In the 21st century, money laundering remains a substantial drag on economic growth. Every year, an estimated 2-5% of global GDP comes from illegal sources, being tentatively laundered by criminals. That accounts for $1.5 — 3.7 trillion, which can’t but raise concerns among authorities worldwide.
However, the concept of “money” is changing, mainly due to technological advance. Now it includes not only cash, electronic currency, stocks, etc. but also a newly-emerging phenomenon of virtual money.
And while the whole world recognizes cryptocurrency as a unique opportunity to reform the imperfect financial system, criminal elements see bitcoin and co. as the new way to disguise their illicit earnings.
What is Cryptocurrency Laundering?
If you are already familiar with the general concept of money laundering, it wouldn’t be hard to grasp the idea of crypto laundering. This is basically the same process of making dirty money clean, but with only one difference. The dirty money is represented in a form of convertible virtual currencies. Most popular examples of such are Bitcoin, Ethereum, and Litecoin.
Methods of Cryptocurrency Laundering
- Unregulated Crypto Exchanges
According to Elliptic’s report, 45.4% of illicit bitcoins are being washed through crypto exchanges.
This creates confusion in the mind of yours if you are familiar with the core essence of the blockchain technology. How is it possible, if public blockchains are browsable for everyone?
When it comes to regulated exchanges, that’s true. Exchanges can cooperate with governments to track illicit transactions and detect the criminal. However, blockchain stores only list of transactions, not user identities, so it still takes time to link transactions and identities. And when it comes to unregulated exchanges, it turns to be the mission impossible.
Nearly 5% of all bitcoin flow is sent to those services from darknet, and the government can’t stop this. Such exchanges have nothing to do with AML regulations, so the source of illegal bitcoins and the identity behind the transaction remain forever unknown.
Moreover, some users utilize TOR browser which gives them full anonymity. This browser doesn’t collect personal IP address and hides the user’s online activity, making it non-trackable.
- Anonymous Online Casinos
The second place in bitcoin laundering is held by bitcoin casinos, accounting for 25.8% of laundered bitcoins. And no wonder. If money laundering through legitimate online casinos bears “risks” to be identified (at least if criminals provide genuine documents), anonymous crypto casinos don’t require your ID while signing up.
None of the casinos are interested in the source of your bitcoins. After you put money in your account and start playing with it, a number of internal transactions occurs before you get bitcoins back to your crypto wallet. This process is similar to sending currency to offshore banks whose countries have bank secrecy laws.
To make withdrawal even less suspicious, criminals often use some share of their deposit for gambling purposes. They lose and win some bitcoins in the process, mixing sources of where they come from as the result. Later, they split the sum into more digestible parts and incrementally withdraw money with a final wire transfer.
Worth noting, money laundering transactions comprise only a small part of the casino’s registry. Most players just enjoy the fact that nobody can track their gambling activity.
- Crypto Mixing Services
Cryptocurrency tumblers were introduced as enhancers of bitcoin anonymity. Obviously, there are not many fair people who demand full anonymity, as they have nothing to hide (maybe, aside from gamblers we mentioned above). Thus, criminals were drawn to mixers like flies to honey and turned them into powerful money washing machines. Up to date, mixers are responsible for 23.4% of laundered bitcoins.
To launder bitcoin through mixers, criminals create one “clearnet” wallet and a few more in the “darknet”. Using an anonymous browser, they transfer crypto to the hidden wallet and run money through a mixer. The mixing service, in turn, splits the sum and randomly sends money to other “darknet” addresses, blending their transaction histories.
Once the “laundry” is done, bitcoins are deposited to regulated crypto exchanges and even may be traded for conventional currencies.
How widespread is crypto laundering?
Crypto laundering represents a tiny fraction of all laundered money, comprising only 1.7% of the total amount. But even this fact is no reason to abandon the issue and just let things slide. It just can’t afford to wait, as the lack of AML regulations in the crypto segment is extremely alarming.
Possible Regulations to Prevent Crime
Currently, there is no unified approach to dealing with cryptocurrency laundering. Standard AML policies are not applicable to this new phenomenon in the financial world. Yet, authorities are already working on new regulations. Some European countries have offered possible amendments that could minimize crypto laundering in the long term.
France proposes to ban all anonymous cryptocurrencies that make identification impossible. Germany is about to create a state-run register of cryptocurrencies. Ireland calls for prevention of anonymous safe deposit boxes. The information on how authorities are going to deal with cryptocurrency mixers and bitcoin online casinos was not provided.
All in all, the idea of centralized regulation of a decentralized currency is grotesque by nature. It seems that nothing but changes in the core technology might stop crypto criminals. Unfortunately, it will no longer be blockchain as we know it today.
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