Dispelling Crypto Myths
A comprehensive report released by a leading blockchain analysis company tries to debunk misconceptions and shed light on the reality of cryptocurrencies
Cryptocurrencies have become a hot topic of discussion in recent years, with both avid supporters and sceptical critics voicing their opinions. However, it is crucial to base our understanding of this emerging digital asset class on accurate information and reliable data. In an effort to debunk misconceptions and shed light on the reality of cryptocurrencies, we turn to a comprehensive report released by Chainalysis, a leading blockchain analysis company. The key findings of the report, challenge some of the prevalent myths surrounding cryptocurrencies.
- Myth: Cryptocurrencies are primarily used for illegal activities.
Reality: Contrary to popular belief, Chainalysis’ report highlights that illicit activities account for a relatively small portion of cryptocurrency transactions. In fact, the majority of cryptocurrency usage is legitimate and conducted by law-abiding individuals and businesses. The transparency of blockchain technology enables effective monitoring and analysis, making it increasingly challenging for illicit actors to utilise cryptocurrencies undetected.
- Myth: Cryptocurrencies facilitate money laundering on a large scale.
Reality: While instances of money laundering involving cryptocurrencies do occur, the Chainalysis report provides evidence that traditional financial systems still dominate illicit money flows. The report shows that the proportion of illicit funds laundered through cryptocurrencies is relatively limited when compared to traditional channels. Financial institutions and regulatory bodies have been actively implementing compliance measures to prevent and detect cryptocurrency-related money laundering.
- Myth: Bitcoin is the preferred currency for criminals.
Reality: The Chainalysis report emphasises that criminals do not overwhelmingly favour Bitcoin over other cryptocurrencies. While Bitcoin was initially associated with illicit activities due to its early adoption and recognition, the landscape has significantly evolved. Criminals are increasingly diversifying their cryptocurrency usage to exploit different altcoins’ features and privacy-enhancing tools.
- Myth: Cryptocurrencies lack mainstream adoption and real-world use cases.
Reality: Chainalysis’ research reveals a growing trend of mainstream adoption and real-world utilisation of cryptocurrencies. More businesses, including multinational corporations, are incorporating cryptocurrencies into their operations, and an increasing number of individuals are utilising cryptocurrencies for everyday transactions. Additionally, many countries are actively exploring central bank digital currencies (CBDCs), demonstrating a willingness to embrace digital assets at a governmental level.
- Myth: Cryptocurrencies are highly volatile and speculative.
Reality: While it is true that cryptocurrencies can experience significant price fluctuations, the Chainalysis report highlights that market maturity is gradually reducing volatility. Increased institutional involvement, regulatory clarity, and improved market infrastructure contribute to a more stable cryptocurrency environment. Moreover, the underlying blockchain technology has gained recognition for its potential to revolutionise various industries beyond finance.
- Myth: Cryptocurrency is all scams.
Reality: Over the years, we’ve seen disheartening stories about victims losing cryptocurrency in everything from romance scams to pump and dump token sales. Given the attention on these exploits, those with minimal knowledge of the ecosystem would believe cryptocurrency simply can’t be trusted. However, the data shows that scams represent a tiny fraction of all cryptocurrency activity. Mainstream services received inflows of $8.1 trillion worth of cryptocurrency in 2022, while crypto scammers’ collective on-chain revenue was just $6 billion on the year.
- Myth: Crypto is anonymous and untraceable.
Reality: Despite what you may have heard, Bitcoin was never meant to be and has never been untraceable. Satoshi Nakamoto’s Bitcoin whitepaper contrasted the potential privacy of Bitcoin with that of bank transactions, while outlining a vision for cryptocurrency’s traceability. Cryptocurrency transactions have always been pseudonymous, in that they’re tied to a static, publicly visible address, and not anonymous, as many believe. The extension of KYC obligations to cryptocurrency businesses also ensured that other transactions, such as conversions of fiat currency into crypto, wouldn’t be anonymous either. Far from being anonymous, the blockchain has produced the most transparent, democratised financial system the world has seen yet, with all transactions recorded in a public ledger. However, to effectively monitor activity or track down criminals, having the right tools is important, and that’s where blockchain analysis platforms come in. Crypto businesses, financial institutions, and law Legitimacy 14 enforcement agencies have been using these tools to maintain compliance, mitigate risk, and trace criminal activity in order to recover stolen or illicit funds.
