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The rapid growth of cryptocurrency presents major challenges for financial institutions, tax authorities and other regulators, demanding technological innovation. 


Market values, user behavior, technology, regulations, and predictions about what the future will look like – in the world of cryptocurrency, things change fast.  


But one thing is certain: Crypto is here to stay, and its rapid evolution is driving a wide range of responses from financial institutions, central banks, tax authorities, law enforcement agencies and other regulators – across every corner of the globe. All these sectors are trying to determine what changes to make in their current policies and activities to meet the compliance and enforcement challenges posed by cryptocurrency.  


The Cost of Crypto 

The total value of all cryptocurrencies today (including the two largest, Bitcoin and Ethereum) is estimated at $1.5 trillion (US$) or 1.27 trillion (€), compared to the total global GDP of $85 trillion in 2020. And it’s growing fast, with an estimated annual growth rate of 7% over the next five years. More merchants are accepting cryptocurrencies and the number of transactions is growing rapidly.  


The major threats and risks presented by cryptocurrency include: 
  • The loss of tax revenue to governments at all levels and in all regions. Lax or outdated reporting requirements prevent tax agencies from being able to see, track or understand cryptocurrency transactions that should be taxable, enabling individuals and organizations to avoid tax payments. 
  • It’s difficult, sometimes impossible, for banks to meet the KYC (Know Your Customer) and anti-money laundering/counter terrorism financing (AML/CTF) rules, and exposing them to significant fines and penalties for non-compliance. 
  • For banks and financial regulators, accurately evaluating risks and threats is an increasing challenge. 
  • For law enforcement, enabling criminals to hide their illegal activities from scrutiny is also a rising hurdle.  

How Governments are Responding to Cryptocurrency Threats 

Governments are responding with a flurry of proposed policy changes. In July 2021, the European Commission announced a major proposal to apply its AML/CTF rules to the entire crypto sector, requiring all service providers to conduct due diligence on their customers. If adopted by the EU Parliament and Council, the rules would ensure full traceability of crypto asset transfers, such as Bitcoin, and allow for prevention and detection of their possible use for money laundering or terrorism financing. In addition, anonymous crypto asset wallets would be prohibited. 


In the U.S., the federal Internal Revenue Service recently announced that it would begin requiring companies to start reporting all transactions of $10,000 or more that involve cryptocurrencies.  The IRS said cryptocurrency already poses a significant detection problem by facilitating illegal activity and tax evasion.  


A Game of Cat & Mouse 

For tax enforcement agencies, financial intelligence units and others investigating financial crimes, trying to track the movements of bitcoin and other cryptocurrencies “is a complex, 21st century cat-and-mouse game,” according to the Wall Street Journal.  “Because the scammers know their movements can be traced, they typically move their illicit gains across hundreds, or even thousands, of transactions. They might control dozens of other wallets and move the money back and forth.”  


The trend is clear – both government agencies and financial institutions recognize that they need greater visibility into cryptocurrency transactions and accounts, and they are moving on multiple fronts to achieve that. But even with the necessary regulations and laws in effect, there are daunting challenges to being able to have the visibility required.  



Solving Cryptocurrency Challenges with Advanced Analytics 

To overcome the challenges posed by cryptocurrency, an innovative solution like advanced analytics  technology is needed. If adopted, these new reporting requirements will give banks and government agencies access to cryptocurrency transaction and account data they’ve not had before, but the data volumes will be huge.   


It will be tremendously challenging to analyze the vast number of transactions and entities to understand whether AML/CTF laws have been broken, whether taxes are due, whether activity represents legitimate business transactions – or criminal activity.  


Advanced analytics tools utilize entity resolution and network generation to answer those questions.  


By combining data reported by the cryptocurrency exchanges and data from other sources, including financial institutions, commercial data providers and others, analysts will be able to link transactions to individuals and companies and determine account ownership. 


It’s an interesting and exciting time to be involved in technology, in cryptocurrency issues and in meeting these fast-evolving challenges.

Decision intelligence for government agencies starts with advanced analytics.

Discover hidden risks and opportunities by seeing the relationships between people, places and organizations across multiple disparate data sets. And start seeing the world in more than one dimension to help you make better decisions. 

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