Perspective by: Debanjan Chatterjee, financial analyst
The path of the stablecoin sector is significantly shaped by opposing groups debating potential criminal applications. Critics of stablecoins highlight the transfer of illicit funds, while advocates assert that the transparent nature of blockchains can help identify such crimes.
There is a widespread lack of understanding regarding how a thorough integration of stablecoins into global finance can utilize blockchain’s features of immutability and transparency to combat financial crimes, even within traditional finance.
The stablecoin narrative
The stablecoin sector is thriving, driven by enhanced regulatory clarity and significant use cases. Their capability to enable quicker, more affordable transactions than conventional banking systems has bolstered their global adoption. The total circulating value is estimated to exceed $200 billion.
A multitude of tech companies, retail giants, and traditional financial institutions is now looking to launch their own stablecoins. The payments landscape might be likened to a metaphorical spiral staircase leading back to pre-Civil War America, where numerous local banks issued their own private currencies as legal tender. Although these currencies were part of everyday transactions, their acceptance was often limited to the issuing bank’s vicinity, inadvertently preventing attempts to obscure financial trails.
Monitoring illicit finance
In contrast, with flourishing cross-chain interoperability, it’s reasonable to anticipate that users will find it straightforward to convert one stablecoin to another or to any other digital asset, or to off-ramp to fiat. This vision of an impending future characterized by unrestricted and instantaneous capital movements across jurisdictions naturally calls for rigorous regulations to combat illicit finance.
Related: Real-time crypto laundering reveals CEX vulnerabilities — Report
Regulatory frameworks for stablecoins require compliance with the highest standards of Anti-Money Laundering (AML). Surprisingly, the ability of stablecoins themselves to bolster law enforcement efforts against financial crime has yet to gain traction in the crypto conversation.
Stablecoins circulating globally on immutable, transparent, public blockchains enhance the global fight against illicit finance by providing traceability in international finance.
The old paradigm
The outdated framework of traditional finance severely hampers anti-crime efforts, primarily because each bank or financial institution operates as a walled garden, a closed ecosystem controlled by a central authority. Compliance teams within these institutions can investigate only the financial activities that occur strictly within their confines, representing just a fraction of any entity’s overall commercial interactions, as individuals and firms typically engage with multiple financial entities.
Each walled garden therefore offers only a partial insight into their customers’ activities.
Suspicious Activity Reports filed by banks are based on fragmented views of their clients, which can lead to misreporting of risk assessments. Furthermore, this outdated situation creates major inefficiencies for law enforcement agencies, as they must approach each financial institution separately for records related to the entity under investigation and painstakingly assemble a comprehensive picture.
The new paradigm
A landscape characterized by agile, international capital flows on stablecoin rails will empower law enforcement to observe suspicious patterns using unfragmented, reliable, and transparent information sourced directly from blockchains, eliminating the need for navigating bureaucratic hurdles.
On a more provocative note, a robust stablecoin payment economy will routinely enable capital transfers between traditional finance and blockchains and vice versa.
Funds from real-world offenses like human trafficking, drug dealing, and violent crimes, as well as crypto crimes involving decentralized finance hacks, ransomware, and scams, could be laundered through a combination of traditional finance and crypto products.
Leveraging real-time blockchain data in AML strategies can offer timely intelligence on criminal organizations that primarily utilize banks for their illicit gains.
For instance, recent instances of financial crimes such as sanctions evasion have demonstrated the intertwined patterns of sanctioned funds flowing seamlessly between banking and stablecoin sectors in attempts to launder and evade sanctions.
The future pathway
The rise of a comprehensive stablecoin ecosystem will significantly illustrate to the global compliance community how the inherent transparency of public blockchains enables rapid and sophisticated responses to prevent and detect illicit finance.
This can stimulate crucial collaboration between anti-crime units within traditional finance and the crypto sector, facilitating intelligence sharing for mutual benefit.
Custodians of conventional financial products have yet to recognize that the metaphorical breadcrumbs scattered across blockchains can serve as reliable indicators of user intent. A stablecoin environment deeply integrated with the global banking framework will encourage the use of these assets to enhance the safety of the universal financial network.
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.
