A Lurking Variable: The Role of Crime in Cryptocurrency Value

Tyler Sack
December 13, 2019

There is an old saying on Wall Street that financial markets are determined by two powerful emotions: greed and fear. In 2018 Bitcoin’s volatility seems to have reinforced the saying, leaving many to speculate the true value of cryptocurrency as a whole and if its price reflects some form of market correction. Presently, it is clear that there remains no reasonable method to reach a valuation.

Last year, BlackRock CEO Larry Fink referred to cryptocurrency as an index for money laundering. With the anonymity of transactions it is certainly possible that a majority of trades could be illicit activity, money laundering would definitely influence coin prices based on volume alone.

Bitcoin was initially released in January 2009 and Silk Road, the darknet market, was launched in February 2011. The latter is best known as an anonymous platform that specialized in selling illegal narcotic products, among other illegal products and services. Interestingly, all transactions were conducted with bitcoins. The FBI shut the site down in 2013 but its media coverage may have contributed to bitcoin’s popularity, adoption, and possibly a benchmark in market size for the black market.

Though imprecise, the estimated number of illegal activity using cryptocurrency is roughly over a third of all transactions. These estimates make up nearly 37 million transactions annually, but have been in decline since 2016. That is not to say that the trend is a direct result of prevention or policing because it may indicate that enforcement has motivated users to invent or adopt better concealing techniques such as adopting shadow coins over mainstream options that are less transparent when it comes to the user’s activity.

Today, there is a lack of consistent regulation between governments. In many cases, regulation bodies are still evaluating the potential benefits and risks that come with mainstream adoption of the technology. With the rapid growth in value, however, the asset is maturing faster than regulation can be developed. The most extreme laws have banned ICOs and cryptocurrency trading, leading to the freezing and seizure of assets by authorities when enforced, but not addressing the underlying criminal activity and effectively preventing the opportunity for legal transactions.

The goal is to not discourage or impede innovation, but to ensure the technology is not exploited for criminal activity. The argument is that prices would become less volatile with more regulation, if there is less illicit activity, then it makes sense that trading should follow a similar trend of dominant markets. So, how will the laws on anonymity and transparency impact the future of cryptocurrency? Personally, my biggest question is whether or not regulation will reveal or remove the value of Bitcoin?