Opinion by: Debanjan Chatterjee, financial analyst
The trajectory of the stablecoin industry is heavily influenced by warring factions on opposite sides debating possible criminal use. Stablecoin opposers point to transfers of illicit funds. Proponents argue that the transparent nature of blockchains can be used to detect such crimes.
There is a lack of awareness of how a deep integration of stablecoins in global finance can drive the use of blockchain’s properties of immutability and transparency to fight financial crimes, even in traditional finance.
The stablecoin story
The stablecoin industry is going from strength to strength, aided by increased regulatory clarity and meaningful use cases. The ability to facilitate swifter, more cost-effective transactions than traditional banking rails has accelerated their adoption worldwide. The total value in circulation is estimated to be north of $200 billion.
We now have a host of tech firms, retail giants and traditional financial institutions lining up to issue their own stablecoins. The payment economy might be on a metaphorical spiral staircase that runs back to pre-Civil War times. Back then, the US had hundreds of local banks, each issuing their own private currency to be used as legal tender. Despite being a part of everyday payments, those currencies were not accepted too far away from the issuing bank. In hindsight, this probably kept an unintended check on any attempt to obfuscate the money trail.
Tracking illicit finance
In contrast, with thriving crosschain interoperability, it can be safely assumed that users will not have to jump through hoops to convert one stablecoin to another or any other digital asset or off-ramp them to fiat. This vision of the near future, marked by unabated and instantaneous capital flows across jurisdictions, naturally translates to stringent regulations to address illicit finance.
Related: Real-time crypto laundering exposes CEX vulnerabilities — Report
Regulatory guardrails for stablecoins mandate adherence to the highest standards of Anti-Money Laundering (AML) compliance. Surprisingly, the prowess of stablecoins themselves, to beef up law enforcement’s fight against financial crime, is not yet a part of the crypto zeitgeist.
Stablecoins flowing across the globe on immutable, transparent, public blockchains add teeth to the global fight against illicit finance by providing traceability in international finance with a much-needed leg up.
The old world
The archaic structure of traditional finance severely handicaps counter-crime initiatives. This is primarily because each bank or financial institution is a walled garden, a closed ecosystem in which the central authority controls all accesses, processes and user experiences.
Compliance professionals at each such financial institution can only investigate financial activity that transpired strictly within the virtual walls of the organization. This is a sliver of any entity’s entire set of commercial dealings, as any firm or person typically engages with multiple financial institutions.
Any walled garden hosts only a partial picture of their customers.
Suspicious Activity Reports filed by each bank are based on an incomplete picture of their customers, potentially causing misreporting of risk levels. Additionally, this outdated predicament causes significant inefficiency for law enforcement agencies, as they must separately obtain access to records from each financial institution that the entity under investigation might have touched and then proceed to painstakingly stitch together the complete picture.
The new world
A world with agile, international capital flows on stablecoin rails will enable law enforcement to study suspicious patterns using unfragmented, reliable and transparent information gathered directly from blockchains. Tracing across jurisdictions will not entail navigating red tape.
On a more thought-provoking note, a robust stablecoin payment economy will induce routine capital flows from traditional finance organizations to blockchains and vice versa.
Proceeds from real-world offenses, such as human trafficking, drug peddling and violent crimes, and crypto crimes, such as decentralized finance hacks, ransomware and crypto scams, might be laundered across a combination of traditional finance and crypto products.
Using live data from blockchains in AML initiatives can provide prompt intelligence even on criminal organizations that primarily use banks to place the spoils of their crimes.
Case in point, in recent times, the financial crime of sanctions evasion has exhibited such patterns, with sanctioned funds flowing interchangeably across both banking and stablecoin rails in an attempt to launder the same and dodge sanctions.
The road ahead
The emergence of a pervasive stablecoin infrastructure will do wonders to showcase to the global compliance community how the ubiquitous transparency of public blockchains enables lightning-fast, sophisticated responses toward preventing and detecting illicit finance.
This can spur much-needed cooperation between anti-crime divisions within traditional finance and crypto, with each sharing relevant intelligence for cross-pollination.
Custodians of conventional financial products have not yet recognized that metaphorical bread crumbs strewn across blockchains can be used as well-founded signals to infer user intent. A stablecoin industry, deeply integrated with the global banking system, will influence the use of these assets to make the universal financial network safer.
Opinion by: Debanjan Chatterjee, financial analyst.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
