Bitpanda Mythbusters: Demystifying cryptocurrency misuse

The persistent myth: crypto as a tool for crime

Cryptocurrencies like Bitcoin continue to be shrouded in myths of being a hotbed for criminal activities including terrorism and money laundering. But how true is this perception? To answer this question it is essential to examine not just the use but also the mechanisms in place that actually make cryptocurrencies less attractive for illicit activities than traditional, less traceable forms of currency and other mediums of exchange. What is important to remember is that any technology can be used to avoid sanction or finance illicit activities — we need to be objective and investigate every layer, following facts instead of conjecture and supposition. 

Transparency and traceability in blockchain technology 

Unlike traditional cash, which is virtually untraceable, blockchain technology, which underpins cryptocurrencies like Bitcoin, offers a transparent, immutable, and verifiable ledger of all transactions. This public accessibility makes it an unlikely choice for anyone wishing to hide their financial dealings. Crypto-native firms and national enforcement agencies have been effectively using blockchain analytics and forensic tools to trace and curb illicit actions. The crypto industry is required by the current regulatory frameworks to have AML and CFT set-ups - the framework which will be strengthened by the upcoming Market in Crypto Assets Regulation and AML Package. Specifically, crypto-compliant firms like Bitpanda, are well equipped (forensic blockchain analysis) and trained (expert teams) to monitor and investigate, which includes direct contribution to progress in this sector and assistance to the authorities.

Accordingly, the importance of risk mitigation must be reminded. This occurs with solutions like, amongst others, Integrating KYT (Know Your Transaction), Risk-Based Approach and Enhanced Audit Trails. Therefore, blockchain acts more like an open-audit system rather than a covert operation tool. 

As the blockchain data analysis company Chainalysis puts it:

“With the right data and tools, investigators in the public and private sectors can leverage the transparency of blockchain to uncover illicit activity that may otherwise go undetected. Blockchain analysis can generate both intelligence signals for proactive lead generation and more concrete evidence of illicit flows in existing investigations, helping a broad range of analysts and investigators unravel increasingly sophisticated money laundering networks.”

Given this, cryptocurrency is very much less suited for illicit activities, incl. financing terrorism. For example, if we think of cash then we see that it is very much anonymous while bank transfers are not open to public scrutiny. Interestingly, the United States Treasury Department in its recent report stated: “Criminals use cash-based money laundering strategies in significant part because cash offers anonymity. They commonly use U.S. currency due to its wide acceptance and stability” and “the use of virtual assets for money laundering remains far below that of fiat currency” (United Treasure State Department). 

It is important to remember that even the more sophisticated methods that obfuscate the track or combine off-chain actions, can be investigated and pursued by combining on-chain forensic analytics with off-chain intelligence. Any unusual transaction can be flagged by compliance teams even if outside the scope of a crypto-assets service provider or when clients' funds leave the ecosystem. Notably, the illicit proceeds cannot be virtually utilised: once identified on the blockchain then forever “tainted”. All in all, it is fairer to say that crypto is a hindrance instead of facilitator of illicit activities by ill-intentioned individuals who abuse and exploit technology.

Certainly, the technology will be challenged and new ways of using it illegally will emerge. But at the same time, the ultimate power of transparency and constant advancement of forensics tools (same as in other criminal actions) keeps up the pace, where the ultimate goal will be that bad actors will realise that it simply does not make sense to exploit since they will be traced down.

Real-world enforcement and regulation

The real-world application of blockchain's traceability can be seen in numerous successful operations by national authorities. For example, the U.S. government's seizure of Hydra Market, and the apprehension of notorious figures like Razzlekhan and her husband, showcase the efficiency of blockchain analytics in tracking down illicit activities. These examples provide a stark contrast to the above-mentioned anonymous and untraceable nature of cash transactions, which are still the predominant method for criminal money movements. Another interesting example is the case of Europol along with Belgian and Spanish authorities that disrupted and ended a drug-money laundering network, where, unfortunately, cryptocurrency investments and movements were involved. It was noted here that: 

“No doubt Europol’s onsite deployment of a cryptocurrency specialist was also critical in achieving this result. When it comes to crypto asset seizures, time is of the essence. Criminals can move crypto assets even when in police custody, so immediate action during the operation itself significantly increases the degree of success”. 

