Familiarity with and ownership of cryptocurrency are on the rise. Research indicates that 40% of U.S. adults now own crypto. This growing demand is likely driven by consumers looking to find alternative investment opportunities that offer potential higher returns than traditional banking. Additionally, there’s a widespread belief that blockchain-based technologies represent the future, encouraging many to secure a stake in this evolving ecosystem.
However, the anonymity associated with cryptocurrencies presents significant risks, necessitating regulatory oversight. Recent real-world examples of these threats include Hamas using crypto to evade sanctions and Russian money laundering networks that were exposed and detected by the UK National Crime Agency’s (NCA) Operation Destabilise.
This raises critical questions: how do you legislate a technology as dynamic and fast-changing as crypto, and why is such regulation crucial?
Why We Should Care About Crypto Legislation
Put simply, bad actors can exploit new crypto capabilities. Over time, this puts not just customers at risk, but the wider integrity of the banking system as well. For example, a joint international operation led by the NCA recently highlighted new uses of crypto assets to launder the proceeds of international criminal activities, including moving money across borders to elude detection. And this is a problem that’s only growing.
Chainanalysis estimates that more than $22 billion was laundered using crypto assets in 2023, and this figure trended higher for 2024. New technologies inherently involve a balance of risks and rewards that policymakers must navigate. However, as these figures suggest, the U.S. risks exposing consumers and the broader financial system to greater potential downsides than upsides in 2025.
Why the U.S. is Behind the Curve in Crypto Regulation
Compared with the UK and the European Union, the U.S. is missing the mark when it comes to crypto regulation. The European Union’s Markets in Crypto-Assets Regulation (MiCA), in part, provides a framework for managing financial crime risk with respect to crypto assets. The UK’s approach is more circumspect, led by the Financial Conduct Authority (FCA). Engagement between the public and private sectors is critical because the assets and the technology are still relatively nascent, so learning and working collectively to manage and identify financial crime risks is even more important.
Meanwhile, the current U.S. landscape is evolving and may change direction with a new administration in 2025. The 2024 Financial Innovation and Technology for the 21st Century Act is a first step to more cohesive regulations, and amendments continue to be made. However, collaboration between regulators, such as the Securities and Exchange Commission (SEC) and the Financial Crimes Enforcement Network (FinCEN), is needed to develop a uniform, harmonized approach.
Because the U.S. Congress has not established plans to regulate crypto at the federal level specifically, oversight is currently spread across various bodies, making a harmonized approach to compliance more difficult for organizations subject to multiple regulators. What’s more, understanding the entire ecosystem is important as assets can be moved through the broad ecosystem of financial services companies to obfuscate financial criminal activity.
The Legislative Approach Needed for Effective Crypto Regulation
One of the most effective ways to combat financial crime in the crypto space is to ensure that legislation focuses on its foundational goal: stopping financial crime. Laws and regulations should not just restrict or control cryptocurrencies for their own sake but should aim to prevent illicit activities such as money laundering, fraud, and the financing of terrorism. By adopting this approach, policymakers can create more targeted, effective, and sustainable policies.
Transparency is central to this approach. Transparency is vital at multiple levels, particularly in how it relates to both crypto’s underlying technology and the broader framework of legislation that governs it. From a technology perspective, lawmakers can encourage or mandate the development of technologies that allow for better monitoring and tracking of crypto transactions. This includes integrating tools that allow law enforcement agencies to track transactions across blockchains or require that crypto exchanges and wallet providers implement Know Your Customer and anti-money laundering (AML) protocols to ensure that the system is not being threatened by bad actors.
It’s critical that legislation is inherently flexible to handle evolving technological developments. To that end, we need to avoid a “black swan” event by keeping inherent risks in mind. For example, suspicious activity detection on crypto assets must use sophisticated anomaly detection techniques such as machine learning to detect the “unknown unknowns.”
Legislation should also continue to adopt the guiding principles of industry organizations like the Financial Action Task Force (FATF) and the Wolfsberg Group. Both groups advocate for a risk-based approach to AML and countering the financing of terrorism.
A United, Global Front
Financial criminals operate across borders and are indifferent to national boundaries. By establishing cryptocurrency guidance and a harmonized approach under an organization like the FATF, complemented by strong regional legislation, governments and organizations can better tackle the global problem of financial crime. What’s more, such an approach enables financial institutions involved in the digital and crypto asset ecosystem to better understand and fulfill their obligations on a global basis.
Crypto operates globally without any centralized oversight. These borderless assets can facilitate the cross-border transfer of value without involvement from central banks, for example. Criminals will take advantage of the opaque nature of these assets. They are not subject to compliance obligations, so they are singularly focused on perpetrating crime. Also, data sharing is essential. We need to establish mechanisms to share insights globally across the industry.
What the Future Holds
Financial crime prevention needs to be more prescriptive in legislation. Overall, legislation must establish harmonized approaches and mechanisms to share insights between all participants, both public and private, and provide the tools and technologies to see the currently obfuscated data involved in crypto transactions.
As witnessed, crypto and blockchain usage has rebounded in 2024. And while there is value to consumers, the risks continue to evolve. To effectively manage risk, we need a synchronized approach. This involves publishing details of known typologies and sharing data and insights to ensure that the data and technologies we use are fit-for-purpose and not just “check-in-the-box” activities. This foundation will help foster an approach that supports our moral imperative to stop financial crime—whether that be money laundering, fraud, terrorist financing, human trafficking, or other predicate crimes.
