Money Laundering via Crypto a myth or reality

CRYPTO IS USED FOR MONEY LAUNDERING AND TAX EVASION. You have often heard this statement either by some friend, family, or on news, etc and this sentence originates from government officials.

There are 2 most favorite reasons for government and critics to make against bitcoin and other cryptocurrencies:

1) Volatility

2) Money laundering

The above two reasons are the biggest impediment to the mass adoption of crypto. To be fair, the high volatility point is pretty valid and it will indeed take some years for crypto to get stable.

But what about the (second reason) money laundering which is thrown around casually by the Critics of bitcoin & cryptocurrency.

In this post, we’ll try to verify the accuracy of this argument and try to answer questions such as

Is crypto really a money-laundering tool?

What is money laundering?

Money laundering is a process through which large amounts of money obtained by some criminal activity (i.e. Ransome, drug dealing, bribery, etc) are made to look like legal money (i.e. money obtained from legitimate sources). Commonly it is also known as the process of turning black(illegal) money into white(legal) money.

Process of money laundering

There are three stages involved in the process of money laundering. Quickly, let’s see what these steps are without going into too many technicalities.

• Placement

Placement is the first stage of money laundering. The purpose of this step is to introduce or inject illegal money into the financial system.

This is done by dividing large sums of illegal money into small less suspicious chunks of money and injecting it through intermediaries such as financial institutions, exchanges, businesses, casinos, etc.

This is the most vulnerable stage among all the stages of money laundering as the illegal money is most susceptible to get caught in this stage by the law enforcement agencies.

• Layering

Layering is the second stage of the money laundering process. The purpose of this stage is to make it difficult for law enforcement agencies to detect money laundering activity.

It is done by making complex financial transactions in which money is moved between various accounts to obscure the source of the money. Another way it can be done is by buying some assets through illegal money and then selling that asset again.

This stage is safer as compared to the placement stage. Although, too many transactions in a day in deviation to normal practice can raise suspicion of authorities at this stage as well.

• Integration

Integration is the final phase of the money laundering process. The purpose of this stage is to bring the laundered money back into the economy and reunite it with the money launderer (aka criminal).

After the layering stage money is no longer tied to an illegal source but to use that money a reasonable explanation is necessary as to how the money launderer came into the possession of this money. The integration provides that explanation.

This stage is the safest among the process of money laundering as it is extremely challenging for the authorities to catch the money launderer because the trail of money couldn’t be traced back to the money launderer after the layering stage.

How is it done through crypto? (ways/methods)

• Crypto Mixers or tumblers

Crypto mixers which are also known as ‘tumblers’ are the services that are used to obscure the trail of bitcoin or other cryptos and make it difficult to trace it back to the origin of the funds.

The mixing services do this by taking crypto from the client, then they send them through a series of various addresses(crypto wallets) to blur the origin of crypto and later recombine the crypto resulting in ‘clean’ crypto.

Its main aim is to break the links between the sending address and a new address to confuse the law enforcement agencies about its original source.

• Online casino & gambling sites

Many online gambling sites & casinos have started accepting payments in bitcoin and other cryptos. Criminals could buy in chips at these sites from their illegal funds and play a few rounds of poker, blackjack, etc and then cash out remaining chips for clean money from the casino.

Most of these sites and casinos have little to no safeguards like ‘Know Your Customer regulations. This prevents law enforcement agencies from obtaining information about the transactions from these services.

• Initial Coin Offering (ICOs)

ICO is a blend of IPO (Initial Public Offering) and Crowdfunding. In ICO investment can only be done through pre-existing cryptocurrencies ( like bitcoin or ethereum) and in return investors get tokens worth the same amount invested. These tokens can be freely traded at any exchange and can be converted to other cryptocurrencies or to Fiat.

There are many ICOs springing up at an unprecedented pace and many of them don’t follow all the regulations placed by the authorities, additionally, they raise a large sum of money in a very short time.

This lack of application proper regulations such as record keeping and the large sums of money getting transacted in a short time makes it difficult for authorities to keep track of all the transactions and provides an ideal way to launder money for criminals.

• Peer to Peer exchange

Peer-to-peer exchanges allow individuals to send currencies from their accounts to the account of others without going through a financial institution. Lack of transparency allows criminals to use these decentralized peer-to-peer networks to send funds to another location.

