Crypto cannot so easily be decoupled from the aura of criminality, as many still associate blockchain technology with the “dark web” and potentially illegal activities such as money laundering. The question of illegal activity in crypto has also been high on the agenda of regulators, with politicians often labelling cryptocurrencies as “a particular concern” in terms of criminal activity and terrorist financing. Recent research has revealed the truth about crypto’s prevalence in criminal activity.
Laundering Money the Old-Fashioned Way
Despite the many concerns of crypto being an instrument for crime, a newly released three-yearly report by the U.S. Treasury Department says that fiat is still the preferred medium for most financial crimes. The report presented an in-depth analysis of the process of money laundering.
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The Treasury’s findings included a detailed discussion of virtual currencies, stating that their user base and market capitalization have expanded dramatically since their previous risk assessment in 2018. However, these reports revealed that fiat currency and traditional networks still outnumber those involving cryptocurrency.
"The use of virtual assets for money laundering remains far below that of fiat currency and more traditional methods," the U.S. Treasury stated.
The same results were found in the 2020 report by SWIFT (Society for Worldwide Interbank Financial Telecommunication). Even though DeFi is synonymous for obscure money transfers to many, government-backed fiat is still generally the leading choice for laundering money.
"The cases of laundering through cryptocurrencies remain relatively small compared to the volumes of cash laundered through traditional methods," the report states.
Not So Easy to Launder Money with Crypto
According to a Chainalysis report, in 2019, criminal activity represented 2.1% of total cryptocurrency transaction volumes, worth roughly $21.4 billion. In 2020, the illegal share of all cryptocurrency activity decreased to 0.34% with $10.0 billion in transaction volume. According to the UN, an estimated $1.6 trillion per year, or 2.7% of global GDP annually, is connected to money laundering and illicit activity. This means that criminal activity utilizing cryptocurrency transactions is much smaller than those in fiat currency, and its use is declining year on year.
The use cases of cryptocurrencies point to the fact that it is not as easy to perform illegal activities with crypto as it might seem. The report by the not-for-profit research organization ‘Rand Corporation’ noted that, despite the “perceived attractiveness of cryptocurrencies for money laundering purposes . . . an estimated 99% of cryptocurrency transactions are performed through centralised exchanges, which can be subject to AML/CFT regulation similar to traditional banks or exchanges.”
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In the report, Chainalysis highlighted that cyber-criminals dealing with cryptocurrencies typically share one common goal: move their “ill-gotten funds to a service where they can be kept safe from the authorities and eventually converted to cash.” The most significant difference between fiat and cryptocurrency-based money laundering is that, due to the inherent transparency of blockchain technology, it is easier to trace how criminals move their cryptocurrency between wallets and services to convert their funds into cash.
On the one hand, peer-to-peer transactions and self-custodial wallets can assist users in evading financial controls, as regulations can only target centralized intermediaries such as the most prominent exchange platforms. On the other hand, most blockchains – including Bitcoin – use very transparent public ledgers, making it easier to track criminals down.
Regulators often name ‘Zcash’ and other privacy coins as a focal point of money laundering concerns. Privacy coins often use the zero-knowledge protocol to shield customer information from other parties involved in a transaction. However, there is little evidence that malicious actors are exploiting this.
But… Crypto Is Still a Good Choice for Crime
Nevertheless, the use of virtual currencies as payment for online drugs, laundering criminal funds, and evading sanctions has increased. The recent U.S. Treasury report seems to align with a recent Chainalysis crime report, which claimed that more funds were sent to criminal blockchain addresses in 2021 than in any other year. According to the U.S Treasury, “virtual assets” are an ever-evolving domain within money launderers’ expanding armory for concealing their finances.
Overall, through the amount of cryptocurrency sent from illicit addresses to addresses hosted by services, cybercriminals laundered $8.6 billion worth of cryptocurrency in 2021.
"That represents a 30% increase in money laundering activity over 2020, though such an increase is unsurprising given the significant growth of both legitimate and illicit cryptocurrency activity in 2021," the report states.
One thing that stands out is the difference in laundering strategies between the two highest-grossing forms of cryptocurrency-based crime in 2021: theft and scams. Virtual assets have been used extensively in phishing assaults and ransomware scams throughout the pandemic. Shady operators use the allure of profit from the unpredictable cryptocurrency market to entice victims into disclosing personal information, or to infect their devices with viruses. The attackers then demand payment in crypto after the attack, which is both pseudonymous and irreversible.
More recently, following Russia’s invasion of Ukraine, western governments imposed stringent sanctions on Russia. Concerns soon arose over the potential for individuals to use cryptocurrency to evade sanctions, as was noted in Russia’s booming interest in cryptocurrencies. Tom Robinson, CEO of blockchain analytics firm Elliptic, underlined that crypto “can and will be used for sanctions evasion” but isn’t a “silver bullet.”
