Deploying The Blockchain Against Cryptocurrencies, Giving Regulators An Edge Over Criminals


Whenever cryptocurrencies go under regulatory spotlight, the conversation quickly descends into what has become a cryptocurrency cliché, the use of crypto assets to fund criminal activities and terrorism. The point which regulators omit to also emphasise on is the fact that terrorism, drugs and all the other illicit activities under the sun pre-date crypto assets which were only discovered almost a decade ago. The 9/11 attacks occurred long before crypto assets arrived and to relate crypto assets to terrorism for example would be to put the cart before the horse. It cannot be denied though that cryptocurrencies make it easier for unscrupulous players to take advantage of a vacuum in this space.

Regulators would have to stop dithering about the rights and wrongs of crypto-assets and take affirmative action to protect consumers. In this regard, they should look no further than cryptocurrencies for solutions. The blockchain which powers cryptocurrencies is the biggest tool which regulators will need to quickly get familiar with in order to win the fight against crypto related criminal activities. The same attributes which cryptocurrencies have been lauded for-transparency, immutability and efficiency can enable regulators to discharge their functions without the need to expend the limited resources at their disposal.


All cryptocurrencies function through the manipulation of a public distributed ledger. This ledger is available for anyone who wants to view it through a functionality called blockchain explorer for example. This displays all wallet addresses on a particular blockchain. A search using a wallet address reveals all transactions of incoming and outgoing transactions. The only problem is, you cannot tell who the parties involved in the transaction are-which is why most people confuse this for anonymity. Once you have a wallet address, you can find out more information such as dates when the transaction occurred and all wallets where assets have been sent to which can also enable anyone to then uncover the value of assets involved.

This information can be very useful for regulators as at some point the assets would have to be disposed of and brought back into the traditional financial systems at which point regulators can start asking questions about the source of funds.


Immutability is hailed as one of the fundamentals of the blockchain which enables cryptocurrencies to be passed around on the blockchain without any concerns about double spending. Once a transaction has been recorded and the ledger has been distributed across the network, it is almost impossible to change the record on the blockchain. This is because one would have to conspire with the entire network of computers spread across the globe which were involved in confirming that transaction in the first place. This does not end there, one would also have to do the same by changing all subsequent transactions. This means that enforcement agencies can use the blockchain to nail criminals so long as they manage to get a wallet address.

Transparency, when combined with immutability, can enable regulators to bring prosecutions and enable prosecutors to discharge the burden of proof which is beyond reasonable doubt for criminal prosecutions. This is how assailants were nabbed in the famous Silk Road trial in the US where bitcoins were used in criminal activities. A prosecutor gets proof beyond reasonable doubt through the blockchain as this cannot be disputed in court.


One of the biggest benefits of the blockchain is its efficiency in as far as crypto assets are concerned. Anyone can simply input a wallet address and you get to view all the outgoing and incoming transactions which are recorded and kept on the blockchain. This means that you do not need to solve a difficult puzzle which is normally the case when tracing assets through fiat bank accounts whereby you have to jump through various privacy hoops, with the puzzle increasing in complexity where cross-border transactions are involved.

A combination of transparency, immutability and efficiency can help law enforcement agencies and regulators to stay ahead of criminals if the blockchain can be used effetively.

The pre-requisites

In order to be able to throw the book back at cryptocurrencies, law enforcement and government agencies will have to understand how blockchain technology works. Tackling crime within this sector requires enforcement agencies to adopt smart ways of investigating financial crimes. It also requires cooperation between various government agencies. The complexity of the issues surrounding regulation can be explained through an analysis of the regulatory regime in western countries.

The regulatory framework in the US is confusing as there are multiple agencies which claim jurisdiction-and as an example, the Securities and Exchanges Commission (SEC) and the Commodities and Futures Trading Commission (CFTC) often clash. Cryptocurrencies overlap across these agencies as it is not possible to give a blanket definition to them as every asset is different in the sectors getting disrupted, how it was funded and functionality of the token. Bitcoin for example is classed as a commodity meaning that CFTC retains jurisdiction[1]. The SEC believes that most tokens distributed through ICOs are securities hence they fall under its jurisdiction[2]. The truth is that none of the agencies are wrong, it is simply a reflection of the complexity of issues involved which can only be solved through tailor made laws and regulations.

In the United Kingdom, the Financial Conduct Authority (FCA) is empowered to regulate financial services. Through a statement, the FCA acknowledged that cryptocurrencies fall in a grey area and this is not covered by law[3]. The conclusion has been that this new asset class will require parliament’s involvement before it can get regulated.

The US approach is in sharp contrast with the UK approach and this serves to illustrate how complex it is to tackle the issue of regulations in this space. It is by no way suggested that any country should adopt any of these approaches, however, something needs to be done. The difficulties involved probably explain why some jurisdictions have simply decided to take the irrational measure of a complete barn.

Collaborative approach

Successful regulation of cryptocurrencies will require a coordinated and collaborative approach across government agencies and countries. A better starting point would be for legislation to be passed through parliament which either split regulatory powers across various regulators by following the US approach or the other alternative would be to pass laws which give powers to only one institution to have oversight of all things crypto.

Taking a regulatory option to cryptocurrencies can bring benefits as trading these assets can attract revenue through taxes provided they are clearly defined in law. Germany took the lead in Europe by making cryptocurrencies more like a legal tender and German citizens will be able to use crypto assets for day to day transactions. Taking this approach will mean that it will be easier to develop tailor-made regulations whilst at the same time allowing law enforcement agencies to catch up with how the technology works.

The three attributes discussed above can be harnessed as tools for regulating the cryptocurrencies space. However, the implementation of regulations would have to be frontloaded with training across all sectors which may include training the public and raising awareness on the risks and benefits posed by cryptocurrencies.

Ineffectiveness of a ban

Whilst others may advocate for a ban and feel that this could solve the problem, this is not necessarily the case. A knee-jerk reaction ban can increase demand and drive prices up, cryptocurrencies are already trading at a premium in some parts of the world especially across the whole of Africa. A ban will simply drive this sector underground. The decentralised nature of cryptocurrencies means that enforcing a ban is almost impossible especially in circumstances where law enforcement agencies are under-trained and ill equipped in recovering the assets which are often stored online and can be moved across borders easily.


In as much as the establishment would like to see off cryptocurrencies, the reality tells a very different story. Cryptocurrencies are already becoming mainstream and 2018 has already been a defining period. Major global and traditional institutions which impact on the development of financial services have already signalled an intention to embrace digital assets. Big entities such as Mastercard and Barclays have since moved to file patents for various payments systems using cryptocurrency as a settlement method. Some regulated products such as futures have started to surface in the UK. In the US, despite several applications of Exchange Traded Funds (ETFs) being turned down by SEC, it appears to be only a matter of time before an approval occurs. There is consensus that this emerging technology is very disruptive, however, this does not call for taking what appears to be the easier option-a ban. Once this technology gets embedded elsewhere across the globe, playing catch up would be difficult and probably costly. Regulating cryptocurrencies appears to be the only reasonable option on the table. The blockchain which is the driver for cryptocurrencies can be used against this asset class to assist law enforcement and regulatory authorities. However, before this happens there is a need to consider the best approach to take to regulations and lay the groundwork possibly through clearly thought out legislation in parliament.

Post by Prosper Mwedzi

[1] ttps://www.cftc.gov/sites/default/files/idc/groups/public/%40customerprotection/documents/file/oceo_bitcoinbasics0218.pdf

[2] https://www.sec.gov/ICO

[3] https://www.fca.org.uk/news/statements/cryptocurrency-derivatives

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