By Eric Groothedde
May 16, 2024
For years I’ve been using data from blockchain analytics companies like Chainalysis, Elliptic, TRM Labs and Crystal to convince bankers to have a more nuanced view about the ‘criminal level of crypto’. While they were usually adamant to change, gorging on heavy malversations in the crypto industry, and in my mind more sentiment driven, I was emphasizing that (1) most of those issues were caused by people’s misconduct instead of the tech and (2) data clearly shows that only 0.34% of all on-chain transactions were associated with illicit activity.
Beat that buddy!
On top of that and contrary to bank accounts, where the visibility of the money trail stops as your client is transferring funds to a different bank, blockchain transactions are shared on a public ledger and are traceable. Providing opportunities to detect illicit activity since the Genesis block, an endless sea of digital criminal fingerprints. And with success! There are many examples of how law enforcement has arrested, prosecuted and convicted criminals with the aid of blockchain analytics – get yourself a copy of David Carlisle masterpiece “The Crypto Launderers” and you’ll be all set up.
So what’s the issue? Only a small amount of crypto transactions is criminal, and once they use it, they get busted!
Unfortunately, it’s more complicated.
First: not all transactions are brought into the mix. Chainalysis clearly identified the limitations in their report:
-Some funds are illicit and already sent, yet not detected
-Funds derived from non-native crypto crime is not considered illicit unless it is brought into attention by customers
-Funds associated with crypto platforms accused of fraud, with no convictions there are out, because only a court can define this as illicit
-Transaction volume associated with potential market manipulation is out, because the detected transactions are deemed suspicious, yet not defined as illicit
-Funds associated with money laundering is out, because it can lead to double counts and artificially inflate the estimates of on-chain activity
Second: you can use the tech to trace transactions, but you can also use the tech to obfuscate transactions. Mixers, tumblers, chain hopping…criminals will do whatever they can to prevent their transactions to be detected as ‘illicit’, and they do on a large scale. I will focus on this topic in a future article.
Third: we miss ‘the other side of the data’. We have a good overview of the amount of crypto transactions being illicit, yet we don’t have similar data on the amount of criminal activities that use crypto as a means of distribution. So what percentage of crime uses crypto?
On the third part: it is very clear that governments and law enforcement are signaling that criminals increasingly use the unique features of cryptocurrency, blockchain infrastructure and market activity to launder money. For instance the US, Switzerland and the Netherlands (among other countries) emphasized this in recent national risk assessments. Also Europol has been very vocal recently on the rise of professional money laundering service providers starting ‘cryptocurrency-as-a-service’ for both online and offline crimes, including fraud, cyber-attacks, drug trafficking, racketeering and VAT fraud. This week, Europol’s Borja PASTOR published recommendations alongside partner Basel Institute on Governance on preventing and combating the criminal use of cryptocurrencies, being:
- Accelerate innovation for investigative and monitoring tools
- Boost enforcement capacity and training
- Reorganise to foster collaboration and prioritisation
- Engage proactively in multi-sector collaborations
- Consider the whole chain, from prevention to facilitators
Conclusion:
–>Embrace blockchain analytics and invest vigourously to improve it
–>Understand its powers and limitations
–>Don’t have a binary view on crypto crime and learn the nuance that most crypto users aren’t criminals, yet most criminals are crypto users
–>Understand your role in the chain, and how you can collaborate to fight criminals using crypto
Feel free to reach out to me on eric@crysk.eu to discuss your organization’s situation. Looking forward to engage.