Is Traditional Finance More Honest than Crypto?

There is no doubt that the cryptocurrency industry is rife with scams and fraudulent activity, at least as of now. However, it is important to remember that the traditional finance world is not exactly honest, either. In fact, many believe that the crypto industry is actually more honest than traditional finance.

Crypto is built upon software networks, which can facilitate traditional financial services such as lending, borrowing, derivatives trading, and insurance via smart contracts. It uses cryptography for security and removes the middleman in financial transactions.

This burgeoning sector aims to transform traditional finance through permissionless and open-source protocols. While many believe the widespread adoption of crypto could change the landscape for the worse, the greatest regulatory attention for the sector thus far has focused on the traditional concerns around money laundering, financial crimes, market integrity, and the protection of investors and customers.

A Look at Crypto’s Crimes

Crypto critics point to a surge in crimes involving cryptocurrencies in recent years citing its usage as a means of payment in illicit activities. It has been argued that the anonymous nature of cryptocurrencies makes them difficult to trace. As a result, criminals are increasingly using cryptocurrencies to carry out their activities.

If we look at the criminal side of the space, there are a few notable cases of crimes in the crypto sector. The most prominent one occurred in early 2014 when the crypto exchange Mt. Gox fell victim to a massive hack, which resulted in the loss of over 850,000 BTC. It was a devastating blow to the crypto community.

Other incidents involve the Japanese exchange Coincheck getting hacked in 2018, in which a whopping $534 million worth of tokens were stolen. Then in 2019, QuadrigaCX, a Canadian exchange, collapsed after the death of its CEO, who was the only person with access to the private keys. It resulted in the loss of $190 million worth of cryptocurrencies.

Meanwhile, according to blockchain analytics firm Chainalysis’ 2022 Crypto Crime Report, crypto-related crimes reached new record levels in 2021, with $14 billion received by ill-gotten addresses during the year, compared to $7.8 billion in 2020.  This increase in dollar value throughout 2021 comes not from initial amounts generated by illicit activity but rather through the subsequent rise in prices for crypto assets.

For example, the value of some crypto assets, including bitcoin, experienced significant value increases in 2021, sending the total crypto market cap past the $3 trillion mark as well as an expansion in worldwide users.

The most important thing here is that only 0.15% of 2021’s crypto transactions were tied to illegal activity, down from 0.62% in 2020. It goes on to show that the growth of legitimate cryptocurrency usage is “far outpacing the growth of criminal usage,” as illicit activity’s share of crypto transaction volume has never been lower.

TradFi is Actually Worse

Now, if we look at the world of traditional finance (TradFi), the situation is much worse. The sector is fraught with corruption and dishonesty. From insider trading to fraud and embezzlement, there are countless examples of financial institutions and individuals engaging in unethical and illegal behavior.

TradFi has been around for centuries and is the most commonly used form of financial planning. At the core of a mainstream financial economy is a set of intermediaries who connect dispersed actors. The paradigmatic middlemen are financial institutions such as banks and market providers like securities exchanges.

It is a centralized system where a handful of people or entities control the flow of money and information. This central authority can easily manipulate the system for its own benefit. Additionally, traditional finance is often opaque, making it difficult for people to understand how their money is being used. It can lead to people being taken advantage of by those in power.

Traditional financial institutions are supposed to be pillars of the financial system, but time and again, they are found to be committing crimes. The latest example is the case of Wells Fargo, which has agreed to pay $3.7 billion to settle a laundry list of charges that harmed consumers by charging illegal fees and interest on mortgages and auto loans, as well as incorrectly applied overdraft fees against savings and checking accounts.

This is not the first time banks have been penalized for wrongdoing. For instance, in 2012, JPMorgan Chase was fined $2.6 billion for its role in the Madoff Ponzi scheme. And in 2016, Deutsche Bank was fined $7.2 billion for mortgage abuse.

As a matter of fact, this centralized system is so rife with fraud that the top 10 banking institutions, including Bank of America, JP Morgan Chase, Wells Fargo, Citigroup, Goldman Sachs, Deutsche Bank, Goldman Sachs, Credit Suisse, Morgan Stanley, and NatWest Group have had a total of more than 7,150 penalty records since 2000 amounting to nearly $350 billion, according to Violation Tracker.

The penalty offense of these banks range from fraud, banking violation, False Claims Act, toxic securities abuses, investor protection violation, price-fixing or anti-competitive practices, economic sanction violations, anti-money-laundering deficiencies, Foreign Corrupt Practices Act, and more.

It is clear that banks are not deterred by the penalties they have to pay. They continue to engage in illegal activities, knowing full well that they will be caught and fined. It is because the fines are simply a cost of doing business for banks. After all, they are able to make billions of dollars in profits, even after paying billions in fines.

This is why it is important for there to be stricter regulation of the banking industry. The current system is not working, as banks still engage in illegal activities. It is time for tougher penalties to be imposed on banks to deter them from breaking the law. But instead of focusing here, regulators are trying to crush the nascent crypto industry, which aims to disrupt TradFi.

The Hypocrisy of Anti-blockchain Regulators

In recent times, the crypto sector has come under intense scrutiny from regulators, which is hardly surprising given the increasing interest from retail and billions pouring into the sector.