The scale of illicit activities in crypto - objective representation

It's critical to address the scale of illicit activities within the crypto space. Here, we need to draw attention to nuances, context and details that are not always transparent. The figures and facts need to be presented in their entirety, not selectively by picking numbers. As Chainalysis points out:

“We have seen overstated metrics and flawed analyses of terrorist groups’ use of cryptocurrency and feel compelled to address some misconceptions. In short, failing to identify service providers can inflate estimates for terrorism funding and lead to the identification of incorrect cashout destinations. Crypto is inherently traceable, but this common pitfall can result in flawed investigations, hindering efforts to disrupt terrorism financing operations”

Furthermore, the blockchain analytics company Elliptic rebutted the numbers provided by the Wall Street Journal regarding the financing of terrorist groups concerning attacks on civilians:

“Terrorist groups do make use of crypto assets for public fundraising, but the amounts involved are tiny relative to other funding sources. Careful and detailed understanding of blockchain analysis is needed whenever approaching a nuanced and sensitive topic such as this, and the full context of any analysis should be provided by those using these insights.”

The insignificant amount, compared to what was reported, was also confirmed by Mr. Nelson, a United States Treasury official, during the US hearing by representative Mr. Tom Emmer.

According to a report by Chainalysis, the percentage of crypto transactions linked to illicit activities was just 0.34% in 2023, down from 0.42% in 2022. In comparison, Nasdaq reports estimated that in 2023 approx. $3.1T in illicit funds flowed through the global financial system, without mentioning the crypto industry. To put into contrast, illicit crypto addresses received approx $25 billion (24.2bn) in 2023 (the value is a lower estimate subject to revision). As can be seen, the global financial system dwarfs the scale seen in the crypto industry and constitutes a small %. Other reports from TRM labs informed that illicit activity in the crypto world appears to have diminished. According to TRM Labs, the total illicit funds shrank by 9% in 2023 vs 2022 - this despite criminals handling nearly $35 billion worth of crypto-assets (again the value can vary - same as with different data for BTC energy consumption). Even if some values and new activities can rise, given the sophistication of criminal methods, on-chain forensic analytics thanks to transparency expose criminals and reduce the usage of crypto for money laundering.

It is essential to remember the context and details of the reports. As illustrated, many reports on cryptocurrency misuse, especially concerning terrorism financing, are often overstated or flawed. Crypto’s inherent traceability is sometimes overlooked, leading to misconceptions about its role in funding illicit activities. Proper identification and investigation techniques are crucial in preventing such misinformation, while research, understanding and attention to details are of vital importance.  

Compliance and violations in traditional finance

The narrative often misses significant non-compliance and violations within traditional financial systems. High-profile cases, such as JP Morgan's massive record expungement ($4 million fine for deleting about 47 million emails) or the European Commission’s hefty fines on banks for cartel behaviour in forex trading (€1.07 billion), highlight issues in traditional banking that often go under-discussed. Therefore, once you start investigating and understanding the magnitude of illicit actions using current monetary means and how difficult it is to track and stop them, then the situation looks different. 

Privacy tools and their double-edged nature

While privacy-enhancing tools like mixers or tumblers can obscure the traceability of funds on a blockchain, they still do not eliminate the possibility of tracking. Agencies can often deduce the endpoints of transactions, indicating whether funds are being directed to or from these privacy tools. Crypto Asset Service providers, like Bitpanda, can quickly identify transactions to and from these platforms. Bitpanda has specialists who do not dismiss transactions and customers in connection with mixers and tumblers out of hand, but rather know which dangers and issues to watch out for. Therefore, although it’s more difficult and obscure, there is still a possibility to investigate and trace. This shows that investigators are not left without a lead. In addition, mixing platforms that have been used particularly frequently for illegal purposes or that have been categorised as having an increased risk potential are repeatedly shut down by jurisdictions.

On the other hand, it should also be noted that though these tools often appear to be used for illegal activities, they are not illegal per se and have use cases that serve legitimate and useful purposes, such as maintaining the right of privacy on the web over one's funds. Another example is transactions or support for investigative journalists who are persecuted and critical of the government in certain countries. 

Unfortunately, any technology (like what is happening in the AI sector) can be exploited by the actions of bad actors, which is important to remember. Ignoring this could negatively impact these groundbreaking monetary developments. If we extrapolate this thought, then we could designate the telephone or internet as tools for illicit transactions and activities. 

Conclusion

The narrative that cryptocurrencies primarily serve illicit purposes does not hold up against the robust, transparent, and traceable nature of blockchain technology. With continued advancements in blockchain analytics, the crypto space is becoming increasingly inhospitable for criminals, making it a less likely avenue for illicit dealings than traditional, opaque financial systems. Understanding and presenting the facts without hype is essential in demystifying the real uses and abuses of cryptocurrency. Remember, It is crucial to rely on facts rather than speculation when examining the true uses and potential abuses of cryptocurrency.

As for the myth about cryptocurrency being inherently illicit? We can now consider that officially debunked! 

Disclaimer

This article is distributed for informational purposes, and it is not to be construed as an offer or recommendation. It does not constitute and cannot replace investment advice. Bitpanda does not make any representations or warranties as to the accuracy and completeness of any information contained herein. Investing carries risks. You could lose all the money you invest.