Popular British comedian John Oliver once eloquently put: Cryptocurrencies are everything you don't understand about money put together with everything you don't understand about computers. Quite understandably, most laymen really did not care about them even just a few years ago.
However, those circumstances have drastically shifted as cryptocurrencies become integral to mainstream financial infrastructure and political discourse over time.
For starters, Bitcoin, one of the most popular cryptocurrencies, is currently valued at $50,000 a piece for each of the 21 million units available. Dogecoin, a cryptocurrency that started as a joke back in 2013 has accumulated a market capitalisation of over $7 billion and each of its pieces is currently valued at over $5.
Financial transaction through crypto exchanges is rising by the minute, encouraging tech giants like Tesla to convert $1.5 billion of their $20 billion cash reserves to bitcoin with multiple others to follow suit.
Dark side of cryptocurrency
Putting aside all the good news, there is a dark side to cryptocurrency as well. Cryptocurrencies have been associated with illicit activities that range from money-laundering for drug cartels in Latin America to funding egregious human rights violations in North Korea.
As recently as 22 February, Sydney police arrested a man named Yi Zhong and confiscated $1 million in cash from his car. Yi had been accused of money-laundering for a criminal syndicate.
This is not a blip on the radar. Since the advent of cryptocurrencies, regulators have been worried about their potential for money laundering and other pertinent crimes.
In April 2019, Mexican police arrested infamous human trafficker Ignacio Santoyo, accusing him of running an elaborate prostitution racket across Latin America. Interestingly, it was not the 2,000 women that he sexually exploited that eventually led to his arrest. Rather, he was suspected of money laundering using bitcoins.
Mexican law enforcement authorities warned that cryptocurrencies were being funnelled into cartels and gangs that control a vast underground criminal market for sex, drugs, guns and people.
Why is crypto favourite among criminals?
Criminal activities are highly cash-intensive. We have all seen those rolled-up bundles of cash in TV shows like Narcos or Breaking Bad. And moving these mountains of cash earned overseas back to the drug cartels can be an even more daunting task than smuggling the drug itself.
An alternate can be the banking system. However, putting the proceeds into banks can also expose the cartels to perilous circumstances as well, something Carlos Slim is quite familiar with.
To get around these predicaments, drug cartels usually split their offshore illegal earnings into small amounts and deposit them into various bank accounts. This technique is commonly known as 'smurfing'. Then they use these accounts to buy a series of small amounts of bitcoin, essentially obscuring the source of the money.
But the story does not end there. Apparently, cryptocurrencies are being used for international terrorism and human rights violations as well. For example, the US recently indicted two Chinese nationals for allegedly conspiring with North Korean state-sponsored hackers. Tian Yinjin and Li Jiadong were charged with money-laundering of over $1 million worth of cryptocurrency.
The investigation report revealed interesting features of this elaborate scam.
Apparently, the economy of North Korea had been crippled by sanctions aimed at its nuclear programs. Hence, Kim Jong-UN had to turn to cryptocurrency to generate revenue and did so mostly by stealing it.
Earlier in 2019, sanction experts warned the United Nations against the 'widespread and increasingly sophisticated' cyber-attacks by North Korean hackers who allegedly pilfered as much as $2billion from the crypto exchanges and other financial institutions.
Adverse circumstances like these, pushed the newly-appointed Treasury Secretary, Janet Yellen to pledge increased regulation for cryptocurrencies and other speculative market practices.
Is the crypto market becoming more reliable?
Although regulators and politicians caution against the potential risks of the bitcoin bubble, blockchain investigation firms like Chainalysis suggest that the market is becoming more reliable over time.
According to their 2020 report, criminals who use cryptocurrency as means of money-laundering have become concentrated around a small cluster of online services.
These services include high-risk cryptocurrency exchange portals, online gambling platforms and financial services that support operations head-quartered in high-risk jurisdictions.
More importantly, they found that a major chunk of these illegal transfers does not take place across a large number of services. Rather, only a small group of 270 blockchain addresses have laundered around 55% of all cryptocurrency associated with crime. When they expanded their sample, they found that 1867 addresses out of several million received 75% of all criminally-linked cryptocurrency funds- a sum estimated to be around $1.7 billion in 2020.
"We believe the growing concentration of deposit addresses receiving illicit cryptocurrency reflects cybercriminals' increasing reliance on a small group of OTC (over-the-counter) brokers and other nested services specializing in money laundering.", Chainalysis stated in the report.
Need for a regulatory authority or not
The firm suggests that money-laundering through cryptocurrency is now in a vulnerable position and the high concentration of illicit transactions around only a few addresses suggest a bottleneck for such transfers. Given such circumstances, well-orchestrated policies from the regulatory bodies may as well be the final nail in the coffin.
Involvement of regulatory authorities may become unnecessary as many of the money-laundering services are also second-tier services hosted at larger legitimate operators. Convincing these larger operators to enforce its anti-money-laundering policies may effectively shut down most of the active money-laundering hotspots.
And they might be right in assuming so. In 2019, over $1 trillion worth of cryptocurrency transactions took place, only 1.1% of which had been associated with criminal activities- a much better number from earlier years.
Although the volume of cryptocurrency transactions was driven by darknet markets during their initial years, as the number of users and number of companies adopting the currency increases, the ratio of illicit transactions is also decreasing, implying a much healthier market environment at present. An increasing number of transactions also make it easier to track transactions on public blockchains and increasingly difficult to remain untraceable.
On top of that, crypto hackers are finding it increasingly difficult to hack into cryptocurrency exchanges and steal from common investors, essentially marking their heist in 2018 (worth about $1 billion) as an inflexion point.
Last but not the least, accusations against cryptocurrency revolving around money laundering can also be applied in the case of traditional banking institutions as well. For example, Carlos Slim infamously laundered hundreds of millions of dollars through HSBC, long before anyone could sniff it out.
Cryptocurrencies can be more effective in minimising illicit transfers since most of them maintain a transparent ledger and most transactions can be traced back to their source, except for a few exceptions that take place on high-risk sites. This too has been dwindling for quite some time and firm regulations coupled with the execution of anti-money-laundering policies by cryptocurrency giants can drastically reduce such money-laundering.