However, it is hypocritical of anti-blockchain regulators to push the narrative of the industry being a dangerous scam when TradFi is often more corrupt. The blockchain industry is based on transparency and decentralization, while TradFi is based on centralization and manipulation. The blockchain industry is open and inclusive, while TradFi is closed and exclusive. The blockchain industry is about empowering the people, while TradFi is about empowering the few.

As the crypto industry continues to grow and evolve, regulators are scrambling to keep up. However, instead of trying to understand this new technology and its many positive implications, the regulators are trying to “choke” the crypto sector by making it increasingly difficult for exchanges and other businesses to operate. It could have a devastating effect on the sector.

One recent example is US Senator Elizabeth Warren (D-Mass.) proposing a bill to crack down on money laundering and terrorist financing via cryptocurrency. The Digital Asset Anti-Money Laundering Act is designed to “mitigate the risks” that crypto poses but ends up proposing exactly the opposite.

If the bill becomes law, it will expand KYC rules to be applied to crypto participants, including wallet providers, miners, and validators. The Act will further allow FinCEN to implement a proposed rule under which institutions are required to report certain transactions involving unhosted wallets where the user is in complete control of the contents rather than relying on an exchange or other third party.

The focus of the bill is financial surveillance and effectively outlaws the self-custody of digital assets, which gives users control over their own assets. The cryptocurrency industry heavily opposes the bill, which would effectively make it illegal for Americans to participate in public blockchains.

As the crypto industry matures, we will likely see more of this heavy-handed regulation from governments worldwide. But there is a need for regulators to take a balanced approach towards crypto regulation.

Innovation in the financial sector is essential to the health of the economy as a whole. And yet, financial regulators have often been reluctant to embrace new technologies like cryptocurrencies.

This is understandable, to a certain extent. After all, financial regulation is designed to protect consumers and investors, and new technologies can be risky. But if regulators take too cautious an approach, they risk stifling innovation.

Cryptocurrency and blockchain can actually help prevent fraud and corruption, lower enforcement costs through easy-to-access information, and faster verification. Moreover, it can assist in monitoring implementations as well as effectiveness and efficiency, increasing the development impact.

Already, there are many blockchain analytics and compliance companies that help law enforcement agencies and investigators identify and track the origins of illegal funds.

The Issue isn’t Crypto but rather Human Greed

The technology behind Bitcoin and other virtual currencies, the blockchain, is an open, distributed ledger capable of recording transactions between two parties effectively, in a verifiable, and permanent manner.

Because blockchain is the public record of all transactions made using cryptocurrency, the blockchain is searchable and can be used to keep track of all transactions.

However, regulators and critics argue that the sector is especially appealing to thieves because fraudulent transactions cannot be reversed, which is typically possible with traditional financial systems. However, most headline-grabbing recent hacks have been attacks not on blockchains per se but rather exchanges — websites where people buy, sell and hold cryptocurrency.

Many of the high-profile crypto crimes are simply old-school scams that are leveraging a new medium. For example, many Ponzi schemes and other investment scams have migrated to the crypto world to exploit unsuspecting investors.

The issue isn’t crypto but rather the continued human greed, as we saw in the case of crypto exchange FTX’s implosion. While the platform was built on the promises of blockchain technology, it was an “old-fashioned embezzlement” operation that took money from customers for its own purposes, said the bankrupt company’s new CEO John J. Ray III, this month at a US Congressional hearing in Washington, DC.

This can also be seen from Chainalysis’ report, which noted that stolen funds, cybercriminal administrators, and scams were the most popular type of crimes committed in the crypto sector.

The Growing Trend of Bitcoinization

As the cryptocurrency industry matures, there is now a growing trend of Bitcoin separating from other digital assets. It is because Bitcoin is built on the idea of removing trust from the equation.

Bitcoin was created in 2009 to solve the corrupt traditional finance system. The creator, pseudonymous Satoshi Nakamoto, designed Bitcoin as a decentralized, trustless peer-to-peer system that would allow users to send and receive payments without the need for a third party.

The cryptocurrency is powered by blockchain technology, which allows for secure, transparent, and tamper-proof transactions. Since its launch, Bitcoin has become the most popular cryptocurrency in the world, with millions of users and billions of dollars worth of transactions occurring daily. While the traditional finance system has continued to be plagued by corruption and fraud, Bitcoin has emerged as a trusted and reliable alternative.

Over the last decade, bitcoin has gained attention from regular individuals and governments across the globe. Even if the cryptocurrency eventually fails or is reduced to a lesser role on the global stage, it may fundamentally change how the world views currencies. This has led some people in the industry to view Bitcoin as the purest form of cryptocurrency.

That is not to say that other cryptocurrencies do not follow the ethos of the blockchain industry, as other digital assets, such as Ethereum, are also trustless and allow for smart contracts and other complex transactions.

However, the trend of separating Bitcoin from other digital assets will likely continue as the industry matures and investors become more sophisticated, especially after the FTX collapse, which is driving the sector back to its roots.

Final Word

Traditional finance is controlled by a small group of people who can easily manipulate the system for their own benefit. In contrast, the world of cryptocurrency is often lauded for its transparency and accountability. With all transactions being recorded on a public ledger, it is difficult for anyone to engage in nefarious activities without being caught.

So, which is more honest – traditional finance or crypto? As it can be seen that crypto has the potential to be more honest and transparent than TradFi, thanks to its decentralized nature and use of blockchain technology.

While the cryptocurrency industry may not be perfect, it is typically more honest than traditional finance. This is why more and more people are turning to crypto, despite the risks.