Cryptocurrencies sometimes get a lot of slack for enabling criminal behaviour, but, is the criticism justified? We wrote recently about how crypto has resulted in deaths, kidnappings, and robberies, but in this article, we’re going to look more at how criminals and criminal organisations use crypto, rather than how they go about trying to obtain it. Let’s try and answer the big burning questions about crypto money laundering.
How does crypto-laundering work?
Criminal organisations have always suffered from the same issue – legitimising their huge cash flow. Drugs, weapons, trafficking, and plenty of other illegal activities all have a large cash flow and criminals find it hard to get that money into banks without arousing suspicions. The act or art of getting that cash into a bank, usually by performing some fraudulent business activities and ‘cooking the books’ is known as money laundering. Why laundering? Because they’re trying to turn dirty money into clean money.
Crypto-laundering involves three stages: Placement, Hiding, and Integration.
- Placement – Since it is possible to buy cryptocurrencies with cash, criminals have seen the potential there for them to get their cash into a digital format. Knowing that every crypto exchange has different security protocols and levels of identity verification, they are able to create pseudonyms and use fake details to get their accounts online. It is this vulnerability in the process that initially opens the door to the criminal use of cryptocurrencies, and financial and legal authorities around the globe are trying to board up the loopholes.
- Hiding – One of the advantages of the blockchain is that transactions create a digital chain to show their history. However, some developers felt this was invasive to user privacy, and so they developed anonymizing services to remove tracks and hide sources, essentially making cryptocurrency a playground for dirty money (whether this was intentional or not, we don’t know).
- Integration – After using several methods and services, the cryptocurrency holdings can be deemed clean, and now the criminals can find a way to either change it to fiat currency and send it to a bank account or spend it on sites that accept crypto. From a tax and legal point of view, it still needs to be explained as to how the individual came to have this money, so it’s quite common to claim that they bought into early-stage ICOs and did a lot of trading. The volatility of the crypto market is a good mask for explaining crypto-laundering.
How much money is being laundered through crypto?
An analysis in 2019 stated that a staggering $2.8bn was laundered through crypto exchanges in that year alone. Chain Analysis, who performed the research, also stated that around $1bn was laundered in 2018, meaning a massive increase took place. What will 2020’s shocking statistic be? We are yet to find out.
According to Chain Analysis, the rise in laundering is down to the way in which criminals are now interacting with exchanges, essentially by going through 3rd party traders to do their bidding on their behalf. These 3rd parties are called OTC brokers, and they’re advanced or experienced crypto-traders who offer their services for a fee. It’s suspected that many of these OTC brokers are using the dark web to advertise their money-laundering services.
How to catch a crypto criminal?
To catch a crypto criminal, you have to first look at the methods they are using to launder money and find a weakness. The methods are:
- Unregulated exchanges – Using exchanges with weak security and ID verification
- Tumblers – These are the anonymizing services that split up the cryptocurrency, send it through various dark web wallets, and eventually help it to find its way back to the original wallet
- P2P – Trading cryptocurrencies directly with other (typically unsuspecting) individuals on decentralized platforms and exchanges to maintain anonymity
- ATMs – The popularity of crypto-ATMs has exploded in the last few years, and so they now present an opportunity for criminals to be used as a cash-deposit-for-crypto machine
- Gaming sites – With the rise in popularity of Bitcoin, online gaming sites started accepting crypto-payments, and so criminals are able to buy chips and then cash them out quite quickly in order to launder
- Prepaid cards – There are some services out there that allow people to load their cryptocurrency onto a prepaid debit card and either sell it, spend it, or exchange it for other currencies
For governments and legal entities around the world, it’s easier to try and put in place preventative measures, such as compliance and identity verification, than to try and actually catch criminals in the act. Hiding data trails and creating confusion around transactions and how funds were obtained are the primary methods used by crypto-criminals, so there are efforts to encourage better record-keeping and request proof of an unbroken trail of transactions on the blockchain.
There are several ways that crypto-criminals can be caught, and the techniques used are getting more and more advanced. One method is simply through data collection, tracking, and studying patterns. If enough monitoring is in place, and the trails are accurate, some crypto-transactions can be traced back to dark web wallets and ransomware, giving the authorities a good reason to pursue a criminal. This method is flawed in that it doesn’t work for every exchange, it doesn’t protect against P2P trades, and it requires a large amount of data-intensive study. Over time, however, through the combination of compliance and monitoring, it’s becoming more difficult for criminals to find exchanges on which they can actually get away with laundering.
Another way of capturing a crypto-criminal, as was the case with Ross Ulbricht, the founder of the Silk Road (a dark web service), was simply to sit and wait for them to slip up. Ulbricht failed to use the right anonymising services and created aliases that could be linked to his real life, and that’s how he ended up with a double life sentence (and no chance of parole). Interestingly, the approximately 174,000 Bitcoins seized from Ulbricht and put into an FBI wallet makes the FBI the holder of the largest single crypto wallet in the world.
Catching crypto-criminals is serious work, and so taskforces from all around the world are putting in a lot of time and resources into getting the infrastructure they need to thoroughly investigate. Trump, the EU, the FBI, MI5, Interpol and more are all hot on the case.
So, now we know that the world’s best taskforces are on the trail of crypto-criminals, we have to look at the one crypto which punches well above its weight in illegal usage…
Monero (XMR) for masterminds
With Bitcoin being the biggest name and the most valuable cryptocurrency, naturally, it’s the coin of choice for most crypto-criminals, however, the smarter cons who really want to protect their anonymity have generally been turning to Monero. As we mentioned before, $2.8bn worth of money laundering is suspected to have taken place, and within that, $400m is estimated to have been done using Monero (roughly 14%). This is remarkable as Monero represents less than 0.5% of the entire cryptocurrency market.
Monero is not complicit in the illegal activity and their management is actually working with the authorities and AML compliance to do as much as they can to stop illegal usage, whilst protecting the anonymity of their users. It’s a catch 22 really, and the same goes for the organisations trying to hunt down crypto-criminals, because whilst they want to get as much support and backing as they can, the more they reveal their methods, the more likely it is that the criminals will adjust their laundering approach to avoid being caught.
Monero is being used by criminals in other ways too. Hate groups, ransomware attackers, and malicious hackers who embed mining code into programs and websites are all using the privacy of Monero to make illegal gains. It is even thought that more than a third of all ransomware attacks are using Monero.
Are cryptocurrencies more criminal-enabling than cash?
Absolutely not. Cryptocurrencies are tracked, there’s a chain of events, there are digital identity checks and compliances to be made. Of course, there will always be developers and crooks looking to find ways to wash money, but it’s happening far more with cash than with cryptocurrencies. Cash is the least traceable way of spending, and whilst it’s not always easy to buy a large asset like a house with criminally-procured cash, it is still easier than trying to buy that same house with Monero!
As Reddit user u/SteveLovesCrosswords so elegantly put it:
Monero prevents criminals from seeing my finances and targeting me.
Monero prevents money that I obtain legally from being tainted by a criminal history
Monero prevents criminals from devaluing my hard-earned money for their own gain
So yes, Monero and criminals are closely intertwined.