Cryptocurrencies have apparently acquired a reputation as the preferred currency of choice for discerning criminals looking to avoid the prying eyes of authorities around the world. How did that reputation come to be acquired – and to what extent is it deserved?
What has happened so far
Law enforcement agencies around the world are catching up to criminals who attempt to engage in money laundering with cryptocurrencies. Earlier this year, Japanese police revealed that they had received over 600 reports of suspected money laundering with cryptocurrencies within a single eight-month period. Many of these were transactions that had displayed suspicious behavior easily linked to money laundering.
Around the same time, Europol – the European Union’s law enforcement agency– also revealed that up to £4 billion of illicit funds in Europe were being laundered via cryptocurrencies. Just two months later, the United States (US) and Europol joined forces to smash an international cryptocurrency money laundering ring. An investigation had revealed that nearly 150 people were involved and to the tune of €8 million.
The press release issued by Europol after the operation was unequivocal: “Once the criminals realised that cash withdrawals and bank operations were easy to track, they changed their laundering methods and turned to cryptocurrencies, mainly bitcoin.”
Why is it happening
Europol’s statement revealed nothing that seasoned cryptocurrency users did not already know. The anonymous and unregulated nature of cryptocurrencies is fundamental to their creation and use. There are no central authorities to resolve disputes or enforce transactions. The options ordinarily available to law enforcement authorities, therefore, do not apply to cryptocurrencies: the police cannot monitor transactions, nor can they freeze accounts or assets.
Enterprising criminals around the world have taken full advantage of that by using cryptocurrencies to launder the proceeds of their illegal activities. Generally, the money is first converted into bitcoin – then converted back into cash. Others have taken it further, with the joint US-EU operation pulling back the curtain on a complicated scheme that involved hundreds of bank accounts and overseas travel.
Money laundering with cryptocurrencies has been described as having “enormous advantages” over other methods traditionally preferred by criminals, such as the Swiss banking system. The Swiss banking system’s infamous tradition of secrecy, in which banks have steadfastly refused to disclose names and other information to foreign tax authorities, closely resembled the anonymous nature of cryptocurrencies.
International pressure eventually forced Switzerland to give up its tradition of secrecy. However, as cryptocurrencies lack any central governing authority, foreign governments are at a loss at this point. For now, authorities the world over have opted to direct their frustrations at cryptocurrency exchanges.
What is being done
Exchanges are the most prominent targets for anti-money laundering (AML) policies, as they are the primary go-to for the conversion of cash to cryptocurrencies and vice versa. Some countries are contemplating tougher legislation to put exchanges under greater scrutiny. As of this year, Australia will extend existing financial regulation to cover exchanges, while the EU has declared its intent to follow suit by treating exchanges like banks.
On the other hand, China has simply resorted to banning them entirely. While China may present a useful test case for such a draconian measure, the fact remains that over-the-counter trades continue to be legal over there. Trading via exchanges may be the most common method of facilitating money laundering, but they are not the only method.
Money laundering can be conducted wherever trading can take place, and it should, therefore, come as no surprise that the volume of cryptocurrency trades in China has continued to rise in spite of the ban.
As such, the effectiveness of such policies remains to be seen. Regulations governing the traditional financial sector are already unable to completely stamp out money laundering there. Money laundering in the EU alone is an industry that is estimated to be worth nearly €110 billion per year, with the amount laundered via cryptocurrencies a mere drop in the ocean at 3% to 4% of that amount.
Not nearly as bleak
Experts have concurred, noting there should be “[u]nderstanding that at a certain point regulation will be ineffective against anonymous users.” All of this may, therefore, be a fear of – and consequent overreaction to – the unknown. A report released earlier this year revealed that less than 1% of bitcoins in circulation have been used for illicit activities, such as ransomware payments and darknet market purchases.
To put that amount in context, 30,000 bitcoins seized by the US government after the shutdown of darknet market Silk Road were auctioned off for $20 million.
The anecdotal evidence from around the world also appears to support that report, with cryptocurrency users in Hong Kong have had their bank accounts frozen as a precautionary measure – and in spite of the fact that cryptocurrency crimes there have almost exclusively been confined to nothing more than a spate of Ponzi schemes.
On a final note, cryptocurrencies have other features that make it difficult to launder money. The blockchain technology that underpins cryptocurrency wallets is a matter of public record, with transfers that can neither be reversed nor amended, recorded almost immediately for the rest of the world to see.
The January 2018 hack of Coincheck was one such example, with the hackers encountering such difficulties in attempting to transfer their ill-gotten gains. The wallets were easily monitored and the exchanges handling their transfers could be notified of any attempt to do so in order to block them.
Around the same time, the CEO of American investment company, BlackRock – one of the world’s largest financial services providers – stated that cryptocurrencies were “more of an index of money laundering than anything more than that.” That may be ironic, considering that the $100 bill is the financial instrument most commonly used in money laundering – and between $800 billion and $2 trillion is laundered each year in US dollars.
For the moment, it is clear that cryptocurrencies are no more different than any other financial instrument or asset in regards to money laundering, and that their potential and scale for doing so has been grossly exaggerated.