“Events, dear boy, events.” The former British Prime Minister, Harold Macmillan, was talking about how unpredictable incidents can blow governments off course. But the quote also captures why forecasting what lies over the horizon is fraught with a fair degree of uncertainty – just think back to December 31, 2019, who’d have thought the world would be dealing with an ongoing unprecedented health crisis!
As our colleagues have recently set out, today’s connected world is likely to be impacted by a range of different cyber developments over the next 12 months, ranging from ransomware operators moving away from Bitcoin through to more criminals utilising deep fake technology to penetrate organisations’ cyber defences.
But what about cryptocurrencies and fincrime? As we have previously examined, 2021 was an explosive year for cryptocurrencies and we expect their popularity and focus to continue in 2022. Here’s our trend predictions for the coming year.
1. Financial crimes will accelerate in direct proportion to the use of cryptocurrency
Trend: The increasing prevalence of financial crimes will be hindered by the wider use of blockchain forensics and cryptocurrency intelligence tools, both of which will prove effective in catching this new breed of crypto-criminals and stopping illicit fund transfers and money-laundering.
It is imperative that organisations use technology to track and trace money laundering activities, fraud and dark web activity, especially as security hacks and ransomware attacks continue. Chief Security Officers, Compliance Officers and Investigators should seek software solutions to help them trace theft and suspicious activities in near-real-time, and develop robust disaster recovery response plans.
FinCrime impact: Thinking ahead and monitoring is the key – preparing cyber security preparedness plans, along with implementing cryptocurrency tracing, and enhancing fraud/ AML intelligence software for large enterprises, government entities, crypto exchanges and value-added service providers will be critical in 2022 and beyond.
2. Crypto regulations on the horizon
Trend: A new wave of proposed regulations around the world may be passed into law during 2022/23, as cryptocurrency and “novel financial institutions” are likely be regulated in a similar way to traditional financial institutions.
We also have a high expectation that the Travel Rule – whereby any virtual-asset transfer of above USD/EUR1,000 must include personal details of both the originator and beneficiary – will become mandatory, and the challenges around reporting currently due to ‘the lack of one unified technology to support it’ will need to be addressed.
FinCrime impact: Regulating cryptocurrencies may have a positive long-term impact, though many governments around the world have different ideas on how this asset class should be controlled and overseen, impacting AML control programmes’ progress to get ahead of the regulatory curve concerning crypto. Having an early understanding of the crypto exposure risk of an institution is a useful initial step towards digesting and responding to various regulations as and when they are released.
3. Cryptocurrency will increasingly be considered taxable, just as traditional currencies are
Trend: In some parts of the world, cryptocurrency is already taxable, and in others, its murky water to navigate depending upon whether it is income, capital gains and so on. Countries where cryptocurrency is subject to some form of tax reporting includes the UK and Japan. Some European countries have more lenient rules on the taxing of cryptocurrency, including Portugal and Switzerland.
The United States recently passed a wide-ranging Infrastructure Bill which now classifies digital assets under the ‘brokers’ definition, meaning crypto asset businesses (digital asset transactions, non-fungible tokens (NFTs) and cryptocurrency) and individuals are most likely subject to tax reporting when the bill goes live. Currently non-compliance with the US tax code section 6050I is a felony charge. If this code now extends to all crypto assets, the concern is how does it become enforceable? And what infrastructure for reporting and tracing exists to make it enforced?
It’s also likely other countries will follow suit, communicating and/or implementing similar tax regimes in 2022/23 and beyond.
FinCrime impact: An increase in under-reporting of crypto assets is a likely outcome, as is the likelihood for tax evasion. Financial institutions and crypto asset businesses will need to be mindful of what processes are needed to adequately support their own interests and the interest of their customers’ for digital assets tax reporting to avoid unwanted regulatory scrutiny
4. Central Bank Digital Currency will be reality
Trend: The global rise of digital payment solutions has given rise to central banks worldwide working towards creating their own Central Bank Digital Currencies (CBDC). China, The Bahamas, The Marshall Islands, Sweden and Ecuador, all have a CBDC. Three of the world’s dominant central banks – the European Central Bank, the Bank of Japan and the Bank of England are all working on their own digital assets. We can expect to see further interest in similar projects from other countries.
FinCrime impact: Institutions will need to incorporate CBDC legal tender into their fraud and AML programmes, systems and controls. New types of scenarios, behaviour baselining and analytics – including artificial intelligence and machine learning – will need to support this.
5. Non-Fungible Tokens (NFTs) will take off, but their growth may not be sustainable
Trend: NFTs will be on offer everywhere in 2022 as a means for artists to express their creativity and the public to own works of art, music and fashion that don’t deteriorate like their real-life counterparts. However, the buzz around NFTs is expected to quiet down, as this market becomes flooded with fake NFTs of dubious origin at high prices. Eventually, we’ll see NFTs having to be verified as authentic just like designer handbags in order to justify their prices and retain their value.
FinCrime impact: Get ready for new blockchain tools to verify that the NFTs are actually what they portend to be in terms of their creator, designer or other key identifiers. There are already fake NFTs perpetuated by fraudsters. This will necessitate systems to verify the provenance of NFTs, just like physical goods. Until those systems are in place, a plethora of fake NFTs will flood the market.
Of course, these predictions are just that – predictions. Only time will tell how they play out. But one thing’s for sure – crypto isn’t going anywhere. All of us – individuals and businesses, governments and regulators – will have to accept and adjust to this new reality, and fast.
