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Bitcoin & Money Laundering

Bitcoin & Money Laundering

Explainers Cryptocurrencies

31 Aug 2021

You may not be a fan of taxes, but most people would agree that money laundering is undesirable. Practically speaking, money laundering is the criminal’s way to ensure that their crime pays off, so to speak.

Money laundering is critical to the operations of pretty much every form of transnational and organized crime which might involve drug traffickers, organized criminals, terrorists, arms traffickers, human traffickers, blackmailers or credit card swindlers. In the long run, money laundering can wreak havoc to an economy and even to the social fabric of communities. Think for example of corrupt officials that abuse to amass wealth with impunity.

Money is generally laundered through currency exchange houses, stock brokerages, gold dealers, casinos, automobile dealerships, insurance companies and trading companies. Furthermore, to mask illegal activities criminals also make use of private banking facilities, shell corporations, offshore banking, free trade zones, wire systems and trade financing.

According to a United Nations report, money laundering costs the global economy between $800 billion and $2 trillion per year - or about 2-5% of the global gross domestic product. It is estimated that around 90% of all money laundering activities goes undetected.

Bitcoin and Money Laundering

Bitcoin is often associated with the infamous Silk Road — a dark market on the ominous dark web. Silk Road enabled anyone to purchase items like weapons and illegal drugs with Bitcoin. Although the marketplace has long been shut down, mainstream media still refers to this history. The reasoning often goes that since Bitcoin facilitates anonymity, it is helpful to criminals.

However, the argument that Bitcoin is a preferred tool to launder money is a misconception. Identities on the Bitcoin blockchain are not anonymous, but pseudonymous. Each identity is associated with an alphanumeric string, called a private key. While it is true that Bitcoin offers a certain level of protection over the identity of users, transactions are actually public.

It is also a misconception to think that regular money, or fiat, is somehow better managed. Certainly, capital controls and reporting/ auditing requirements make it difficult to escape the system of control. However, with the help of shell companies and other sophisticated structures, money laundering doesn’t have to be all that hard.

In fact, if instead of money laundering, we talk about “asset management structures” and “tax beneficial schemes”, we will quickly find the loudest anti-crypto leaders in finance knee-deep in dubious laundering schemes.

Let’s not forget: Just two years ago (2019), a record amount of fines were imposed, including 58 anti-money laundering penalties. The majority of these fines were imposed on banks, while around 17% were given to organizations in the gaming, gambling and cryptocurrency sectors.

The problem with Bitcoin and money laundering

Bitcoin seems to be useful when it comes to certain aspects of the money laundering enterprise. For example, using cash to purchase Bitcoin and then to send such Bitcoin overseas is relatively easy. However, the problem is usually more around the ability to put illicit funds back in the economy without being noticed.

Bitcoin does allow for certain techniques that could be useful, such as coin mixing to safeguard privacy and erase/ blur a coin’s history. However, pseudonymous identities, public transactions and coin mixing do not currently provide a more efficient or effective way to launder money compared to plain old US dollar. Bitcoin’s transactional record is permanent and criminals will have to think twice before going on chain.

In this respect, it’s always good to head back to the latest Chainalysis report. The reality is only around 1% of all Bitcoin transactions are associated with crime. And when it comes to coin mixing, most entities use it only to enhance privacy. Only around 8% of mixed coins per year are stolen and around 3% of coins have some association with the dark web.

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