Cryptocurrencies have gained a reputation as vehicle to fund criminal activity. While that’s true to some extend, that’s no reason to condemn cryptos altogether. Instead, we should put things in perspective and talk about solutions.
In early 2018, the Al-Qaeda-linked terrorist organization Al-Sadaqah has been promoting photos of their thugs via Twitter and Telegram accounts.
The goal was to raise money for “assisting front line Mujahideen” in Syria. The photos displayed banners with bitcoin addresses to send “donations,” adding fuel to the fire of crypto-critics.
It’s wasn’t an isolated incident. Bitcoin and other cryptocurrencies have been used for all sorts of criminal activities over the last years: terrorist funding, cybercrime, sex trafficking, drug trade, money laundering, fraud, scams, tax evasion, capital flight, the list goes on.
Law enforcement agencies and financial market watchdogs have already rung the alarm bells. But crypto enthusiasts protest and claim criminal activities only account for a small portion of global crypto trading activity.
So, how big is the problem, really?
In fact, nobody knows the facts
Here is some “data”:
Sydney-based researchers estimate that around $76 billion of illegal activity per year involves Bitcoin, which is equivalent to 46% of global Bitcoin transactions. $76 billion, that’s close to the scale of the US and European markets for illegal drugs.
The Drug Enforcement Agency (DEA) agent Lilita Infante says that 10% of Bitcoin transactions are associated with illegal activity.
So is it 10% or 46%? There is quite a difference in these findings. Of course, there is. Anonymity is the main reason why criminals may use Bitcoin in the first place.
But then, if it’s all happening anonymously, how can you even come up with a realistic estimate of which percentage of Bitcoin transactions are connected to illegal activities? And what does “illegal” mean in the first place, given that Bitcoin is used globally in countries with different legal systems?
So, these “statistics” are just guesswork.
Anonymity is the main issue
It’s virtually impossible to identify the true scale of the problem, so let’s put the statistics aside for a moment and focus on the reasons why criminals use cryptos.
The main reason is anonymity. If you were a thug or a gangster, you’d also care about your privacy. After all, most upstanding citizens don’t care too much about their data, as long as it’s not being used without their knowledge.
But if you’re buying drugs or try to fund a self-proclaimed “holy war,” you don’t want people to know where you keep your money, where it comes from and what you’re going to do with it. Cryptocurrencies allow for this kind of anonymity.
The problem for law enforcement is twofold.
Firstly, banks and other financial institutions get cut out of the loop, so the police lose a valuable source of information on financial transactions.
Secondly, a person’s details are replaced by an anonymous account key, making it hard to track that person down. Also, the transactions themselves are encrypted, which makes it even more difficult for the police to link specific payments to specific individuals.
Mapping money flows
Here is the good news: While it’s definitely possible for criminals to run with cryptos, it’s getting harder to hide.
While crypto users can withhold their identities, they still reveal other information that is useful to law enforcement agencies. Blockchains, where all the transaction data is stored, “provide a really useful source of truth,” says Jonathan Levin from Chainalysis.
His company develops tools that can help investigators draw inferences about how people are using cryptocurrencies. The main goal is to map how criminals move funds around and identify where the crypto coins are being converted to fiat.
That said, some newer cryptocurrencies like Zcash and Monero are designed to conceal the information that Chainalysis and others use to follow the money flows. That’s why criminals have been moving away from Bitcoin and are migrating into these systems that are harder to trace.
It’s a struggle for technological superiority. Both, law enforcement and criminals are becoming more technologically sophisticated, and both try to gain the upper hand.
Therefore, instead of viewing each other as enemies, blockchain companies and government agencies should team up and use their combined expertise to find ways to eliminate criminal activities in cryptocurrencies for good.
The role of regulations
Cryptocurrencies are no niche phenomenon anymore, so regulators have to step up their game.
Criminals, just like everyone else, have to use crypto exchanges to redeem their coins in fiat. Governments could require exchange users to disclose their identities. In this case, the exchange could confirm an address and reveal an owner’s identity. Hence, anonymity, for the large part, is removed.
That’s already happening today. Many exchanges require users to identify themselves with a government issued photo identification and phone verification.
Not everyone in the crypto community likes this idea, as anonymity is one of the principles Bitcoin was founded on and privacy is a person’s right. But hey, we need to make some compromises. We can’t complain that cryptos have a bad reputation and then on the other hand not be willing to do anything about it.
Putting things in perspective
The fact that cryptos can be used to hide criminal activities is an issue, whether it’s exaggerated or not. But, let’s also put things in perspective: The alternatives we have are no better!
Who on earth believes the current financial system is not being abused for criminal activities? Sure, it’s easier to track down criminal subjects if they are using bank accounts, but what about the bank account providers themselves?
Bitcoin came as a response to the 2008 financial crisis, which revealed some of the most large-scale criminal activities ever witnessed in human history. Without the widespread corruption of centralized agencies, both in the financial sector as well as in government, Bitcoin would never have been born.
Talk about money laundering: The money laundering activities happening in crypto markets is a drop in the ocean compared to global real estate markets. What are we going to do about that?
Or talk about cash: Cash is by far the most popular means of financing for any sort of criminal activity. Why is nobody talking about getting rid of cash then? It’s way easier to not leave any trail with dollar bills than it is by using cryptocurrencies.
ICO scams? Yes, there have been a few. How about Bank of America’s Mortgage-backed securities fraud in 2008? What about the LIBOR manipulation scandal which involved multiple major banks from Deutsche Bank to Citigroup?
If we were serious about combatting criminals, cryptos are not the first thing to focus on. There are really just two reasons why cryptos have gained such a bad reputation.
Firstly, it’s a new technology, one that most people don’t really understand. It’s human nature to be afraid of things we don’t understand.
Secondly, cryptos are a thorn in the flesh of the current financial industry and government elites. They are more than happy about the status quo, and actively work against the proliferation of cryptocurrencies.
To wrap things up: Let’s be realistic and not artificially blow up the issue. There are black sheep in every flock, but that’s not to say the entire herd is a bunch of criminals.
Most people in the crypto space have set out to change the world for the better, not to scam grannies or fund al-Qaeda. We need better technologies to track criminal activity and we need better regulations. Let’s work together on solutions and we can keep the bad guys out.