by Paige Donner
The rise in cryptocurrencies and the recent explosion of DeFi (decentralized finance) make this an important question.
With banks starting to get into the cryptocurrency business, it looks as if this new finance mechanism is here to stay. However, financial institutions and the government need to pay close attention because the same person-to-person aspect that makes it attractive, also leaves it vulnerable to funding terrorism, both overseas and in our own cities.
We’ve all heard claims about people investing $200 in Bitcoin back in 2012 only to see their stakes make them wealthy. We also hear about people getting scammed by crypto “investments” or losing the key to their cryptocurrency accounts and losing all access to their wealth. It’s the Wild West out there.
But when huge institutional investors start piling into Bitcoin and Ethereum, it’s time to pay closer attention. Notably, in July, the Office of The Comptroller of the Currency issued a letter permitting US banks to offer cryptocurrency custodial services.
What is cryptocurrency?
While many eyes are glued on the upcoming presidential election, I believe that today’s real upheaval is occurring in our financial systems, something that’s both exciting and potentially very dangerous. For those unfamiliar with how cryptocurrencies work, here’s a quick rundown:
The currency is based upon something called Distributed Ledger Technology (“DLT”) or “blockchain.” Techies call the resulting system “Web3.” Web3 works through a networked system of computers that a consortium of individuals and groups of individuals maintain. This networked system tallies who owns the cryptocurrencies, such as Bitcoin or Ethereum, as well as the transactional relationships (i.e., debtor-creditor) taking place among cryptocurrency owners. It creates a form of peer-to-peer banking, with no third parties or regulators.
The best analogy is to compare cryptocurrency to the Hawala banking tradition practiced extensively in Middle Eastern, African, and other cultures. That system also circumvents banks. Instead, it is peer-to-peer, with one person conveying cash to another via trusted middlemen. At its core, it is the practice of sending remittances. Because it doesn’t necessarily use banks, the US Treasury Department notes Hawala’s implications for money laundering.
Hawala is, therefore, like the fundamental feature of cryptocurrencies -- peer-to-peer transfer of funds. The blockchain code contains an instruction that automatically enters every transaction into the decentralized ledger that the network computers maintain.
No central authority offers oversight or regulation because cryptocurrencies make central banking unnecessary. This is perhaps why governments have reacted as they have. Still, last month, Wyoming authorized Kraken, a dominant cryptocurrency coin exchange, to be the first hybrid crypto-fiat currency bank established in the country. U.S. regulatory institutions and banks are also cracking their doors open to cryptocurrencies.
A recent video presentation features Fox’s Jeanine Pirro in a friendly debate with a leading financial adviser of the Palm Beach Research Group, Teeka Tiwari. Ms. Pirro calls Bitcoin and other cryptocurrencies “Funny Money,” while Mr. Tiwari calls them “The future of money.”
The Pirro-Tiwari debate will soon be reflected more broadly in America. What if, 20 years ago, half of Americans said they didn’t believe in “email and the internet thing” and refused to use them? Had they persisted in this belief, would they be able to lead productive lives in today’s world? We may be facing that same technological leap forward today.
The risks of cryptocurrency and implications for domestic terrorism
There are serious downsides to cryptocurrency, though. The machine-written computer code risks imposing economic slavery because of its lack of human control. It excludes people who are not technology-oriented or lack internet access (i.e., the poor). And, just like Hawala, it is an agile way to transfer money to terrorists or illegally fund an election campaign.
An increasing number of above-board institutional investors (e.g., Ark Investments) are making strong arguments for Bitcoin and companies like Visa are going all in. But outside of the main companies -- Coinbase, Kraken, Gemini, Jaxx, Binance, Bitgo, Blockchain.com, etc. -- the cryptocurrency fringe is a scary place with some major bad actors, especially in Decentralized Financing (aka, “DeFi”).
A few early adopters I’ve spoken with, after getting scammed by crypto “traders,” not only lost their money but could no longer even get regular bank accounts. How can you function as a responsible citizen without a bank account?
Players on the fringe of these cryptocurrencies would just as soon see your bank close your accounts, all the better to usher you into their underworld of the ‘unbanked.’ Promises of 3000% gains in a month are roping in a lot of naïve people. Like the Donkey Boys in Pinocchio, there are plenty who can be lured with promises of ease and riches, especially in these uncertain times.
Even more worrying is the way cryptocurrency can help fund terrorism. On September 29, French authorities arrested 29 people for allegedly sending cryptocurrency “vouchers” to jihadists. Cryptocurrency also invites hacking:
The recent $200 million hack of Singapore-based major cryptocurrency exchange KuCoin has been making headlines, but the difference between this attack and others in the past has been the hacker’s blatant utilization of everyone’s favourite new crypto frontier - DeFi (decentralized finance).The U.S. government has already struggled with a prototype of computer-based banking and attacks on our monetary system, with money going both to thieves and, perhaps, terrorists. In 2007-2009, the favored way to hijack our monetary system was the Automatic Clearinghouse Transfer (“ACH”). You know ACHs as automatic deductions from your checking account.
What you probably don’t know, but criminals do, is that ACHs had a loophole: It was possible to strip money from anyone’s account by knowing only the bank account number, the bank routing number, and the name on the account. If you could get into the system, you did not need a pin, a signature, or a written authorization. The operational loophole essentially created a peer-to-peer bank transfer -- and people in banking knew about it.
In 2008, I was involved in a criminal case in Los Angeles County Superior Court that was the first case to establish, in sworn court testimony by ETrade bank officials, that anyone could initiate an ACH transfer with account numbers, routing numbers, and the account holder’s name. However, it wasn’t until late 2009 that the FBI paid attention. By then, criminals had stolen over $100 million from US small businesses and government accounts holding public funds.
The government clamped down on ACH fraud, but cryptocurrency creates the same problem on a greater scale and with even more dangerous implications than theft. This year, Black Lives Matter and Antifa rioters are waging war in American cities. A big question is the source of their funding. It’s entirely possible that it’s being done through untraceable cryptocurrency transactions. Those transactions can filter dark money through PACS and can make cross-border, peer-to-peer fund transfers possible, instantaneous, and undetectable.
This crypto-adoption is funding the complete disruption and upheaval of the US economy and the dollar. It undercuts how we get paid, run businesses, and how we pay for mortgages/rent, food, electricity, and transportation. This disruption is coming at the exact time of our decidedly divisive election during a once-in-a-century pandemic.
At an individual level, I have no other advice then to urge caution. At a national level, we can only hope that the government is paying close attention.
Paige Donner is an entrepreneur focused on enterprise solutions that blockchain technology offers small businesses, in particular smart contracts. She is also a regular contributor to Newsmax.
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