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Why cryptocurrencies are interesting for criminals

by | Feb 24, 2021 | Cryptocurrency Compliance, Financial Crime Academy

Many things have changed to the good over the last few years. Some cryptocurrencies like Bitcoin became easier to trace, major darknet platforms where taken down by law enforcement, and internal financial crime investigation units have upgraded their technological financial crime prevention solutions.

However, the amount that is connected to illicit activity still accounts for more than is good.

In the past, cryptocurrency has definitely been thought of as something that is anonymous; something that criminals can use and no one’s going to be able to find their money. There is quite a number of infamous examples, which make this very apparent.

Financial Crimes around Silk Road

Silk Road was launched in 2011 and then taken down by the FBI in 2013. It was a huge marketplace where you could buy pretty much everything from drugs to firearms. Wildlife trafficking was also present there. This gave Bitcoin a bad reputation to start with. As the years have evolved, the industry and the community has struggled to shake this bad reputation that Bitcoin had because of Silk Road.
Other dark markets attempted to take Silk Road’s place after it was taken down. AlphaBay launched in 2014 and that was shut down by law enforcement in 2017. This was the start of the big economy of dark markets. There were other crypto crimes such as Ransomware attacks as well where the most famous one was in 2017.

Cryptocurrency Features that are Interesting for Criminals

Aside from the pseudo-anonymous nature of crypto, there are some other elements that are less spoken about but they’re important to understand in order to capture your risks correctly. You hear a lot about peer to peer payments in the traditional systems but Bitcoin itself is genuinely peer to peer. You can make a payment with absolutely no middleman; you use someone’s address, you send them a certain amount of Bitcoin, it goes on the blockchain, gets broadcast and they receive their transaction.

That’s all good and well, but what if someone can come along and unplug the main server that this great currency runs on?

Of course, in Bitcoin’s case, it’s completely decentralized. There is no one central switch that you can turn off and then shut down Bitcoin or cryptocurrency. This makes it a bit more attractive than some other options available. 

Then you’ve got the final bit that more recently has definitely been coming to the limelight because of the many institutions creating their own cryptocurrency and their own payment route system on blockchain.

This is something where someone can block payments.

Whereas your traditional cryptocurrencies, Bitcoin and Ethereum for example, are permission-less and censorship-resistant. You can’t, on the actual blockchain, block a payment between two parties. That’s really important because it means that any anti-financial crime controls and any attempts to stem the criminal use of cryptocurrency has to happen at the point of entry. It has to happen with the exchanges, the banks and the ATM providers before it gets onto the actual Bitcoin blockchain because after that point, you can’t stop those transactions.

When cases of Bitcoin and crypto assets being used in crime first started appearing a few years ago, there was generally a perception that you had a perfect mechanism for online criminality. The pseudo-anonymous nature of the transactions was the perfect thing that criminals could dream of. 

Cryptocurrency Transactions are recorded on the (oftentimes publicly) Blockchain

However, there was a catch in all of this. What made Bitcoin less ideal for crime than is sometimes acknowledged is the fact that crypto asset transactions are recorded on the blockchain. Public ledgers provide a complete and total history of transactions. As a result of those blockchains being open, visible, and constantly being updated with new information, it became possible to more effectively analyse the history of transactions, follow the flow of funds, and to begin to unmask those behind certain payments. 

Back in the days, Silk Road accounted for about 30% of crypto assets or Bitcoin transactions at the time. Today, illicit transactions in the Bitcoin ecosystem – not speaking about other cryptocurrencies here – are just under 1% of all activity. The reasons for this are manifold. One reason is that more and more legitimate people become interested in the blockchain technology and use cryptocurrencies for a wide variety of cases. In relativity, the criminals have been crowded out as a proportion of the entire flow of funds.

Ongoing Illicit Activity

It can be observed that dark web marketplaces make up about half of all crypto activity. Dark web markets are still quite accessible, and they do rely heavily on Bitcoin and other cryptocurrencies to facilitate the dealings. In addition, scams and Ponzi schemes make up an additional third of illicit activity in Bitcoin and credit card schemes make up just under 10% of the overall illicit activity. Illicit activity around credit cards usually relies on websites on the dark web or sometimes in the open web where criminals that have stolen credit card details can sell those credit card details. Thefts and hacks of exchanges also contribute to this picture. And then, there is portion that is comprised of miscellaneous activity like money laundering in general, terrorist financing, and sanctions evasion.

On thing that should be mentioned here already is, that if criminals use a cryptocurrency like Bitcoin, it has become a lot easier to trace back the funds than it has been in the past. Nowadays, there are many tools out there that help internal financial crime investigations unit to follow the money, and especially law enforcement with the possibilities that they have can, with a reasonable amount of effort, trace back the funds.

However, the technology is also emerging on the side of the criminals and financial crime and compliance professionals should be aware of mixers and tumblers in particular. These are services that are offered by third parties that obfuscate a cryptocurrency transaction. They are normally provided by like-minded criminals who charge a certain fee. In essence, mixers and tumblers mix different cryptocurrencies together. In addition, there are wallets out there that are extremely private. And then there are cryptocurrencies, like Monero for example, which is one of the most well-known privacy coins. This protocol is very hard to track, unlike Bitcoin, which means that criminals are more likely to take advantage of its features.

Alright, now you know why cryptocurrencies are potentially interesting for criminals and in which areas of the cryptocurrency universe you’re most likely to encounter illicit cryptocurrency transaction.

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