Crypto-assets & Financial Crime

Criminals see cryptoassets as the perfect medium for financial crime. That’s because of the perceived anonymity a person enjoys when they use Bitcoin and similar currencies. But is there proof that cryptocurrencies are being used for financial crimes? And if so, what’s being done about it?

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Why Cryptocurrency?

Why white-collar criminals and fraudsters choose to use cryptocurrencies? The media’s perception is that currencies like Bitcoin afford criminals a degree of privacy they don’t enjoy when using cash or bank transfers.

To an extent, that’s true. A bitcoin wallet’s ID is a string of characters that on its own is impossible to link to any one person, either a criminal or not. The name that a person uses on an exchange isn’t necessarily linkable to a person, either, provided that they don’t use something recognisable.

But the anonymity of cryptocurrency is undermined by blockchain. Every transaction is logged and tracked in a publicly accessible, uneditable ledger. As things stand, it is possible to disguise funds and their ultimate destination through a tumbler, but with enough time and effort, any amount of funds can be tracked.

Regardless of how accurate claims of anonymity are, however, those claims are the reason why criminals are attracted to cryptocurrencies. Bitcoin’s rise to fame caught the attention of businesses, individuals and fraudsters alike.

Which Financial Crimes?

Cryptocurrencies can be used for almost any type of crime: the most well-known, headline-grabbing crimes are those related to the dark web. Anything to do with hacking and ‘cyber-crime’, terrorism and sexual crime is highlighted extensively.

What isn’t highlighted is anything that doesn’t grab the imagination. Simple fraud and money laundering don’t stir the imagination like those listed above, so even though they’re much more common than, say, terrorist funding, they’re largely ignored.

In terms of financial crimes, there are several to be aware of, including:

1. Money laundering

2. Bank fraud, i.e. fraudulently accessing and taking the assets of a bank

3. Posing as a bank in order to dupe victims into sending you money (which is also known as ‘bank fraud’)

4. Payment fraud, which is any kind of scam to steal money from a victim, e.g. phishing, ID theft or pagejacking

5. Fraudulent chargebacks, i.e. securing a refund from a business when one isn’t necessary, but still keeping the item

6. Funding crimes, e.g. terrorist funding.

Money laundering can be done easily through cryptocurrency. Coins are bought through an exchange and are then put through a tumbler. They are then forwarded in chunks to another wallet not previously used by a known person.

As for terrorist funding, this has been covered extensively in the media. Even though the frequency with which it occurs has likely been overestimated, that doesn’t mean it hasn’t happened.

Are All Cryptocurrencies Involved in Financial Crime?

All that being said, not all cryptocurrencies are as much involved in financial crime. Bitcoin received a lot of attention for being the first in the market, and for its incredible growth in value. But it’s not the most popular with people that want to remain anonymous.

Monero and Z-Cash are currently the most popular privacy-centred cryptoassets available. Each of these privacy-oriented cryptocurrencies has been involved in terrorist funding, specifically ISIS.

It’s currently unclear to what extent these currencies are being used for less glamorous, headline-grabbing financial crime. And to be absolutely clear, the people behind these currencies deny that there’s a problem. Both are built on blockchain, like all cryptocurrencies.

But any criminal that’s knowledgeable about cryptoassets would be attracted to these privacy-centric currencies over others like Bitcoin.

What Is Being Done?

Law enforcement agencies are waking up to the possibilities and dangers of cryptocurrencies. INTERPOL, for example, are actively preparing to meet these dangers. They have set up a special group specifically to look at cryptocurrencies (the INTERPOL Working Group on Darknet and Cryptocurrencies).

In 2018 they held a meeting which highlighted Altcoins as a matter of specific concern. But with over 2,000 cryptocurrencies currently available, they have their work cut out identifying which ones are most likely to be used by criminals. In particular, they highlighted Monero and Z-Cash — the two cryptoassets we described above — as worth investigation.

Aside from investigating individual crimes, however, it’s unclear how much INTERPOL can do. The task is being left to FinTech, crypto companies and regular financial institutions to identify fraudulent transactions where they can.

Is Extra Government Regulation the Answer?

Some cryptocurrency regulations already exist and lessen the chance of financial crimes.

In the U.S., for example, Bitcoin exchanges have to be registered with the Financial Crimes Enforcement Network of the US Department of Treasury. But more stringent regulation isn’t the answer until tools are available that can pinpoint financial crime and fraud.

With every transaction recorded in the blockchain, though, the capability to do that is there. All we need is the right tools to analyse all the data in front of us. Many IT solutions are currently available in the market, and some of them offer adequate levels of reliability.

You could also argue that government at least needs to make a bigger noise about investigating these claims of white-collar crime. Even if they don’t currently have the capability to catch every fraudster, making it obvious that they’re trying may at least discourage future criminals.

But as for regulation, there’s very little more that governments could do that wouldn’t violate the underlying point of cryptocurrencies. The idea is that each coin is independent, devolved, and free of government interference.

It’s striking a balance between complete deregulation and the prevention of financial crime that’s going to be difficult.

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