Crypto Has Achieved More in Combating Financial Crime Over the Past 15 Years Than Traditional Finance Has in the Last 150 Years. Big Banks Need to Take Note.

TradFi is still smoke and mirrors

Think of it this way, and let’s put our forensic hat on, it’s difficult to hide in plain sight. There is simply no comparison between crypto and TradFi when it comes to transparency and traceability. TradFi – and let’s aim those crosshairs more squarely at banking – often involves many intermediaries across various jurisdictions. It’s too easy to get those all-important KYC checks bogged down in a paper trail that spans across five different time zones and hops from tax-free island to tax-free island. It is complex. Ideal for money laundering; particularly as, in most cases, you’re never really certain about where those funds originated from.

Contrast this with blockchain technology, and it’s night and day. The fabled “immutable ledger of transactions” is exactly this. As the backbone of crypto, it offers not only transparency but permanency. Every transaction is recorded and cannot be altered once completed. For those investigating any nefarious activity, it’s the ultimate trail of breadcrumbs to the crime, and is invaluable when it comes to creating an industry that scores top marks in compliance.

Then there’s the fact that centralised finance is, well, centralised. It’s far too easy for criminals to exploit single points of failure in financial systems, and we’ve seen this happen too many times. DeFi, on the other hand, spreads control across a network, making it much more difficult for bad actors to breach the system. This decentralisation is not just a technical distinction; it completely changes the dynamics of security and trust.

TradFi also has a tendency to lean towards post-transaction monitoring. While this isn’t without its merits, a post mortem approach often means that financial crimes are detected only after they have occurred. Being relatively new, the crypto industry has the ability to innovate from the ground up, and real-time transaction monitoring is more of an industry standard than a “nice to have”.

In 2022, online banking fraud in the UK surpassed £1 billion for the first time, and this milestone forced many banks to go after the tech platforms rather than reimburse the victims of fraud themselves. Contrast this with crypto and, despite the majority of crypto investors being less sophisticated, and the industry being almost a century less mature, crypto fraud in the UK peaked at £226m in 2022.

Playing devil’s advocate, you might argue that the volume of transactions in TradFi dwarfs that of DeFi, but perhaps crypto’s real-time monitoring of transactions, and the immediacy of this, allows for quicker detection and flagging of irregularities. This prevents many crimes before they can cause widespread damage.

Why crypto will stay ahead in the fight against financial crime

Crypto providers pride themselves on having a proactive front-foot stance, which puts them in good stead, and ahead, in the fight against financial crime. Advanced monitoring tools enable real-time scrutiny of transactions, which is far more effective than the delayed responses seen in TradFi. Then we have the incoming rulebooks – Markets in Crypto-Assets (MiCA) regulation in Europe will create more harmony amongst those crypto providers who follow the rules.

Privacy is another stumbling block for TradFi. They face a dilemma that’s difficult to solve – how do you enhance security measures without infringing on the privacy of your users? Crypto providers have an answer to this question: through the blockchain. That immutable ledger provides a permanent record of transactions. This unique feature accomplishes two crucial goals simultaneously. Firstly, it protects users’ right to anonymity. It also ensures that activity remains traceable, which is essential for detecting financial crime.

Users maintain control over their personal data, choosing which information to share in the fight against financial crime. Imagine having an entire logbook of evidence that can be anonymously shared in order to weed out the bad players. It’s the power of community at its finest.

Financial crime will continue to evolve, but the crypto industry has the adaptability and drive to evolve with it. It’s not just the technology, it’s the philosophy. The blockchain was created for good – breaking down the silos of TradFi to create a truly collaborative network on a global scale. Crypto is often unfairly maligned as a haven for criminals, but the reality is quite the opposite. The crypto industry is not just keeping up with the challenges of financial crime; it is setting new standards. Those big TradFi banks could learn a thing or two.

About The Author

	Paula Steiner is the Chief Compliance Officer at Fiat Republic. She has more than 9 years of Regulatory Compliance and FinCrime experience in financial institutions and Fintechs. Her previous roles include Senior Consultant at Deloitte and Compliance Officer at Mollie Payments.

Editorial Note: This article is made possible by MVPR.