How well do criminals use digital assets?
Entities involved in illicit activity received some $ 5 billion in digital asset funds in 2020 and sent a similar amount. These sums, from blockchain data provider Chainalysis, however, represent less than 1% of global cryptocurrency flows, and are eclipsed by the $ 1.6 billion in cash that is laundered each year, according to UN estimates. .
Nonetheless, the free and loosely regulated world of digital assets gained a reputation for facilitating crime, given the lack of checks and balances on the system during its early years. The net has tightened as regulators circle and cryptocurrency firms develop tools to eliminate questionable activity. But the use of digital assets for crimes like scams and ransomware requests persists.
Why do criminals use digital assets?
The appeal of digital assets for criminals is that they offer different levels of anonymity, depending on the asset in question. This can make it a tool to facilitate money laundering, for example.
Bitcoin, the most popular, offers a pseudonym to its holders. This means that holders can choose services to buy and sell the cryptocurrency without being required to disclose personally identifiable information. However, every transaction is recorded on an immutable blockchain, so those with the technical expertise can see which digital wallets are sending funds to others.
In contrast, monero, a smaller cryptocurrency, was designed as an anonymous ‘privacy coin’ to hide the identity of the sender and recipient, as well as the amount traded. However, it is more illiquid, which means it can be difficult to buy large amounts and may attract unwanted attention from criminals.
What types of criminal activity are digital assets used for?
Scams make up the majority of criminal transactions using digital assets, according to Chainalysis. Last year, for example, the pirates have taken over the Twitter accounts of hundreds of leading users, including US presidential candidate Joe Biden and electric car mogul Elon Musk, demanding more than $ 100,000 in bitcoin. “Double all payments sent to my BTC address.” You send $ 1,000 and I send you back $ 2,000! A scammer from Musk’s account wrote.
The second most important crime category is illicit dark web transactions, according to Chainalysis data. The dark web is the name given to parts of the Internet, popular with hackers and criminals, which are invisible to search engines and require anonymization software to access them. They serve as hubs for the buying and selling of guns, drugs, stolen data, and other illegal goods.
Many only accept payments in digital assets. On Hydra, the dark web’s largest marketplace in terms of income, there are money launderers called “Treasure Men”: a user pays an amount in cryptocurrency to an intermediary, who will turn it into cash and the will leave at a pick-up point.
A smaller but rapidly growing criminal use of digital assets is collecting ransomware payments. Ransomware typically involves hackers entering an organization’s data or hijacking computer systems and only unlocking access for a ransom. As the practice has proliferated, hackers have started demanding ransom payments in bitcoin or monero, making it more difficult for law enforcement to trace the funds. In 2020, at least $ 350 million in crypto ransoms was paid to hacker gangs. Other cases of criminal use include financing terrorism, evading sanctions, or transferring stolen funds.
“I see the promise of these new technologies,” US Treasury Secretary Janet Yellen said in February. “But I also see the reality: cryptocurrencies have been used to launder the profits of online drug traffickers; they have been a tool for financing terrorism.
Are there ways to stop this?
Regulatory pressure has encouraged many cryptocurrency companies to improve their control over harmful activities.
When digital assets started to take off, criminals were using major cryptocurrency exchanges, many of which had little or no anti-money laundering (AML) or know-your-customer (KYC) processes. Blockchain analytics firm Elliptic estimates that between 2011 and 2019, major exchanges helped cash between 60% and 80% of all Bitcoin transactions from little-known players. That share now stands at 45%, as many crypto exchanges have upgraded their systems.
In September, the U.S. Treasury first imposed sanctions on a cryptocurrency exchange, for facilitating ransomware payments. Other regulations or sanctions may be pending.
Meanwhile, law enforcement and the private sector are developing technology to track criminal groups and their use of digital assets, analyzing cryptocurrency flows on the blockchain. For example, US authorities were able to track and recover much of the ransomware payment made to Russian hackers who effectively shut down the Colonial pipeline earlier this year, causing fuel shortages on the US east coast.
However, the cat-and-mouse game is intensifying as criminal groups develop techniques to cover their crypto tracks.
For the latest fintech news and opinions from FT’s correspondent network around the world, sign up for our weekly newsletter #fintechFT