considerable damage to innocent victims. “This group of thousands of fraud examiners I hope can rally to seek out those smaller scale criminals who are adding up to billions of dollars (in fraud),” he said.  

And it doesn’t necessarily mean years of learning either. For those fraud examiners who wish to trace cryptocurrency, there are now automated tools such as block explorers, which allow people to search real-time and historic information about a blockchain. “I don’t have access to all the best tools, but I have looked at block explorers and confirmed things as a reporter,” said Greenberg. “I can see money flows. It’s out there in the public and that is the crazy thing about the cryptocurrency world. These are often crimes that are recorded in full public view.”