By Erika Koutroumpa,
“Money makes the world go round”-a phrase that truly reflects the inner workings of our societies. With the development of new technologies, the options of payment seem to increase at an exponential rate, with cryptocurrencies being at the forefront. The layman is not the only one to be taking advantage of these novelties and like all financial instruments, crypto is used for crime. However, is their use in crime as severe as it is portrayed?
But first, what are cryptocurrencies anyway? The definition of the term is a virtual asset whose accounts are privately contracted but transactions are all publically and verifiably recorded in a visible ledger or “blockchain”. Consistently growing in popularity, this form of currency is considered by some as a new financial system free from control by banks, although currently it is not accepted as legal tender by most companies.
The most popular crypto is bitcoin, with a fixed supply of 21 million coins, unlike conventional fiat currencies where money may be printed when the central bank deems it necessary. It is distributed via a computation system of “miners” and is then held onto the owner’s digital “wallet” which can for example be in mobile app form. Transactions are recorded in a public blockchain in a manner where information cannot be tampered with. Bitcoin is pseudonymous, not anonymous; a wallet is anonymous if the real identity of the owner is not tied to it. Otherwise, via the transactions recorded in the blockchain, it is easy to track an IP address and reveal the user.
Cryptocurrency is thought by governments as a threat to anti-laundering measures, due to assumed user anonymity. A catalyst to this false narrative by the media and policymakers alike is the February 2022 February 2022, US Department of Justice made a record seizure of cryptocurrency of 4.5 million $ increasing the sophistication with which law enforcement is investigating cybercriminals In 2016, the founder of the Liberty Reserve digital currency service pled guilty to laundering over 250$ million.
To a certain extent, these assumptions are true. Some of the first Bitcoin users attempted to take advantage of it for illegal purposes. According to the US DEA, 90% of Bitcoin transactions in 2013 were related to illegal activity, since it is uncontrolled by third parties and has faster transactions and 0 fees. back at a time when bitcoin was less widely acknowledged Report by Elliptic, a cryptocurrency company, revealed that in the years 2013-2016, the source of over 97% of the illicit bitcoins was in the dark web marketplaces, 2016 this figure was 80% with ransomware taking almost a 16% share and according to research by Chainanalysis, bitcoin transactions on the dark web totalled nearly 250 million dollars in 2012 and by 2019 this number reached 1 billion.
In 2016, criminals were growing increasingly frustrated with the longer duration & cost of transactions due to increased demand for cryptocurrencies. Privacy does not seem to be as much of a priority since privacy bitcoins that are not as traceable exist and are becoming more well-known but remain underused compared to more conventional bitcoins. Still, as cryptocurrencies are not recognized as usable currency by most providers and their activity can be traced, criminals prefer to convert it to cash. To do so, they need to withdraw large amounts of the latter via central exchange services, which is not appealing for large amounts of illicit activity such as money laundering.
Contrary to popular opinion, cryptocurrencies are currently used in a very small percentage of crime and are not considered a great threat. Based on a 2018 report for the European Union by Keatinge et al showed that only a small number of cases have been noted where virtual currencies have been used in liaison to illicit activity, asserting that they do not pose a greater advantage to other payment methods. More specifically, illicit activity is estimated at only 0.5% of the crime proceeds and the equivalent amount of 829 million $ is insignificant when compared to the 300$ billion proceeds of crime in the US in 2010 and is just a slice of the 2.7% of the global GDP laundered annually as estimated by a 2011 UNDC report. Lastly, even based on the reports by Chainanalysis, illegal crypto transactions amount for 0.12% of total crypto transaction volume in 2021 and 0.24% in 2022.
Nevertheless, despite the increasing digitalization of our transactions, cash remains king in the criminal underworld. According to a 2016 paper by Rogoff, this means of payment is involved in activities such as drug trafficking, extortion, racketeering, corruption of public officials, human trafficking and money laundering. Common points between crypto and cash: once a crypto transaction has taken place it is final and there is no resource to undo the transaction, no third party like a bank a person needs to go to Furthermore, the demand for banknotes in the UK between 2005 and 2014 has doubled, despite debit cash transactions being significantly more than cash and around half of the missing cash being used in the shadow economy. According to HM Treasury, the reduction of cash and an increase in digital transactions may instead help with tackling tax avoidance and money laundering since they will be more traceable.
To conclude, cryptocurrencies are a relatively new element in finance whose usage is still uncontrolled by regulations both in a national and international scale. The lack of general knowledge over its usage and their portrayal by policymakers and media alike have made it seem like a powerful tool for illicit activity. On the contrary, most related transactions are of legal nature and are misuse is more easily detectable than cash. The future of crypto remains uncertain, though and as our transactions move online more and more, criminal use cannot be accurately predicted.
‘Crypto crime hits record 20 billion $ in 2022, report says”, Elizabeth Howcroft, 13 January 2023. reuters.com. Available here
“Shifting crypto landscape threatens crime investigations and sanctions”, 7 March 2022, Richard Clark, Sarah Kreps, Adi Rao, TechStream, brookings.edu. Available here
“Criminal use of cryptocurrencies- a great threat or is cash still king?”. Simon Butler. pure.royalhalloway.ac.uk. Available here
“Overstating Crypto Crime won’t lead to Sound Policy”, Jennifer J. Schulp, Jack Solowey, Nicholas Anthony, Nicholas Thielman, 27 January 2023, CATO Institute, cato.org. Available here