Most Relevant Cryptocurrencies For Criminals: Tracing the Evolution of Criminal Money Finances

Posted in Anti-Money Laundering (AML) on March 15, 2024
Relevant Cryptocurrencies For Criminals

We will examine the most relevant cryptocurrencies for criminals and individual cryptocurrencies.  And here, we don’t stop at Bitcoin. 

Three predominant dimensions make cryptocurrencies interesting for criminals and, therefore, for our financial crime perspective.  These dimensions are anonymity, scalability, and ease of use.

From a financial crime perspective, knowing different cryptocurrencies and distinguishing between their characteristics is essential for crypto financial crime prevention and crypto compliance.  Considering the most important financial crime cryptocurrencies dimensions, we will look at Bitcoin, Monero, Dash, ZCash, and Verge.

Most Relevant Cryptocurrencies For Criminals

The use of cryptocurrency in criminal schemes is growing and the adoption of this payment method is accelerating. However, when compared to cash and other forms of transaction, the overall number and value of cryptocurrency transactions related to criminal activities still represents a small portion of the criminal economy. A variety of constraints are associated with the use of cryptocurrencies, with high volatility likely playing a significant role in criminals’ reluctance to use cryptocurrencies for long-term investments.

In recent years, cryptocurrency has been increasingly used in criminal activities and to launder criminal proceeds. Criminals’ use of cryptocurrencies has also become more sophisticated. Cryptocurrencies are increasingly being used by criminals as a means of payment or as an investment fraud currency, in addition to being used to obfuscate money flows as part of increasingly complex money laundering schemes. The number of cases involving cryptocurrencies used to fund terrorism remains small.

Relevant Cryptocurrencies For Criminals

We will get a hold of the five most important cryptocurrencies from a financial crime perspective.

Number 1: Bitcoin

Bitcoin is currently the most well-known cryptocurrency on the planet.  Bitcoin is a virtual, decentralized, and, at first glance, anonymous currency based on the proof-of-work consensus mechanism.  Hence, neither is Bitcoin government-backed nor backed by any other legal entity.

The issuance of Bitcoins is done with a process called mining. Mining is the process to voluntarily make computers available to the Bitcoin network to solve complex mathematical problems.  Computers that can solve such problems and, consequently, create transaction “blocks” are rewarded with Bitcoins.  The aggregate number of Bitcoins that can be created through mining is limited: the Bitcoin system is programmed so that the development of blocks in time will be rewarded with increasingly fewer Bitcoins.  At no point in time will there be more than 21 million Bitcoins.  The limited number of Bitcoins, and that Bitcoins’ conversion rates are determined by supply and demand, leads to high volatility in Bitcoins prices.  

Bitcoin can be bought with and directly converted into fiat currency on a wide array of cryptocurrency exchanges.  Examples of exchanges that currently accept Bitcoin are Coinbase, Kraken, Anycoin Direct, and Lunco.  Out of all cryptocurrencies currently in circulation, Bitcoin is the easiest to convert into fiat currency.

Bitcoin is often characterized as an anonymous currency.  Although everyone can verify the chain of transactions based on the public ledger, at first glance, nothing in the system connects Bitcoins to individuals.  However, this anonymous character is far from absolute.  Even though it can be complex, it is technically feasible to identify the parties behind a Bitcoin transaction by bringing together factors that accompany such transactions.  In other words, Bitcoin is not a fully anonymous currency but rather a pseudo-anonymous coin.  Still, Bitcoin is very interesting for criminal organizations because the market volume is quite large, the infrastructure around it has been built, it is well recognized, and almost even reputable.  

Number 2: Monero

Monero is an open-source cryptocurrency with a focus on private and censorship-resistant transactions.  It was launched in April 2014 and is based on what is known as the CryptoNote Proof-of-work algorithm.

Monero has been specifically developed to allow its users to execute transactions in full anonymity.  It is said to be cryptographically private by default.  In particular, it uses cryptography to shield both sending and receiving addresses and the transacted amounts.

Monero is characterized as fully fungible, meaning that two units of Monero can always be mutually substituted.  Non-fungible cryptocurrencies, like Bitcoin and Litecoin, are theoretically susceptible to blacklisting.  Suppose they have been used for illegal activity in the past.  In that case, such history will be contained in the blockchain forever.

On a fully transparent blockchain, such as the Bitcoin or Ethereum blockchain, transactions are always openly verifiable and traceable by anyone.  In practice – though this is not necessarily an easy task – the sending and receiving addresses for such transactions could also be linked to a person’s real-life identity.  Monero advocates to be different because it was specifically built as a secure, private, and untraceable cryptocurrency.

These features make Monero incredibly interesting for criminals all over the world.  Besides, Monero’s market capitalization was at almost 5 billion US-Dollar at the beginning of 2021.  Unsurprisingly, Monero has been attributed to its widespread use in criminal activity in the past over and over again.

