AI Could Combat Crypto Tax Evasion, But Cash Still Reigns in Financial Crime

• Chainalysis CEO Michael Gronager said AI could streamline crypto crime detection.
• One potential application is investigating crypto tax evasion. However, those who cashed out crypto holdings years ago may escape detection.
• Privacy tokens like Monero ($XMR) and Horizen ($ZEN) pose a challenge to AI-based investigations.

Michael Gronager at Chainalysis suggests AI agents will be policing crypto transactions within five years, helping prosecutors and financial authorities identify wrongdoing.

He highlighted generative AI could streamline the process by preventing governmental departments from stepping over each other.

Let's unpack the potential of AI in blockchain crime investigation.

Is AI the Future of Crime Solving?

According to Gronager, crypto will eventually become the most effective tool for solving crimes due to its scalability, ease of use, transparency, global reach, and ability to uncover valuable insights.

For example, generative AI agents can identify crypto tax evaders. However, those who cashed out their crypto holdings several years ago may escape detection.

Gronager notes that some investors may not pay tax on their crypto holdings because of unclear regulations rather than intentionally.

Yet, he believesthis excuse will no longer be valid as tax lawyers and software have become more sophisticated. The IRS and other tax authorities already use AI to detect potential tax evaders.

One challenge to AI crypto crime investigation is privacy tokens like $ZEN and $XMR. While privacy token payments account for less than 1% of all transactions, their use could increase as criminals seek to evade detection.

Unlike traditional cryptocurrencies, where transactions are public, privacy tokens use cryptography to conceal the sender, recipient, and transaction amount. This makes it harder for authorities to trace fundsand identify individuals behind transactions.

Cash Still Reigns Supreme In Financial Crime

AI could revolutionize crypto crime detection, but how big of an impact would it have on the big picture?

A US Treasury Department report suggests it would be negligible. Cash remains the most popular money laundering method for criminals due to its anonymity and stability.

The use of crypto for money laundering is less than that of fiat and other traditional payment methods. However, crypto is commonly used in scams, drug trafficking, and human trafficking.

Besides, crypto criminals are also actively exploring AI. Last month, the Australian Securities and Investment Commission warned about the rise of AI-powered crypto scams.

For example, bad actors may use AI to create celebrity deepfakes, like in the recent fake Tim Cook presentation case.

On a good note, crypto accounts for just 10% of all financial scams reported to the Federal Bureau of Investigation (FBI).

A Call for Regulations and Cooperation

AI has the potential to significantly enhance crypto crime detection. However, it's equally important to establish clear regulatory frameworks and promote international cooperation between governmental agencies.

Additionally, while AI can detect certain types of crypto crimes, it may not substantially impact overall criminal activity, as cash remains the preferred method for money laundering.

References

• Treasury Publishes 2024 National Risk Assessments for Money Laundering, Terrorist Financing, and Proliferation Financing (US Department of the Treasury)

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