More money lost to scams in “traditional finance” than crypto

In this article we investigate fraudulent activity in the crypto asset markets, and compare data against the traditional financial markets.

Public perception

Deloitte recently published the 2019 iteration of its annual Global Blockchain Survey. The report reveals a positive uptick in the prevailing attitudes towards blockchain technology from executives in leading enterprises across the globe.

The survey was conducted between February 8 and March 4, 2019, polling 1,386 high-level executives whose companies had greater than $500 million in profit over the past year. The report is designed to uncover investment and attitude trends relating to blockchain technology and cryptographic assets.

The 2019 Global Blockchain Survey reveals a maturing sector, as investments, adoption rates, and attitudes continue to show positive signs in comparison with past years. For instance, 40 percent of investors said they are willing to invest $5 million or more in new blockchain initiatives over the next 12 months, a one percent increase from 2018.

Additionally, organizations are prioritizing the introduction of blockchain technology at a ten percent increase in comparison to last year. The Deloitte report said that, “83 percent see compelling use cases for blockchain, up from 74 percent, and respondents’ overall attitudes toward blockchain have strengthened meaningfully.”

Deloitte found that the number of organizations who have deployed blockchains within their structure was only 23 percent. This is an 11-point drop from 2018’s 34 percent adoption rate. Additionally, the percentage of those who see blockchain and cryptocurrencies as overhyped has grown from 39 to 43 percent.

The Deloitte report is an insightful look into the curious jumble of attitudes pertaining to blockchain technology and digital assets. On the one hand, many are convinced of the potential these innovations hold, however, there seem to be a number of challenges that are standing in the way of widespread public acceptance and adoption. As mentioned by the report, one of the most worrisome and oft-cited issues are those revolving around legal compliance and regulatory environments.

Looking at the numbers

Unfortunately, the prevailing attitude regarding the cryptocurrency sector seems to be skewed towards the negative. A cursory look online reveals a number of comparisons between the state of the digital currency sector and the ‘wild west’.

The major perceptions attached to cryptocurrencies are scams and fraud. The public still seems to believe that digital assets are utilized primarily by shadowy figures trading on illegal online marketplaces, financing organized crime, and defrauding unsuspecting people through investment schemes. Additionally, the public seems to believe that the rates at which these activities happen within the digital asset sector are higher than those seen within traditional financial markets.

Leading blockchain-intelligence firm CipherTrace published its 2018 Cryptocurrency Anti-Money Laundering Report in the first quarter of this year. In the paper, it was revealed that $1.7 billion in digital assets was lost in 2018. The cryptocurrencies were either stolen from exchanges or scammed from investors. This number represents a 400 percent increase in 2018 when compared to 2017 statistics.

While $1.7 billion is a large number, it pales in comparison to the amounts lost within traditional markets. The amount lost to fraud within the confines of the traditional financial system is actually much larger.

In 2018, the amount lost to fraud in the UK alone totaled out at £110 billion. The report compiled by Crowe Clark Whitehill, a national tax advisory firm, in conjunction with the University of Portsmouth’s Centre for Counter Fraud Studies (CCFS), also found the amount lost to fraud and scams within the traditional financial sector was a whopping £3.24 trillion.

The statistics show that fraud is present in both the cryptocurrency sector and the traditional financial markets. However, in what is a clear contradiction of the prevailing attitudes, the amounts lost within legacy markets are much larger. Of course, the traditional financial market is much larger than the burgeoning digital asset sector. However, if the UK’s 2018 fraud in finance figure is used as a proxy and extrapolated to a global figure, we could estimate that losses due to fraud in the crypto asset markets represent a tiny percentage of what is lost in the traditional financial markets.

Where is the disconnect?

The numbers clearly show that both markets are affected by fraud. Additionally, respected institutions within the global financial system have been found to be operating outside the confines of legality. For instance, this month a former J.P. Morgan precious metals trader pleaded guilty to criminal charges of manipulating the precious metals markets for nine years. Christian Trunz was an executive trader at J.P Morgan. For context, nine years is almost as long as the entire lifespan of the cryptocurrency markets.

Moreover, each year banks are slapped with hefty fines due to the role they play in global money laundering schemes. However, those within the traditional financial market, as well as regulators, are somewhat disproportionately concerned with the digital asset sector, citing money laundering often when discussing the challenges posed by digital currencies.

It is clear that fraud is not a crypto problem, it is a money problem. Money, in all its forms, digital currencies included, is designed to be a store of value and a transfer of value. For a sector that prides itself on its decentralized and open nature, there are undoubtedly fewer barriers to entry for criminals. However, growing global regulatory responses are slowly strengthening KYC/AML structures for the cryptocurrency industry.

As the Deloitte report alludes to, the distrust of the digital asset sector may be characterized as a function of its relative youth and will slowly remedy itself as the sector grows and the public interacts with the technology more.