Number 3: Dash

Dash was formerly known as Darkcoin and is an open-source privacy-centric cryptocurrency.  It was first launched in January 2014 and is based on what is known as the X11 Proof-of-work algorithm.  What is specific to Dash, and makes it different from most other coins, is that it has a two-tier network.  Dash’s blockchain is secured via so-called “masternodes” in addition to the Proof-of-work done by miners.  

In short, a masternode is a server connected to the Dash network, which guarantees a certain minimum level of performance and functionality.  Masternodes help to perform certain tasks related to PrivateSend and InstantSend.  These features allow anonymity and instant transactions.  Transactions with traditional cryptocurrencies can be very time-consuming, which means that they can take anywhere between a few minutes and more than one hour.  Dash tackles this issue utilizing its masternode network.  As a result, Dash competes with nearly instantaneous transaction systems, such as credit cards.  

Like Bitcoin’s blockchain, Dash’s blockchain is transparent by default, which means that generally speaking, transactions are always openly verifiable and traceable on the blockchain.  To give its users true financial privacy, Dash offers the option to use a feature called PrivateSend.  PrivateSend obscures the origins of a user’s funds through a process known as “mixing.” A cryptocurrency mixing service comingles potentially identifiable cryptocurrencies with others to obscure the trail.  Dash is regarded as a privacy coin by many due to this same feature.  In the past, Dash has indeed been used by many criminals around the world.  Unsurprisingly, Dash is blacklisted by many of the more reputable cryptocurrency exchanges.

Number 4: ZCash

Next, let’s talk about ZCash.  Zcash has only been around since October 2016 and was developed by a reputable team of scientists and cryptographers.  It didn’t take long for this coin to join the wave of crypto success stories and reach a peak of more than 2.5 billion US-Dollar in market cap last year.

It hasn’t exactly made its way into the mainstream just yet.  Still, it can be exchanged for fiat currencies on a few exchanges, including Kraken, Bitfinex, and CEX.io.  It can be easily purchased with other cryptocurrencies on exchanges like Binance.

ZCash provides increased privacy through its underlying protocol, meaning less traceability.  If used according to privacy standards, which means with an anonymizing browser, it appears to be the most anonymous option overall.  Besides, ZCash had a market capitalization of over 3 billion US-Dollar in early 2021.  These elements make ZCash very attractive for criminal users.

Number 5: Verge

Last but not least, let’s talk about Verge.  Instead of relying on cryptographic techniques, Verge banks on the existing and tested technology of The Onion Router TOR and the Invisible Internet Project I2P to protect users’ identities.  TOR bounces a user’s communications over a distributed network of relays and tunnels run by volunteers spread across the globe, thereby hiding the user’s identity.  On the other hand, I2P encrypts user data before sending it through an anonymous, peer-to-peer, and volunteer-run globally distributed network.  It allows hiding the locations and IP addresses of the transacting participants.

Verge made headlines when a popular adult website adopted it to start accepting cryptocurrency payments.  The primary reason for the development was Verge’s privacy features.

As of April 2021, Verge had a market capitalization of 570 million US-Dollar.  While this market capitalization is not that big yet, Verge must certainly be watched.  In case market capitalization skyrockets, it is like becoming more interesting for criminals.

Relevant Cryptocurrencies For Criminals

Why Are Cryptocurrencies Important?

Blockchain-based cryptocurrencies, as decentralized platforms, enable individuals to conduct peer-to-peer financial transactions or enter into contracts. There is no need for a trusted third-party intermediary such as a bank, monetary authority, court, or judge in either case.

This has the potential to destabilize the current financial order while also democratizing finance. Over the last decade, the cryptocurrency space has grown exponentially, with new innovations and a collective market capitalization of more than $1.75 trillion.

Why Are There So Many Cryptocurrencies?

The majority of today’s cryptocurrencies are derived in some way from Bitcoin, which employs open-source code and a censorship-resistant architecture.

This means that anyone can copy the code and modify it to create their own new coin. This also implies that anyone is free to join or transact in its network.

Why Is Bitcoin Still the Most Important Cryptocurrency?

Despite the emergence of thousands of competitors, Bitcoin—the original cryptocurrency—remains the dominant player in terms of usage and economic value. As of February 2022, each coin (BTC) was worth approximately $44,000, with a market capitalization of more than $830 billion.

Final Thoughts

Many drug dealers and extortionists now use cryptocurrency such as bitcoin, Ethereum, and, more recently, Monero as their currency of choice. Tax evasion, money laundering, Ponzi schemes, cryptocurrency theft, and kidnapping for ransom are all examples of criminal activities.

As the demand for cryptocurrencies grows, criminals will have more opportunities to hide behind the assumed privacy and anonymity. Because of the cross-border nature of transactions, the use of evasion technology to mask the identity of users, and inconsistent regulations, identifying these cryptocurrency-related crimes has proven difficult for law enforcement.