FEBRUARY 14 — Imagine a world where sending money is as easy as texting your friend – no banks, no borders, just instantaneous. Cryptocurrencies (e.g. Bitcoin, Ethereum, and Dogecoin) are taking us a leap towards this new paradigm.
The World Bank estimates there are 1.4 billion unbanked adults worldwide, with 2.9 million of them in Malaysia.
Recently, following discussions with the Abu Dhabi government and cryptocurrency technology giant Binance, Prime Minister Datuk Seri Anwar Ibrahim announced that the Malaysian government is working on a policy for digital finance, exploring the integration of cryptocurrency and blockchain technology.
Cryptocurrencies offer a potential solution for financial inclusion but also raise jurisdictional challenges and sovereignty concerns for effective law enforcement.
Who is in charge of these borderless currencies if they do not belong to any one country? Traditional financial systems are established around national borders, but cryptocurrencies do not play by those rules.
Cryptocurrencies operate independently on decentralised systems in the absence of central authorities like banks and governments.
They use distributed ledger technologies (DLTs), predominantly blockchain, to achieve security and transparency through consensus mechanisms and smart contracts in the decentralised networks.
The entire transaction history is publicly available and immutable; however, the real-world identity behind each peer-to-peer transaction can be pseudonymous.
Consequently, while cryptocurrencies offer transparency, security, and greater accessibility to financial services, their decentralised and pseudonymous nature also leaves room for exploitation by bad actors.
Ethical considerations call for balancing privacy with preventing misuse, so we need strong compliance standards and global rules to ensure everyone is playing fair.
The legal and regulatory landscape of cryptocurrency is still evolving globally. Every country has its own way of dealing with cryptocurrencies.
For example, Japan, Switzerland, and Singapore embrace clear frameworks, whereas China maintains a cautious ban. India has shifted towards developing a clear framework.
In the United States, the Securities and Exchange Commission (SEC) oversees initial coin offerings (ICOs) as securities, and the Commodity Futures Trading Commission (CFTC) governs cryptocurrencies as commodities, while state approaches vary.
Bad actors can exploit the jurisdictional gaps in this patchwork of rules, for instance, by relocating to evade detection, as seen in the BTC-e case.
The BTC-e exchange was shut down in 2017 for alleged money laundering and other illegal acts through joint efforts between the US and European authorities. Yet the case is still ongoing.
Grand View Research projects the crypto market to exceed US$11 billion by 2030 (13.1 per cent compound annual growth rate [CAGR] year-on-year), driven by increasing adoption of DLT and cross-border remittances.
We need to act quickly in adapting regulation before the gaps become larger and harder to manage, further impeding innovation and enforcement.
Significant actors, including governments, financial institutions, and tech industry players, must collaborate urgently to establish a framework that provides clarity, security, and accountability.
While a one-size-fits-all solution may not be feasible, global regulatory harmonisation is crucial to overcoming the fragmented regulatory landscape.
Exemplifying international cooperation, the Financial Action Task Force (FATF) sets global standards to counter money laundering and terrorism financing, thereby mitigating cryptocurrency risks.
It is commendable that Malaysia is actively working to strengthen its regulatory framework to meet FATF standards, with Bank Negara Malaysia (BNM) anticipating the mutual evaluation (ME) onsite visit in February 2025.
Common regulatory standards ensure consistency in regulating cryptocurrencies and reduce regulatory arbitrage. Moving in tandem, a coalition of tax authorities from Australia, Canada, the Netherlands, the United Kingdom, and the US, known as the Joint Chiefs of Global Tax Enforcement (J5), shares intelligence, conducts joint investigations, and coordinates enforcement actions to address cross-border crypto tax crimes.
They reveal how countries can pool resources to better combat illicit activities and handle complex cases that span multiple jurisdictions through information sharing and collaboration.
Another notable example is Operation DisrupTor in 2020, which targeted dark web drugs and other illegal goods traffickers.
This operation successfully arrested 179 individuals and seized over US$6.5 million in cash and virtual currencies worldwide through collaborative efforts between law enforcement and judicial authorities from more than nine countries.
As technology evolves faster than laws, why not also use tech’s help to tackle the issues it creates? The decentralised and pseudonymous nature of cryptocurrencies complicates law enforcement yet offers opportunities for technological innovations.
Illustration picture shows tokens of the virtual currency Bitcoin being placed on a monitor that displays binary digits, December 8, 2017. – Reuters pic
To prevent illicit activities, robust know-your-customer (KYC) and anti-money-laundering (AML) procedures verify real user identities and ensure continuous transaction monitoring, suspicious activity reporting, and effective compliance programmes, including the use of technology to enhance these capabilities.
Real-time transaction monitoring software complements KYC/AML procedures by detecting unusual patterns or behaviours.
Additionally, forensic tools can uncover illicit activities by investigating transactions.
Advanced blockchain analysis tools, such as those developed by Chainalysis and TRM Labs, use sophisticated algorithms to spot patterns and trace transactions even across different crypto blockchains, enhancing investigative and prosecutorial capabilities against illicit activities.
As technological solutions continue to evolve, keeping cryptocurrencies secure becomes more feasible, does it not?
Regulating cryptocurrencies is not just about keeping money safe but also advancing sustainable development, including SDG 1 (No Poverty), SDG 16 (Peace, Justice and Strong Institutions), and SDG 17 (Partnerships for the Goals).
Through global regulatory harmony and leveraging science, technology, and innovation (STI), we can better manage cryptocurrency ecosystems by mitigating risks, maximising benefits, and addressing ethical implications.
Although the journey is complex, with the right strategies, we can create a more equitable future where cryptocurrencies coexist harmoniously with traditional financial systems.
The authors are from the Department of Science and Technology Studies, Faculty of Science, Universiti Malaya, and may be contacted at [email protected].
*This is the personal opinion of the writers or publication and does not necessarily represent the views of Malay Mail.