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.
Financial Crimes around Silk Road
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?
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
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.
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.