How Do Criminals Launder Money Through Blockchain? Tozex Follow Apr 24 · 8 min read

Introduction

Although Bitcoin has been around for a little more than a decade, it is still falsely associated with fraud and illegal activity. It is totally unfair, but the king of crypto can live with unfairness. More important, money laundering via blockchain is not as easy as it might seem at first glance.

The brainchild of Satoshi Nakamoto came into existence during the global financial crisis. Hence, dealers of shadowy online markets immediately appreciated the core benefits of innovative technology, such as privacy and the complete absence of any government control.

But things went from a little uneasy to outright bad. On the legendary darknet site The Silk Road, you could purchase almost any prohibited product with BTC, from ATM hacking manuals to illegal drugs and weapons. Digital gold has turned into the preferred currency of cybercriminals using ransomware, cryptojacking, malware, and DDoS attacks. While these are all bad, we know that there are worse things still waiting just over the horizon.

Either way, there are new methods of blockchain analysis and illegal transaction detection to keep up with the developing technology. Thanks to the effective AML solutions from cybersecurity companies and the efforts of law enforcement agencies, Bitcoin money laundering is becoming a cumbersome process. In addition, the widely held view about the complete anonymity and confidentiality of crypto is far from reality. Every now and then, transactions with the most altcoins are easier to track compared to fiat currency.

And the question that plays over and over in our mind is: What is complicating money laundering through the blockchain and how can we identify hackers using virtual currencies for shady activities? We know how important an answer to this question is, which is why we thought you’d like to know.

How Much Does a Bank Account on the Darknet Cost?

According to The Committee of Experts on the Evaluation of Anti-Money Laundering Measures (Moneyval), in 2017 criminals used a wide variety of money laundering techniques to make $1 trillion in illegally obtained funds appear clean. And every year this figure only grows.

At the same time, over the past 10 years, the darknet has remained the main place for hackers’ criminal transactions. In a recent report, Armor analysts declared that on the deep web you can easily buy customer data from Wells Fargo, Bank of America, Lloyd’s Bank, and the PayPal payment system at reasonable prices. For example, access to a JPMorgan account with a balance of $20,000 will cost the buyer only $1,000.

The Myth of Complete Anonymity

The popularity of Bitcoins as funds of highly illicit schemes is no coincidence. It is based on distributed ledger technology, which is controlled by the users themselves without the involvement of third parties. Although it is almost impossible to find out who exactly stands behind a particular crypto wallet, the transaction history with records of senders and recipients’ accounts, date, time, and payment amount is available to all network participants.

But never mind all that. Mind this instead: just the fact, as soon as a digital asset leaves the blockchain system, the anonymity ceases to be the main card in hackers’ hands. The blockchain wallet ID is a combination of letters and numbers that does not provide any information about its owner. Despite this, purchasing any goods or paying for services using a wallet, trying to withdraw and convert digital assets into fiat currency, it wouldn’t be hard to track down who owns the account and all previous transactions.

What’s more, a great many crypto exchanges that care about reputation and do not want problems with regulatory authorities have implemented the KYC procedure to identify their counterparties. There are also special AML solutions based on clustering technology allowing you to detect the connection between wallets and the shadow market as well as recognize bad actors at the time of withdrawal through online exchanges.

In turn, hackers try to avoid prosecution by using available methods to anonymize transactions and launder money.

How Do Criminals Launder Money Through Blockchain?

The simple, but not very effective way to legalize dirty digital money is to manually mix transactions. Bad guys can double back and send funds through several wallets of different users. Although the method may confuse a newbie trying to get a full account history and origin of the cryptocurrency, professionals won’t have such a problem.

Third-party services like LocalBitcoins or forums such as Bitalk.org or Telegram are also used for money laundering. However, cashing out funds through such P2P platforms is associated with great risk, since no one guarantees the honesty of sellers and buyers. Furthermore, the platforms seek to protect themselves from fraud by removing the possibility of buying cryptocurrency for cash.

Another hot idea of converting illegally obtained virtual currencies into cash is the use of mixer services. What really hurts is the whole absurdity of the situation. There is a huge number of such sites on the network; they are not blocked by Internet providers and operate on solid legal footing. The imperfection of the legislative system of most countries in relation to digital technologies is to blame. For example, a Bitcoin mixer allows you to divide transactions into several parts and mix them with the ones of thousands of other wallets. As a result, the recipient receives the requested amount from different users, but it is almost impossible to establish a connection between the sender and receiver.

Although using automated mixers is more efficient than manual mixing, modern algorithms enable you to track your transaction history. According to analysts at Kent State University, most services are not as complex as they might seem, as they tend to use repeated templates and the same addresses. And this was in article published more than two years ago.

