Lael Brainard who is a member of the federal reserve believes that Bitcoin is being used in continuous illegal activity. Her bold estimation states that 1 in 4 people are using Bitcoin in illegal transactions. Lael spoke in Germany on December 18th to the European Central Bank in order to talk about the troublesome security risks that cryptocurrency brings. Lael believes that this activity is due to the fact that only 33% of the top cryptocurrency exchanges are following KYC/AML regulations which require ID verification in order to use their services. Without verifications users can transact with their cryptocurrency undetected which allows them to receive value from hacked/exploited funds or other illegal activity.
It is clear that Brainard has some clear biases as she is working for the Federal Reserve which has direct competition with Bitcoin, however some of her claims are valid. Without KYC/AML practices it can be extremely hard to verify identities which makes it easier for illicit activity to occur. However, the study in which Lael is referring to does not actually outline the entire market. It would be almost impossible to say with confidence that 25% of activity in Bitcoin is illegal without having a way to capture these transactions. Criminal investigations in Bitcoin transactions have not accounted for 25% of the volume, meaning that the study is simply estimating that the illegal activity is that high solely due to 66% of exchanges not offering KYC/AML.
Fiat is still the main currency that is used in fraudulent activities as criminals still prefer fiat currency. The first line of defense should be in making it harder for criminals to get fiat, and then more regulation can come into play for Bitcoin. If regulators just put sanctions on the cryptocurrency market, it will not change the fraud market as a majority are still using fiat. Most of the cryptocurrency exchanges that are not requiring ID verification that Brainard is talking about are crypto to crypto exchanges. Criminals are still transferring cryptocurrency from these exchanges to verified services in order to get fiat, so if better regulation is put into place by the federal reserve it can make it harder for these criminals to get fiat.
Since Bitcoin wallets do not verify identities, people are free to create unlimited amounts of wallets which hazes the exact number of participants in the Bitcoin economy, so predicting the amount of illegal activities can be difficult.