So, law enforcement’s [clink above to cop blog post] big victory here is the takedown of eXch.cx. This crypto exchange was recently charged with actually laundering almost $2 billion. The German BKA, in conjunction with Dutch authorities, seized servers, data, and a nice €34 million in crypto. But dig down deep and you’ll find serious cracks in our new regulatory structure for crypto. This operation illustrates how woefully inadequate our system is at every level. I’d go so far as to say it emphasizes the unforeseen results of bathing oneself in the wrong targets.

The eXch case isn’t a victory. It’s a big, flashing red light. We need a fundamental rethink. Here are three fatal flaws laid bare by this shutdown:

Anonymity Illusion Fools Regulators

Regulators are fixated on stamping out anonymity within crypto. They operate under the delusion that if they can only just make everyone untraceable, the ne’er do wells will suddenly stop existing. What a naive thought!

Here's the reality: true anonymity online is a myth. It’s true that savvy criminals will always find ways to obfuscate their transactions, with mixers, tumblers and other privacy-enhancing technologies. Racing after this ghost is an expensive misallocation of resources. Rather than work to identify anonymous transactions, we need to be looking at transaction behavior.

Think of it like this: it's like fighting a hydra. Take off one head (anonymity) and two come back in its place. We need to think smarter. Second, don’t get caught up in the identities of the players – focus on the flow of funds. Build cutting-edge AI platforms that can rapidly flag illegal activity. These tools are tremendously powerful, regardless of whether the user is named John Doe or doing business as John Doe. The blockchain is a public ledger. We just have to be smart about using that to our advantage.

Centralized Exchanges Are Easy Targets

The eXch case highlights another critical flaw: the over-reliance on targeting centralized exchanges. Sure, eXch enabled a lot of bad behavior, but putting it out of business will not stop the criminal element. It simply pushes it elsewhere.

When regulators squeeze centralized platforms, illegal funds just quickly migrate to DEXs and privacy coins. These substitutes offer more difficult-to-follow routes for illegal dealings. It's a classic game of Whack-a-Mole. As you learn in the game, you shut down one platform, and another one springs up in its place. eXch actually went so far as to announce its own closure to escape having to operate in a “hostile environment.” They knew the heat was on.

We should get beyond this need to accept that blockchain technology, as a legitimate and stand alone technology, is decentralized by nature. Regulation must adapt to this reality. That’s a recipe for failure, trying to shoehorn it into the frameworks we’ve built and maintained for largely centralized institutions.

We need to develop comprehensive strategies to monitor and regulate the entire crypto ecosystem. This includes:

  • Developing robust tools for analyzing on-chain data.
  • Working with DEXs to implement AML/KYC measures without compromising decentralization.
  • Educating users about the risks of using unregulated platforms.

Global Cooperation Remains A Pipe Dream

The eXch takedown truly was a model of international cooperation, and that’s a good thing. eXch got away with it for so long because it laundered billions. This marks the beginning of revealing the real cracks in our current disjointed and splintered regulatory landscape.

Inconsistent regulations from one jurisdiction to the next work to create regulatory loopholes that criminals can and do exploit. If any country relaxes the rules, they’ll just shift their business there. It's a regulatory arbitrage.

What’s needed is a more unified global approach to crypto regulation. That does not require establishing one all-powerful, one-size-fits-all regulator. This doesn’t mean repealing the AML rules but rather setting universal standards and protocols for AML/KYC, information sharing and cooperation among regulators and police across borders.

Think about it: If the Lazarus APT group really did use eXch to launder funds from the Bybit hack, that's a problem that transcends national borders. It requires a coordinated international response.

It’s high time for policymakers to cease and desist with the game of whack-a-mole, and instead begin to construct a real global framework for crypto regulation.

The eXch shutdown should be a call to action. It’s time to leave behind these old habits and fully adopt a new, more sophisticated, data-driven, globally coordinated approach. Otherwise, we’ll be playing a game of whack-a-mole while the bad actors get to keep cashing in. The future of finance, and the fight against illicit finance, hinges on it.