The surest way to “clean” cryptocurrency would be wallets with a high degree of anonymity, like Electrum or blockchain contracts to mix transactions. Most importantly, this decentralized approach is still far from being implemented. The technology of self-executing contracts implies transparency, so parties involved in transactions can be easily identified by analyzing deposit and withdrawal transaction histories.

With that said, Ethereum co-founder Vitalik Buterin proposed an on-chain smart contract-based ether mixer. He believes that the possibility of anonymous payment will contribute to the development of projects that collect donations, fight poverty, and create an alternative banking system in prosperous nations. The basic idea is to create a smart contract that runs on the zk-SNARK Protocol (zero-knowledge proofs). It will mix transactions using a register of repeaters with the wallets and IP addresses of users who voluntarily agree to provide their details for a certain fee.

Online Games and Crypto Casinos

The easiest way to launder money is likely using cryptocurrency. It will be enough to buy Bitcoins, register on the casino or bookmaker website, and make a deposit and few small bets.

After that, you can withdraw funds and the wallet will receive “clean” Bitcoins, which you can safely resell, as well as perform other financial transactions.

In addition to the coin with a stellar reputation, criminals certainly use other coins focused on anonymity such as Monero, Dash, and Zcash. Although, these require more technical proficiency from users.

That’s why the international organization against money laundering (FATF) issued its recommendations on crypto regulation, saying that anonymous cryptocurrencies should be outlawed.

Together with widespread AML and KYC procedures for crypto services, FATF recommends suppressing the activities of various mixers and tumblers that allow you to hide the real recipients and senders of payments. And also limit the use of anonymous currencies.

In general, the FATF gave one year to digital currency exchanges to meet the new requirements. Either way, despite the strict framework, shadow exchanges will remain on the market and trade anonymous cryptocurrency for cash clandestinely. Hence, the FATF is not likely to become a serious obstacle for scammers when laundering stolen money.

Methods to Combat a Global Threat

At the moment, almost all legal exchanges require verifying user identity according to AML and KYC rules. However, this technology does not allow you to track Bitcoins that get to the exchange from mixing services. Hence, it is not suitable for preventing money laundering.

Furthermore, there are many exchanges that continue to work by bypassing the formal rules. It is almost impossible to stop their work at the legislative level. This will help to make sure the precedent in China, where the government banned cryptocurrency exchanges throughout the country. Despite this, citizens of the Middle Kingdom can go on selling/buying Bitcoins.

Precedents/Cases

As you may recall, Japan tried to fine or even close six crypto exchanges. However, this led to the fact that the leadership of those exchanges agreed to tighten control over the user’s activity.

Another example is South Korea. In 2018, the country’s authorities tightened the rules for exchanges and forced them to carefully monitor the transactions of their users. At the same time, the project managers were required to provide the financial regulator with data on any “major league” transaction. At the end of the day, such restrictions were lifted altogether owing to inefficiencies.

Tracking Transactions Becomes Easier

With an abundance of various ways to anonymize transactions with virtual currency, the technology continues to evolve at an ever-increasing pace. As artificial intelligence and analytics are a natural team, higher-level tools open up a new window for network monitoring and detecting illicit activities with digital coins.

Countering money laundering through blockchain is an innovative course in combat against cybercrime. However, all market players are interested in developing effective solutions, as this will help improve the reputation of cryptocurrency and reduce the volume of illegal transactions around the globe.

Concluding Thoughts

Well, let’s face it — the worst hadn’t been any of those listed things. The worst had been a nagging conviction that the reputation of the cash for the Internet has become stained due to severe cases of fraud. Discussion on the need for new approaches to combat BTC money laundering began in 2018. Obviously, the existing methods have turned out to not be effective in this case.

At the G20 summit, it was decided to entrust the international organization FATF with developing effective options for anti-money laundering in an innovative way. But, despite that, we have yet to see concrete results.

There is no specific understanding of how to deal with this troublesome process. No technical tools are coming to the rescue either. The only reasonable solution to this issue is to try to tighten the regulation of buying/selling Bitcoins.

The world community has been acutely facing the problem of combating money laundering since the famous Al Capone. Since then, ways to legalize “dirty money” are improving and advancing by leaps and bounds. In the era of high-tech digital technologies, scammers have received a new tool — the cryptocurrency market.

According to statistics from the Federal Bureau of Investigation, the cases of money laundering where criminals used cryptocurrency have been identified from 2017 to 2018. The total exceeds 1,200,000,000 US dollars. And that’s just from the solved cases only. In practice, these numbers are considerably higher. That is a dreadful thing to be thinking about, but it’s true. Let’s hope in the near future, for what might be months or years, the situation will improve.

There must be a way.