Digital currencies and Bitcoin have long been associated with criminal activity. This mostly due to the fact that they are unregulated and are not issued by any governmental authority.
This very fact and the anonymity afforded to traders who use it, make it an attractive means for criminals and fraudsters to use it to their advantage.
Blockchain transactions are primarily irreversible and anonymous. They take place in a matter of minutes and do not require a verification or validation process. They also do not adhere to any regulatory or anti money laundering.
All such factors have associated some inherent risks with cryptocurrencies. However, with a little forethought, such risks can be mitigated if not entirely eliminated.
1. Market Value Risk
The value of cryptocurrencies tends to be extremely volatile. Due to their inchoate nature, digital currencies have a high level of uncertainty surrounding them.
Moreover, they are not backed by governments or banks which makes their value even more unpredictable. The value of any given cryptocurrency is purely determined by its users through their trade activity.
This means that a sudden loss of trust in a coin may bring about a drastic drop in its value.
Every other currency or security is generally regulated by an authority like the SEC or a central bank. For every transaction that occurs therein, the authority guarantees its validity and it can thus be reversed.
Cryptocurrencies are not afforded any such validation standards. It can be viewed this way; if you store your money in a bank account but lose your passwords, account number and security codes, you can still restore your account by requesting the bank.
With cryptocurrencies, this is not possible since every account is secured through cryptographic means.
3. Cybersecurity Risk
Due to their anonymity, cryptocurrencies attract a lot of fraudsters and criminals. They generally illicitly gain access to crypto wallets or exchanges and tend to steal funds by scamming the traders through false schemes and incentives.
As their entire existence is on the internet, cyber criminals make the best of it by using spamming techniques like phishing, malware and elaborate Ponzi schemes. Moreover, as they operate through unregulated exchanges, they tend not to have proper security measures that can protect the traders.
4. Regulation Risk
Although digital currencies are now being regulated in some countries, they still pose a major compliance risk in others. Financial regulators have been encouraging companies to comply with anti money laundering regulations.
As a result, a number of crypto exchanges use AML Checks for Politically Exposed Persons (PEPs) or people who are financially vulnerable. AML screening is mostly used by banks to flag any client who is exposed to money laundering or other financial crimes. The same is now being used by some exchanges in some countries.
These AML/KYC measures are automated and are done in real time thus maintaining the fast pace of the digital currency. However, there are still some regions where cryptocurrencies are unregulated and attract money launderers and other criminals.