BOK Staffers Assess Crypto Market Vulnerabilities and Their Implications

Illicit Crypto Activities Estimated to Have Surpassed $100 Billion in S.E. AsiaA recent analysis by blockchain analytics firm Bitrace has found that over $100 billion worth of digital currency has been used in illicit crypto trading activities in Southeast Asia.Photo by Bermix Studio on UnsplashThe firm provided details of its analysis via X (formerly Twitter) on Monday. The data underscores the extensive scope of unlawful activities involving cryptocurrencies across Southeast Asia. The analysis further revealed that illicit activities involve fraudulent schemes, online gambling, and money laundering.Misuse of digital asset innovationSome of the key characteristics of digital assets include the ability to maintain anonymity, decentralization, and borderless transactions, which are generally considered positive attributes. However, the very nature of decentralized cryptocurrency means that nobody dictates who uses it or the purpose for which someone decides to use it. With that, these characteristics have rendered illegal undertakings not only more covert but also facilitated expedited transfers of pilfered resources.The silver lining, however, rests in the inherent transparency of blockchain ledgers. This quality has enabled Bitrace’s team of encryption analysts to trace funds implicated in illicit ventures through intensive on-chain analysis.Key insightsThe Bitrace research points towards the following key insights:Prevalence of Tether (USDT): The use of USDT has gained prominence in both illicit activities and gambling operations throughout Southeast Asia, with a staggering sum of over 115 billion USDT recorded in 2022 alone.Shift to Top Trading Platforms: USDT is observed to migrate from unlawful platforms within Southeast Asia towards top-tier trading platforms. Particularly favored by operators and gamblers, a significant proportion hails from the Chinese demographic, consistently gravitating towards specific exchanges.Inflow into Trading Platforms: A noteworthy development emerges as over 14.6 billion USDT prepares to traverse into trading platform accounts. The mounting risk factor diffuses across an expanding spectrum of addresses and platforms.Likely consequencesIf this blockchain analysis is found to be accurate, there are likely to be ramifications for all projects operating in the digital assets, DeFi and Web3 space. It comes at a time when the focus on the regulation of crypto-related businesses is more intense than ever before.Anti-Money Laundering (AML) and Know Your Transaction (KYT) legislation are cornerstone financial services regulations that have been established on a global basis. If these regulations are being flouted, and crypto is being used as a means to circumvent them, there’s a real risk that regulation could be applied heavy-handedly to counteract that threat of widespread illicit activity.Global crypto exchange Binance has faced criticism in this context, with a suggestion in March that its Turkey-based exchange service had been used by an organization connected with militant group Hamas for money laundering and terrorist financing.In a report last week, Binance claimed that it shared information with authorities that led to the capture of senior ISIS members. More such cooperation will likely be necessary to prevent the sector being subject to overzealous regulation.

Hong Kong's Office of the Privacy Commissioner for Personal Data (PCPD) has issued a directive for the Worldcoin Foundation to cease its operations within the region, citing violations of local privacy laws. The decision comes after the PCPD found that Worldcoin had improperly collected facial and iris data from approximately 8,302 individuals. The agency’s investigation included ten covert visits to six different Worldcoin locations between December 2023 and January 2024. According to the PCPD, the extent of data collection by Worldcoin was deemed "unnecessary and excessive" failing to adhere to the Data Protection Principles.Photo by Claudio Schwarz on UnsplashConcerns over data retentionThe privacy watchdog criticized Worldcoin for its intention to retain personal data for up to 10 years. This retention period was intended for training AI models for user verification processes but was judged by the PCPD to be excessively long, amounting to prolonged retention of personal data. Following the findings, the PCPD has issued an enforcement notice to Worldcoin, mandating the cessation of all its activities in Hong Kong. Privacy Commissioner Ada Chung has called on the public to report any ongoing operations by Worldcoin in the city. In response to growing international scrutiny, Worldcoin announced in March that it would halt the collection of personal data and is planning to introduce a new feature titled "Personal Custody," which would purportedly allow users to store their data on their devices. This change comes as Worldcoin faces additional challenges in other jurisdictions, including Spain and Portugal, which have also expressed concerns over the project's data collection practices. The project was also scrutinized in South Korea but it recently resumed services. As of now, Worldcoin has not provided comments regarding the recent regulatory actions. 

Singapore Looks to Prohibit Crypto Lending and StakingIn a move to bolster investor protection and maintain financial stability, the Monetary Authority of Singapore (MAS) is introducing new guidelines for cryptocurrency platforms operating in the country.Details of the measures were published by MAS on Monday. According to its statement, the measures “will mitigate the risk of loss or misuse of customers’ assets, and facilitate the recovery of customers’ assets in the event of a DPT [Digital Payment Token] service provider’s insolvency.”The proposed guidelines outline several key measures. One such measure is the daily reconciliation of customer assets, which will help prevent discrepancies and safeguard against potential losses.Photo by Hu Chen on UnsplashHolding assets in trustAdditionally, the custody function, responsible for holding and safeguarding client assets, will be operationally separated from other business divisions to minimize the risk of mismanagement or unauthorized use. By the end of this year, it’s understood that crypto platforms will be required to store client assets in trust accounts, ensuring enhanced security and accountability.DisclosuresFurthermore, licensed cryptocurrency service providers will be mandated to provide explicit disclosures to customers, clearly outlining the risks associated with holding and trading digital payment tokens (DPTs). Recognizing the speculative nature of digital token trading, the MAS acknowledges that regulations alone cannot fully protect consumers from potential losses.To further protect retail investors, the MAS intends to prohibit cryptocurrency service providers from facilitating lending or staking activities. Lending and staking, where digital tokens are loaned or pledged to earn profits, are considered unsuitable for the general public due to their complex and high-risk nature.These measures come as part of Singapore’s efforts to strengthen its regulatory environment for digital assets. The consultation process began last year, following the collapse of FTX, a cryptocurrency exchange.Singaporeans suffered disproportionately with the collapse of FTX as previously, MAS had banned global crypto exchange Binance from operating within the city-state. That led to Singapore having more FTX customers than many other world regions. To compound matters, state-owned global investment firm Temasek, was an investor in the fraudulent crypto exchange.MAS had called for feedback and proposals, with a focus on enhancing investor safeguards and promoting responsible trading practices. While the regulations aim to provide a safer environment for investors, the MAS also emphasizes the importance of individuals exercising caution when engaging in digital token trading.Contrasting approachesWhile Singapore is taking steps to tighten regulations, other cities like Hong Kong are adopting a more inclusive approach to the crypto industry. Hong Kong Legislative Council member Johnny Ng has voiced support for the local crypto business and has encouraged prominent exchanges like Coinbase to establish operations in the territory, aiming to foster greater engagement and growth within the sector.As the crypto industry continues to evolve, regulatory frameworks play a crucial role in ensuring investor protection and maintaining market integrity. Singapore’s proactive approach to strengthening its regulatory environment reflects its commitment to striking a balance between fostering innovation and safeguarding the interests of investors.