The crypto-crime myth.
It’s a common anti-crypto argument: that cryptocurrencies are a haven for fraud, money laundering, and all manner of criminal activity. In the early days, this perceived risk carried over to banks across the country, where account closures were common for anyone found buying bitcoin.
That mindset has shifted in recent years, with the Financial Crimes Enforcement Network (FinCEN), Financial Action Task Force (FATF) and other regulatory bodies recognizing the potential of blockchain technology. In March of 2022, President Biden issued an executive order on cryptocurrency that – while stopping short of creating new financial regulation – called on the U.S. Government to develop an integrated approach towards sustainable crypto practices. In particular, the report singled out consumer protections, financial system stability, and the curbing of crypto for illicit purposes as focus areas.
Yet the myth that crypto is a “go-to” avenue for criminal financial activity persists. But how true is it? Criminal crypto activity certainly exists, and in fact, crypto-related illicit transaction activity hit an all-time high in 2021 (growing 79% over 2020 totals). But important to consider alongside that fact is that the number of illicit transactions as a percentage of total crypto adoption was lower than it’s ever been, just 0.15% – less than two-tenths of a percent. These numbers (from Chainalysis’ 2022 Crypto Crime Report) indicate that growth of criminal crypto activity is failing to keep pace with general crypto adoption.
Crypto Criminal Investigations
Crypto and Anti-Money Laundering.
Still, we know that any amount of criminal proceeds (big or small) working their way through the financial system isn’t a good thing. So it’s worth asking: how does law enforcement feel about crypto?
Anecdotally, we once witnessed a crypto-primer presented by a Secret Service agent to a room full of law enforcement professionals. The agent’s presentation featured two photographs: the first showed a man delivering a pizza box full of cash to a car in a crowded parking lot, while the second showed the secret service agent happily sitting at his desk drinking coffee. He explained that – in reference to the first photo – he and his team had been forced to hide out in a car for three days waiting for the pizza box handoff to occur in order to gain a critical break in their case. The second photo, on the other hand, was taken of him while he and his team used blockchain analytics to piece together elements of a case that eventually resulted in the arrest of more than 100 individuals in an international scam ring.
“Which type of work would you rather be doing?” he asked the detectives and law enforcement officials in the audience.
Cryptocurrency as an investigative tool.
Parking lot stakeouts aside, the secret service agent’s story emphasizes one key fact: blockchain technology is a powerful tool for criminal investigations. Due to the indelible nature of the blockchain ledger, cryptocurrency has emerged as a powerful tool for tracing financial crime (and its predicate crimes) back to their source. Recently, the Department of Justice arrested the husband and wife duo accused of stealing approximately $4.5BN in cryptocurrency as part of the 2016 Bitfinex hack. The pair had been working to launder the stolen funds, but were only able to successfully launder a small portion of the total amount. This was due in part to the difficulty of obscuring the transaction history recorded by the blockchain – a trail of breadcrumbs that eventually led to their arrest.
Crypto-based “follow the money” tactics have also helped law enforcement track down and put a stop to organizations running a much more heinous crime-for-profit operation. Chainalysis’ blockchain analytics were used by the Department of Homeland Security, the IRS, and other government agencies in the takedown of the web’s largest distributor of child sexual abuse material. Zia Faruqui, a federal investigator on the case, described the blockchain’s immense value in breaking the case: “The darker the darknet gets,” he noted, “the way that you shine the light is following the money.”
Putting Things in Context
Where are we at with crypto regulation?
As of Spring 2022, the U.S. Government has yet to implement a comprehensive regulatory framework for crypto. Part of the delay is due to the fact that various U.S. regulatory agencies have expressed contradicting views on how cryptocurrency should be classified – whether it should be regulated as a currency, security, or commodity. The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission, in particular, have argued over this point, as well as arguing who should be in charge of regulation.
While it now looks like these two groups might work together on drafting crypto regulation, the question remains: What will that regulation look like? Financial regulation has a habit of building new systems based on existing systems – a tactic that might not prove fruitful if applied here. And although a comprehensive regulatory plan isn’t yet available, it’s important to remember that all U.S. crypto exchanges are subject to AML requirements. FinCEN has also listed crypto as one of its top priorities.
All of these signs indicate that regulation is coming. And while we can’t be sure of the final form it will take, we personally believe that novel technology requires novel regulation. To try and regulate cryptocurrency by simply applying the rules as they exist today clearly won’t be sufficient.
Crypto has changed the way criminals conduct money-laundering activities, but it has also changed the strategies used by the law enforcement officials who police them. And in this case, it may be law enforcement who have the upper hand. As Congress and regulatory agencies work on developing AML-specific rules for cryptocurrencies, it’s worth keeping this in mind.
Cryptocurrency is not crime-proof. But with the right tools and a dedicated team of skilled professionals, cryptocurrencies unique characteristics – the blockchain ledger and unique wallet IDs – can provide AML investigators and law enforcement with a potent weapon in the financial crime fighting arsenal.