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Cryptocurrencies and the blockchain protocol have promised to provide inexpensive, secure and transparent ways to move funds.

But they presently carry more problems and negative news than promise, compelling a growing, global chorus of governments and the financial services industry seeking to regulate the issuance and exchange of Bitcoin, Ether and their ilk.

Among those calling for greater regulation are the cryptocurrency exchanges themselves, as well as many of the (generally young) miners, buyers and other individuals directly or indirectly connected to the market.

While moderating a Digital Finance Institute panel at the “Blockchain for Business” seminar in Toronto on March 5, I heard a lot of speakers and attendees not only asking for regulation and cooperation with law enforcement, but demanding it.

The desire for an explicit “operating manual” from regulators has several drivers, not least of which is cryptocurrency’s need for banking relationships. Questions to panelists representing cryptocurrency exchanges and attendees with varied connections to the industry included, “Do you have a bank?” and, “Who is your bank?”

The push for engagement with law enforcement reflected the desire of cryptocurrency enthusiasts that investigators pursue hackers who have managed to plunder millions of dollars-worth of bitcoins and other digital coins from wallets associated with exchanges and their customers.

A number of attendees at the Toronto conference also voiced concerns that cryptocurrencies carry such a dodgy reputation, in part because of a series of disclosures that have reflected poorly on the industry:

• Islamic State has instructed online followers on how to buy and send bitcoins to finance the jihadist group’s agenda.
• Organized crime syndicates in Europe now use Bitcoin ATMs to conceal payments for cocaine shipments from Colombia, a Europol official told ACAMS moneylaundering.com late last month.
• Bitcoin and other cryptocurrencies are now the vehicle of choice for extortionists who install ransomware on corporate servers and individuals’ laptops and deny them access to their own data until they receive payment. Even worse, those engaged in kidnapping have also demanded payment in cryptocurrency
• Pariah states, most recently Venezuela, want to create sovereign cryptocurrencies to evade economic sanctions.

Responding to the regulatory and law enforcement vacuum, Christine Duhaime, a founder of the Digital Finance Institute and chief anti-money laundering officer at cryptocurrency exchange Einstein, floated a proposal that virtual currency exchanges come together to build a joint database of wallet holders linked to illicit activity, starting with suspected fentanyl traffickers.

The proposal met with skepticism, but as cryptocurrency news website coindesk.com put it, the Einstein proposal at least represents an actual attempt to “help the cryptocurrency space overcome its lingering public image as a hive of criminality.”

Absent strong regulations, cryptocurrency will fail to fulfill much of its promise, including as a revolutionary form of payment. Advocates claim some cryptocurrencies work better than others, but the value of the industry’s brightest star, Bitcoin, remains highly volatile and does not always meet expectations for quick transactions—a limitation that even its aficionados in Toronto acknowledged.

The U.S. Treasury Department’s Financial Crimes Enforcement Network reminded the world this month that initial coin offerings, or ICOs, generally fall under its oversight, and Canada is promising to promulgate explicit rules for the industry.

Whether effective government supervision is forthcoming is uncertain. The ease with which cryptocurrencies move value across borders suggests that regulation must be built on international consensus, but true, sustained support for an international regime to govern such transfers has yet to emerge.

Regulators and cryptocurrency exchanges have been talking past each other and some nations are going their own way. With more than 1,500 cryptocurrencies in circulation across the world, common ground and a clearer regulatory regime cannot come fast enough.

kbeer@acams.org
Follow me @KieranBeer on Twitter