- Myth: Anyone can produce new crypto, so it’s worthless.
For most cryptocurrencies, creating new tokens is done by devoting resources to the blockchain’s consensus mechanism, which is the process by which network participants authenticate new transactions and add them to the ledger, thereby perpetuating a single, shared blockchain for all participants. The two most common consensus mechanisms are Proof-of-Work (PoW) and Proof-of-Stake (PoS). Bitcoin, for instance, is mined through the PoW consensus mechanism. In this model, groups or individuals “mine” new Bitcoin blocks by solving complex, cryptographic puzzles.
Whoever solves the puzzle first receives the right to validate new transactions, add them to the blockchain, and receive the associated prize of newly minted Bitcoin, plus fees from the new block’s transactions. This work is energy and computing power-intensive. More often than not, miners are off-ramping large portions of their Bitcoin prizes to pay for operational expenses like electricity. Under the Proof-of-Stake (PoS) model, on the other hand, validators of new blocks don’t have to expend computing power. Instead, they lock up – or stake – some of their cryptocurrency in a smart contract.
A validator is randomly chosen to create each new block and receive the associated rewards, and participants can stake as much as they want to increase their odds. Ether, TRON, and Solana are examples of cryptocurrencies using the PoS model. Regardless of the specific consensus mechanism, mining and staking require enough time, resources, and expertise that it would be inaccurate to say anyone can do it. Aside from mining and staking, anyone can also build new tokens on top of many smart contract-supporting blockchains such as Ethereum, BNB Chain, Solana, and others. However, that doesn’t inherently devalue existing cryptocurrencies. Since Bitcoin launched in 2009, thousands of other cryptocurrencies have launched as well, and Bitcoin’s price has continued to appreciate, while none of its price fluctuations appear related to other cryptocurrencies emerging. Any new cryptocurrency can gain traction if it fills an existing market need, but that traction doesn’t necessarily come at the expense of existing cryptocurrencies.
- Myth: CBDCs will make existing cryptocurrencies obsolete.
Many central banks around the world are exploring the potential of central bank digital currencies (CBDCs) as a way to enhance and broaden access to payment systems. While most CBDC projects are still in the experimental phase, some have speculated that a currency combining the convenience of crypto with the full faith and backing of a central bank would render cryptocurrency obsolete.
In practice, CBDCs are tailored to specific priorities of each country, such as to promote financial inclusion, foster competition in payment systems, or to facilitate the tokenisation of finance. Not unlike crypto, a common aspiration of CBDCs is to make finance more widely accessible or less costly. This doesn’t mean that CBDCs and crypto are substitutes for one another. Just as many currencies and payment rails co-exist today, so may crypto and CBDCs in the future. For instance, some countries with active CBDC projects, such as Singapore and Australia, have concurrently highlighted the potential role of stablecoins in making traditional finance more efficient.
Most importantly, while cryptocurrencies like Bitcoin were invented partly in response to some challenges associated with fiat currencies, such as inflation, today their purpose and potential extend beyond the streamlining of finance. Use cases for crypto and blockchain continue to grow, including in the nascent but fast-growing space of Web3.
- Myth: Crypto is a fad.
Fifteen years after Satoshi Nakamoto’s Bitcoin whitepaper, digital currencies have exploded from the concept of a single digital asset to a thriving ecosystem with a global market cap of $1.18 trillion. Additionally, governments are now implementing or investigating the feasibility of blockchain-based central bank digital currencies (CBDCs), as well as providing regulatory clarity for existing cryptocurrency. Of 45 countries that the Atlantic Council studied, nearly three-quarters are in the process of making substantial changes to their regulatory framework for crypto. While disruptive events dampened crypto market capitalisation and usage in 2022, transaction volume is still much higher than it was in 2019 and 2020, and the raw number of transactions happening is higher than ever. In other words, crypto usage is still rising even if transaction values aren’t as high.
Crypto a legitimate asset class
Based on the findings of the Chainalysis report, it becomes evident that cryptocurrencies are not the den of illicit activities and unregulated speculation that some myths portray. Rather, they are evolving into a legitimate asset class with expanding use cases and growing acceptance. While challenges remain, the progress made in terms of regulation, mainstream adoption, and market stability paints a more nuanced and promising picture of cryptocurrencies. By dispelling common myths, we can foster a more informed and constructive dialogue about the potential benefits and risks of this transformative technology.
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