The Misdirected Focus on Crypto: Why Traditional Banking Systems Dominate Illicit Finance

The global conversation on financial crime has become increasingly fixated on cryptocurrencies. Headlines scream about ransomware payments in Bitcoin , scams in stablecoins, and the shadowy allure of decentralized finance. Yet, the data tells a different story: traditional banking systems remain the dominant vector for illicit finance, dwarfing crypto in both scale and systemic risk. For investors and regulators alike, this misdirected focus risks distorting risk assessments and misallocating resources at a time when both systems demand scrutiny.

The Illusion of Crypto’s Prominence

Cryptocurrencies have captured the public imagination as a haven for criminals, but the numbers reveal a nuanced reality. In 2024, illicit crypto activity totaled $40.9 billion, or 0.14% of all on-chain transactions [1]. While this figure is alarming, it pales in comparison to traditional banking’s illicit flows. Nasdaq’s Global Financial Crime Report estimates that $3 trillion in illicit funds moved through traditional systems in 2023 alone [3]. The United Nations suggests that 2–5% of global GDP—roughly $4–$10 trillion annually—is laundered through opaque corporate structures, shell companies, and cash economies [1].

The disparity lies in visibility. Blockchain’s transparency makes crypto crimes more traceable, amplifying their perceived prevalence. Every hack, scam, or ransomware payment is etched into a public ledger, creating a “halo effect” of notoriety. Traditional banking, by contrast, operates in shadows. Money laundering through real estate, art markets, and cross-border trade finance leaves no digital trail. A 2023 study found that financial institutions lost $485.6 billion to fraud and financial crime, with systemic risks growing as fraudsters exploit AI-driven schemes [3].

Regulatory Misallocation and the Cost of Myopia

Regulators have responded to crypto’s visibility with aggressive enforcement. The U.S. Securities and Exchange Commission’s “Project Crypto” and the Trump administration’s 100-point digital asset policy plan aim to modernize oversight [1]. Meanwhile, the Office of the Comptroller of the Currency has expanded banks’ authority to engage in crypto activities, reducing regulatory friction [6]. These efforts, while necessary, risk diverting attention from the larger problem: traditional banking’s entrenched role in facilitating illicit finance.

Consider the enforcement data. In 2024, 42 Bank Secrecy Act/Anti-Money Laundering (BSA/AML) enforcement actions were taken against traditional banks, up from 29 in 2023 [3]. A single depository institution was fined $1.3 billion for systemic BSA/AML violations—a record penalty that underscores the scale of noncompliance. Yet, these actions represent a fraction of the problem. Traditional banks’ complex structures and global reach make them ideal for laundering proceeds from corruption, drug trafficking, and tax evasion.

Investment Risk: The Double-Edged Sword of Innovation

For investors, the fixation on crypto’s risks may obscure a more pressing concern. While cryptocurrencies offer efficiency and transparency, their regulatory uncertainty and volatility pose legitimate challenges. However, traditional banking’s systemic risks—such as interconnectedness, opacity, and political influence—remain underappreciated.

The 2023 collapse of a major crypto exchange, which saw $34.8 billion in illicit funds, was a wake-up call [2]. Yet, the same year, a global bank was fined $1.3 billion for failing to detect money laundering linked to sanctioned regimes. The difference? Crypto’s flaws are visible; traditional banking’s are systemic. Investors must weigh these risks carefully. A portfolio overexposed to crypto’s regulatory volatility may be less risky than one reliant on institutions with weak AML controls.

The Path Forward: Balancing Innovation and Oversight

The solution lies not in demonizing crypto but in recalibrating regulatory priorities. Traditional banking requires stricter enforcement of AML protocols, enhanced transparency in cross-border transactions, and better use of AI to detect anomalies. For crypto, the focus should shift from prohibition to creating a framework that preserves innovation while mitigating abuse.

The Trump administration’s digital asset report, which calls for clarifying jurisdictional boundaries between the SEC and CFTC, is a step in the right direction [5]. Similarly, the OCC’s decision to permit stablecoin activities for banks reflects a pragmatic approach to integrating crypto without compromising stability [6].

Conclusion

The illusion that crypto is the primary driver of illicit finance is a dangerous distraction. Traditional banking systems, with their vast, opaque networks, remain the dominant channel for money laundering and financial crime. For investors, the lesson is clear: risk assessment must account for both the visibility of crypto’s flaws and the hidden scale of traditional banking’s systemic risks. Regulators, too, must avoid the siren song of crypto headlines and address the deeper, more entrenched challenges in the legacy financial system.

Source:
[1] Chainalysis, 2025 Crypto Crime Trends
[2] Trmlabs, The Illicit Crypto Economy Report 2023
[3] Thl.com, Regulatory Technology and Modern Banking: A 2024 Outlook
[4] Stanford Journal of Business Law, Regulating Crypto Money Laundering
[5] Skadden, A Closer Look at the Trump Administration’s Digital Asset Report
[6] OCC, Clarifying Bank Authority for Crypto Activities