There are two big misconceptions about the criminal use of cryptocurrency. The first is that crypto is king for money laundering. The second is that regulators and law enforcement agencies are asleep at the wheel.







For starters, most money laundering does not occur through crypto, but cash. This is partly because cash is truly anonymous and leaves no audit trail, according to Europol. By contrast, Bitcoin and similar coins are pseudonymous, and thus can be more easily tracked.





Bitcoin's amenability to evidence collection by law enforcement — due to its publicly available, largely tamper-proof transaction ledger — was demonstrated in the indictment by Special Counsel, Robert Mueller, of twelve Russian intelligence agents. The indictment reads: "The Conspirators used the same funding structure — and in some cases, the very same pool of funds — to purchase key accounts, servers, and domains used in their election-related hacking activity.”





The fact that the allegations are at that level of granularity demonstrates the ability of law enforcement to leverage the open nature of the Bitcoin blockchain to follow the money, despite attempts by the conspirators to anonymize their transactions through mechanisms such as peer-to-peer exchanges, and laundering through other digital currencies and at least one third-party crypto exchange.





Law enforcement's ability to effectively map out crypto transactions and use that financial intelligence was especially evident in June when the Spanish Guardia Civil and the Austrian Federal Police took down a criminal network, which produced and distributed synthetic drugs on the Darknet and laundered the profits through crypto (mainly Bitcoin). The coordinated enforcement action resulted in the seizure of more than US$5 million in Bitcoin, and IOTA and Lumens tokens.





Blockchain forensics companies, like Chainalysis and Blockchain Intelligence Group, also provide specialized software that can aid successful law enforcement investigations. In a contract with the US Internal Revenue Service to track crypto-related tax fraud, Chainalysis claimed it had information on 25% of all Bitcoin addresses, “which account for approximately 50% of all Bitcoin activity.” Furthermore, Europol and Chainalysis signed an MoU in 2016 to bolster the public-private collaboration in the fight against financial crime in the crypto context.





This contrasts sharply with the challenges that law enforcement agencies face in tracing the movement of cash, outside of bulk smuggling. Unlike Bitcoin, cash is widely used as a vehicle for money laundering, given its anonymity as a bearer negotiable instrument with no audit trail, per Europol and the Australian Black Economy Taskforce. Furthermore, if a predicate offense like narcotrafficking generates cash, the laundering process is more likely to involve cash. High denomination banknotes and high-value cash transactions are thus disproportionately popular among criminal groups for money laundering purposes, per Royal United Services Institute and Europol.





The success of such laundering methods in the fiat currency context is evident in the oft-quoted estimate from the UN in 2011 that less than 1% of criminal monies are seized and frozen.





This begs the question: why would a money launderer consider crypto as their go-to vehicle for cleaning their ill-gotten gains, regardless of the predicate offense, which generated those funds?





For one, crypto is heavily used for crimes committed in cyberspace, such as ransomware campaigns (the popularity of cryptocurrencies for this particular predicate offence is highlighted by the RAND Corporation). But even cybercriminals generally prefer to cash out their illicit gains and use networks of actual money mules to facilitate money laundering. The use of both witting and unwitting money mules who cash out and help layer those newly-converted cash proceeds through the fiat banking and money transmission systems has been discussed in detail by the United States Treasury and Europol (in its 2015 report, "Why is Cash Still King?" and reinforced in its 2017 Internet Organised Crime Threat Assessment. This dovetails nicely off the finding of one study, which analyzed flows of Bitcoins from illicit entities between 2013 and 2016 to "conversion services" such as exchanges, ATMs, mixers and online gambling sites: “Only 0.61 percent of the money [in Bitcoin] entering conversion services during the four years analyzed were verifiably from illicit sources.”





The amount of financial crime facilitated by crypto may be less than you thought, but regulators are nonetheless on the case. There are numerous interagency task forces through which law enforcement agencies pool resources and expertise to fight financial crime more effectively. In the United States, there is the Virtual Currency Emerging Threats Working Group. In Australia, there is the Commonwealth Serious Financial Crime Taskforce. Additionally and most notably, Europol held its Fifth Annual Virtual Currencies Conference in June this year. The conference brought together “over 300 participants from 40 countries” to share knowledge on “how to foster the legitimate use of this virtual monetary system often abused by hackers, international drug dealers and the money movers of organised crime.”





There have also been numerous shutdowns of illicit darknet marketplaces whose economies were fuelled by crypto, including Silk Road, AlphaBay and Hansa. The seizure of AlphaBay was especially significant in light of its being the largest illicit darknet marketplace at the time, per Europol. Additionally, there have been sizeable virtual currency seizures by law enforcement. Through to the end of this April, Homeland Security Investigations (of the US Department of Homeland Security) had seized over US$25 million in crypto, up from nearly US$7 million by the end of FY 2017.





Countries around the world are also taking proactive measures to detect and fight money laundering and terrorism financing risks posed by crypto. In particular, The American federal anti-money laundering and counter-terrorism financing (AMLCTF) regulator and Financial Intelligence Unit, FinCEN, released interpretative guidance as early as 2013 on the application of its regulations to virtual currency entities, which brought "virtual currency exchangers and administrators" into the scope of those laws. FinCEN and the Internal Revenue Service have, since 2014, examined the AMLCTF controls of more than one-third of all crypto businesses in the United States that are covered by FinCEN’s 2013 guidance and have registered with that agency as money transmitters, including foreign-located exchangers, individual peer-to-peer exchangers, and five of the 20 largest exchanges by volume. This is a better outcome than the entire crypto sector operating underground. Australia and the European Union have also amended their AMLCTF frameworks to regulate crypto exchanges and custodian wallet providers.





More important, the intergovernmental Financial Action Task Force (FATF) — the international standard-setter in the AMLCTF context — continues to be proactive in guiding countries on how to deal with financial crime risk stemming from crypto. It developed guidance for countries and AMLCTF-regulated entities on applying the risk-based approach to virtual currencies in 2015. It also has a deadline of October 2018 to clarify how its standards apply to crypto-assets specifically. Furthermore, one of the priorities of the American Presidency of the FATF (from 2018-19) is to tackle financial crime risk stemming from virtual currencies.





Why is it important to debunk hese misconceptions? Because by overstating the degree of financial crime risk that stems from crypto, and understating law enforcement’s response, we risk implementing excessive, poorly-targeted regulation. Such regulation threatens to stifle the tremendous innovation embodied by crypto and its underlying distributed ledger technology.





Ravi Nayyar is completing an Honors thesis at the University of Sydney about anti-money laundering regulation of cryptocurrencies.