With the help of a third party, they send their dirty money to some other country, a country where exchanges don’t have to follow anti-money laundering (AML) regulations. It’s here they convert their crypto to local fiat and then use it to purchase luxurious expensive assets.

• Crypto ATMs

There are around 15000 Bitcoin ATMs around the world. These ATMs allow people to purchase bitcoin via their credit or debit cards and cash also in some cases. Some ATMs also offer the facility to trade other Cryptocurrencies for cash as well. Additionally, users don’t need to have a digital wallet: The machines create them, providing users with printouts of the wallet addresses and private keys.

Many countries have poorly placed AML regulations (such as KYC) and criminals exploit such loopholes to launder their money through these ATMs.

Analysis: Crypto as money laundering tool: Real threat or simply a hoax

Recently Christine Lagarde(President of European Central Bank ECB) and U.S. Treasury Secretary Janet Yellen Crypto have given their two cents on crypto. To no one’s surprise, they linked crypto and bitcoin with money laundering, terror financing, and other illicit activities.

They are not the first ones who have made such remarks on crypto and most certainly will not be the last one also. Crypto has often been termed as a tool for money laundering and illicit activities. This is by far the most favorite criticism of crypto critics which mostly involves international level institutions, central banks, and governments of various countries.

With so much emphasis given on the money laundering aspect of Crypto, clarity on this issue is much needed.

Let’s look at to what extent Cryptocurrency is used for illicit activities.

According to the chainalysis (a blockchain analysis company) report of the year 2021, the criminal activities in 2019 represented a share of 2.1% of all cryptocurrencies ( roughly $21.4 billion worth of transfer). In 2020, this represented share fell to just 0.34% (roughly $10 billion in transaction value)

SOURCE: CHAINALYSIS REPORT 2021

What this means is that the criminal activities using cryptocurrencies are gradually reducing. They are reducing for a major reason and the reason is that cryptocurrency is not anonymous; it is pseudo-anonymous.

Pseudo-anonymous means that each user is given a nickname or pseudonym. A wallet address in the case of cryptocurrencies and these wallet addresses can later be tracked down to the real owners of those wallets. The criminals have started to realize it as more and more criminals are getting apprehended by the authorities by tracking their wallet addresses.

To make matters worse for criminals, companies like Chainalysis, Elliptic, CipherTrace, etc have come into existence. These are blockchain analysis companies whose sole purpose is to find out how and why are people moving funds on a public blockchain, to identify the real-world identities on the blockchain network, and to protect and minimize the risk of virtual assets getting used in money laundering and investigate other financial crimes on blockchain networks.

On the other hand, as per the data of the United Nations Office on Drugs and Crime, it is estimated that 2% to 5% of the global GDP( around $800 billion to $2 trillion) is laundered each year, much of it in cash.

The 2020 report by SWIFT(Society for Worldwide Interbank Financial Telecommunication), states that “Identified cases of laundering through cryptocurrencies remain relatively small compared to the volumes of cash laundered through traditional methods.”

Hence, the use of cash in money laundering far outweighs the use of cryptocurrency in money laundering. Considering the fact that crypto is a new avenue to transfer money and criminals are always looking for new technologies and instruments to launder money, this explains their affinity towards the use of crypto to launder money.

But the question that arises is will this trend continue to grow in the future or will fade away with the advent of forensic blockchain companies & clarity of regulations?

Conclusion

Looking at the above points it wouldn’t be wrong to say that money laundering via crypto is a fool’s game as it contains a far greater risk to get caught.

Using fiat to launder money is still the most trusted method and its trusted for a reason that fiat is almost impossible to trace once it goes through the 3rd stage of money laundering but crypto on the other hand can be traced even in the 3rd stage of money laundering with the help of blockchain analysis companies.

Although, there’s no escaping from the fact that crypto is still used for money laundering, but then everything has flaws, so does crypto.

On the bright side, blockchain analysis companies are constantly working on new technologies to make the traceability of cryptocurrency better and the result can be seen in the drop of illicit activities via crypto in 2020 compared to 2019.

But can the above be held the same for the fiat? Can they reduce illicit activity via fiat?