Although cryptocurrencies have existed for over two decades, they have garnered considerably more attention in recent years. A majority of this attention has put a spotlight on cryptocurrencies and the potential pitfalls of investing in digital assets. In the most basic sense, a digital asset is something that is developed, stored, and shared in digital form. As blockchain technology developed, this definition shifted to encompass digital media with investment potential such as cryptocurrency and non-fungible tokens (NFTs).
Cryptocurrency is a decentralized, peer-to-peer, digital currency where value is ascribed by demand. Transactions using cryptocurrencies operate from digital wallets and are fairly simple to initiate. The user opens its digital wallet, enters the amount it wishes to send and the recipient address, and presses send. Once sent, it is completely anonymous, no permissions are required, and the transactions cannot be reversed.
The anonymity of cryptocurrency and the lack of regulation makes it especially susceptible to use in criminal operations, such as the sale or purchase of illegal goods and services, and financial crimes, such as fraud and money laundering.
While some countries, like China and Egypt, explicitly prohibit the use of cryptocurrency, the United States does not. Caught between promoting “responsible financial innovation” and quelling illegal activity, the United States is still in the process of developing a formal regulatory framework for cryptocurrency.
In the interim, the U.S. has focused its efforts on cybercrime and seizing cryptocurrency used or obtained in connection with criminal activity. In February 2022, the Justice Department arrested two individuals for conspiring to launder $4.5 billion in cryptocurrency. The cryptocurrency was originally stolen in 2016 from a cryptocurrency exchange, a platform that allows customers to buy or sell cryptocurrencies for digital assets, hard assets, services, or even fiat monies (cash). The Treasury Department has also sanctioned certain cryptocurrency exchanges in order to prevent such exchanges from processing transactions connected with illegal activities. Relying on the Bank Secrecy Act’s anti-money laundering and suspicious activity report reporting requirements, the Treasury Department has sought to hold cryptocurrency exchanges accountable when they expose users to high-risk parties connected with prohibited jurisdictions such as Iran, Syria, or Sudan, internet black markets, and ransomware attackers.
Perhaps the reward of using cryptocurrency for legal purposes may outweigh the risk one day, but until then, without a regulatory framework and considering the nature of activity currently associated with cryptocurrencies, investors should use extreme caution and seriously consider only doing so in consultation with financial and legal advisors.
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