Organised crime using cryptocurrencies
Much of the media coverage on bitcoin and other cryptocurrencies has focused on whether they are an attractive investment with many tales of fortunes made and lost.
One of the factors driving the rise in the value of bitcoin appears to have been its increased use by organised crime, with cryptocurrencies sometimes described as the “blood diamonds” of the digital era and a recent study concluding that almost half of all bitcoin transactions are associated with illegal transactions.
Four main areas of criminal activity lend themselves to cryptocurrency:
- Tax evasion,
- Money laundering,
- Contraband transactions, and
And that list doesn’t even include the increasingly common spectacular thefts of cryptocurrency itself.
This post focuses on the use of cryptocurrencies for money laundering.
What are cryptocurrencies?
There many different types of cryptocurrencies but the best known is Bitcoin. They are intended to be a digital alternative to pounds, dollars or euros.
However, unlike traditional currencies, they are not printed by governments and traditional banks, nor controlled or regulated by them.
Instead, digital coins are created by computers running complex mathematical equations, a process known as “mining”. A network of computers across the world then keeps track of the transactions using virtual addresses, hiding individual identities.
The anonymous and unregulated nature of virtual currencies is attracting criminals, making it hard for police to track them as it is difficult to identify who is moving payments.
Europol director Rob Wainwright told the BBC’s Panorama that three to four billion pounds of criminal money in Europe is being laundered through cryptocurrencies,.
He described the problem of cryptocurrencies:
They’re not banks and governed by a central authority so the police cannot monitor those transactions. And if they do identify them as criminal they have no way to freeze the assets unlike in the regular banking system.
Another problem Europol has identified involves the method that criminals use to launder money.
Proceeds from criminal activity are being converted into bitcoins, split into smaller amounts and given to people who are seemingly not associated with the criminals but who are acting as “money mules”.
These money mules then convert the bitcoins back into hard cash before returning it to the criminals which makes it very difficult for the police in most cases to identify who is cashing this out.
Mr Wainwright also said that police were also seeing a trend where money “in the billions” generated from street sales of drugs across Europe is being converted into bitcoins.
Interestingly, a number of commentators have noted that bitcoin is not as anonymous as other cryptocurrencies and the recent fall in the value of bitcoin may be related to organised crime shifting to different virtual currencies. Disappointingly, this shift may be happening at the same time (and partly because) law enforcement had started to develop ways of tracing bitcoin transactions via the blockchain ledger.
A number of new cryptocurrencies or “altcoins” such as Zcash, Monero and Dash are reportedly becoming more popular with organised criminals and we will need to wait and see how law enforcement fights back.