Bitcoin

“Bitcoin Laundering” Study: Where do Criminals Turn to Mask Illicit Crypto Assets?

Because Bitcoin and other cryptocurrencies are decentralized, there is no central organization that is aware of all the transactions happening on its ledger. Hence, to control Bitcoins, an adversarial government would have to shut down the whole public internet. Bitcoin depends on its decentralized network of miners to process transactions, not central servers, which is why in its ten years of operation, no government has been able to regulate Bitcoin efficiently.

Due to its unscathed reputation, the crypto itself elucidates the impression that it is indeed resilient to attacks on its network making it a haven for tax evaders.

A study was held by the company Elliptic, one known for its Foundation for Defense of Democracies’ Center on Sanctions and Illicit Finance and blockchain analytics. The study ran circles around “bitcoin laundering” by making use of Elliptic’s forensic reports of the Bitcoin blockchain and other publicly available data: specifically to trace the transfer of illicit wealth from the year 2013 to 2016.

The study’s objective was;

To identify where individuals turn in order to cash out or transmit bitcoins (BTC) acquired from illicit entities and to discover typologies for criminals ‘laundering’ bitcoins.

It should go without saying that any study related to the dark web or illicit use of the Bitcoin network, needs to be taken with a grain of salt because avoiding detection is the whole reason for a criminal to use these sorts of platforms in the first place.

Bitcoin laundering, according to the study, is a specific kind of money laundering that exists within the Bitcoin network circumference. A user, here, can transfer his bitcoins to another address, whilst keeping the original source of his funds concealed too. Others that may fall under the same mantle (of laundering), are the bitcoin conversions into fiat currency that are are kept of proper anti-money laundering (AML) and know-your-customer (KYC) policies.

The study elaborated on the common mechanisms for bitcoin laundering, also explaining such activity to be a small fraction of all transactions sent to exchanges and other conversion services, simultaneously. Offering suggestions for law enforcement in order to prevent the masking of illicit funds on the Bitcoin network, the report proved to be a handful for the authorities as well.

Because dodging detection is what criminals seek in all such platforms in the first place, it should go without saying that any study related to the dark web or illicit use of the Bitcoin network, needs to be approached with skepticism.

Conversions service can simply be put as platforms, from where users are able to convert bitcoins into any cryptocurrency such as fiat and also transfer bitcoins from address to address. Titled “Bitcoin Laundering: An Analysis of Illicit Flows Into Digital Currency Services,” the study stumbles around the use of “conversion services.” Constructively the aforesaid then generates a flow of funds that cannot be seen or tracked directly on the public blockchain.

Conversion services are largely funded by users who to wish to mask their exchanges from the dark net markets- as attempts to launder bitcoin- according to the study.

Additionally, the number of possible illicit services (that could be generating “dirty bitcoins”), sent to conversion services increased by five times between 2013- 2016. Stating with the aforesaid, the report also says the sources of these illicit funds (that were transferred to conversion services) are centralized. It states;

Only a small number of entities account for the majority of illicit activity in our sample. Nine of the 102 illicit entities were the source of more than 95 percent of all laundered bitcoins in our study. All nine were dark net marketplaces.

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Even though exchanges are the most commonly used kind of conversion services, bitcoin mixers and gambling sites possess a lot more funds that come into their platforms from elsewhere too. As possible conduits for bitcoin laundering, Bitcoin mixers and gambling sites, conceal their operational operations, aiding them in avoiding enforcement of AML regulations. The report further states;

Fewer than 10 percent of all transactions overall passed through unknown jurisdictions … while 52 percent of illicit laundering went through them.

Reflecting a lot of sources of illicit funds, the conversion services (where funds are sent) are also highly centralized, the study finds. The data states that 97 percent of illicit transaction volume has to pass three different entities.

Unexpectedly, not only did another aspect of the study show a low level of bitcoin laundering as a percentage of all payments sent to conversion services, but it also indicated a drop in illicit Bitcoin transaction volume going to conversion services over the years, simultaneously.

The amount of observed Bitcoin laundering was small (less than one percent of all transactions entering conversion services).

bitcoin-laundering_Figure2.png

Report itself said that the actual volume of illicit Bitcoin transactions sent to conversion services is not truly representative of reality and may “almost surely to be significantly larger” than what the data in the study shows. This was so because intermediate transactions were not inclusive of the sample.

It is likely that illicit bitcoins fell as a percentage of total volume entering conversion services due to the cryptocurrency’s increasing popularity as a speculative investment as well as new laundering techniques.

The drop may also reflect better AML/CFT compliance by conversion services, including the use of blockchain analysis services to determine customers’ source of funds.

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