Blockchain and crypto can be a boon for tracking financial crimes

Governments around the globe have also become more aware of the crypto market and the various ways in which it can be regulated. 

Despite a growing adoption rate and involvement of mainstream financial giants, however, naysayers continue to portray crypto as a tool for miscreants and criminals. Several crypto platforms and decentralized finance (DeFi) protocols have been compromised over the years, owing to various code vulnerabilities or centralization problems. However, stealing of money is the easiest part, while moving that money and cashing it out is nearly impossible.

This is primarily because most crypto transactions are recorded on a public ledger, which acts as a permanent trail, and even if the hacker uses various coin mixing services to hide its origins, powerful transaction monitoring tools can eventually identify such illicit trails.

Even coin mixing services themselves have started to block transactions associated or flagged as illicit.

Through rigorous study, crypto forensic firms such as Chainalysis and Elliptic have further debunked the notion that cryptocurrency provides an ideal tool for financial crimes and masking illicit activity.

A recent report by Chainalysis shows that the percentage of crypto transactions associated with illicit activities in 2021 was a mere 0.15%.

Cryptocurrencies have become more mainstream over the past couple of years, with the public prescription of the crypto market evolving from an internet bubble a couple of years ago to a reliable investment option today.

Dmytro Volkov, chief technology officer at crypto exchange CEX.IO, told Cointelegraph why the notion of crypto being primarily used by criminals is outdated:

“The misconception that crypto is predominantly used by criminals probably has roots in the days of the Silk Road. The truth is that the immutable aspect of the blockchain makes hiding transactions very difficult. In the case of Bitcoin, whose blockchain ledger is publicly available, a serious exchange with a competent analytics team can easily monitor and thwart hackers and launderers before the damage is done.”

He added that “As long as the security team stays proactive and ahead of the curve on blockchain technology, we can continue protecting our customers. As this industry continues to grow, I believe that this myth of crypto being used mainly by criminals will fade.”

Volkov noted that there is an “arms race going on between cybercriminals and the security teams of cryptocurrency ecosystems,” as ne’er-do-wells still try to find instruments to facilitate illicit activities. However, “This is not exclusive to the digital asset industry,” Volkov claimed. 

A “paper” trail

There have been several instances in which criminals were found to be trying to launder stolen cryptocurrencies years after the fact, the most recent example being Bitfinex. 

Law enforcement agents were able to follow the stolen Bitcoin (BTC) — estimated to be around $4 billion in today’s value — through the blockchain to eventually detain influencer Heather Morgan and her husband Ilya Lichtenstein, a cybersecurity specialist.

Related: Making sense of the Bitfinex Bitcoin billions

Derek Muhney, executive vice president at Coinsource — a Bitcoin ATM provider — told Cointelegraph:

“Look at the outcome of the 2016 Bitfinex hack. The individuals involved attempted to launder approximately $4.5 billion in cryptocurrency by employing several methodical laundering techniques. Still, law enforcement was able to follow the money through the blockchain, identify the perpetrators and recover a significant portion of the stolen money. Cases like this prove that criminals may try to take advantage of crypto but they won’t succeed. Crypto was created for the people and will continue to be for the good guys.”

From an outside perspective, using cryptocurrency for criminal activities might seem ideal. Online transactions can be done quickly and without having to physically move sums of money across far distances. But, those in the crypto world know there are robust protocols in place that allow law enforcement to keep records and verify the identity of customers if need be.

Crypto exchanges play a key role

Crypto exchanges play a key role in identifying and blocking or freezing stolen funds, as they effectively serve as off-ramps for crypto to fiat. 

Recently, Binance blocked $6 million worth of stolen funds associated with the Ronin bridge hack. The crypto exchange revealed that the hacker tried to cash out $5.8 million out of the total $600 million via 86 accounts in small batches.

As laundering via centralized exchanges with heavy Know Your Customer (KYC) policies has become difficult, hackers have then turned to decentralized exchanges (DEX) in hopes of anonymizing their movements.

Most of the time, however, these hackers convert their stolen crypto into stablecoins, which, once flagged, can be easily frozen by the issuer. Thus, laundering via DEX platforms has become increasingly difficult as well.

Tigran Gambaryan, vice president of global intelligence and investigations at Binance, told Cointelegraph that while criminals will continue to use crypto for laundering, exchanges are the first line of defense against them:

“Criminals will launder money no matter what form it comes in. When it comes to cryptocurrency, exchanges are the first line of defense and have to be prepared for that. What exchanges need to do is to have a sufficient number of people with the right expertise and the necessary tooling to stop and identify suspicious transactions. Proper KYC and transaction monitoring tools are essential.”

Binance has also helped take down a cybercriminal ring laundering $500 million in digital assets received through ransomware attacks. The exchange has also worked with local governments and law enforcement agencies to tackle ransomware risks.

Major American crypto exchange Gemini said that analytical tools “coupled with the transparency of the blockchain itself, enable Gemini to offer […] digital assets in a compliant way, while further promoting trust in the cryptocurrency ecosystem.”

Fiat currencies are more vulnerable to illicit activities

Some of the biggest naysayers that propagate the narrative of crypto as a tool for criminality are traditional bankers, who themselves are not innocent of ill financial deeds.

Despite governments pouring billions of dollars into stringent banking regulations, including Anti-Money Laundering (AML) measures, major banking institutions have paid over $300 billion in fines since 2000 for a slew of various conduct violations including but not limited to insider trading and AML deficiencies.

In 2021 alone, around seven banks collectively paid $1.933 billion for disregarding internal illicit activities to major AML compliance flaws.

The vast difference between what is being propagated against crypto and the reality of the industry highlights the need for decentralization. Major traditional financial institutions irrespective of the security measures have helped launder more money than criminals manage by using cryptocurrencies.