Is Cryptocurrency Really A Safe Haven For Money Launderers?


Cryptocurrencies had a rocky start to 2022. As a result of tighter economic policies in various countries, investors pulled out of riskier assets, which caused the total crypto market to plunge more than 40%.

Despite this, the total cryptocurrency market capitalisation now sits at a massive $1.8 trillion USD, giving it financial respectability. Crypto is most definitely considered mainstream now and open for business all over the world.

Nevertheless, cryptocurrencies have long had a reputation for shadiness. The main accusation is that they allow digitally savvy criminals to launder and hide the proceeds of their crimes.

Suspicion over cryptocurrencies

Suspicion levels are particularly high among the generation that grew up with the ‘cash is king’ philosophy, where currencies were based on the gold standard and where the bank manager held all the power and information.  

Many non-digital natives are suspicious and cynical of digital currencies because they are hard to understand and don’t have anything physical, like banknotes or coins, to show for one’s investment.

Governments too are dubious about cryptocurrencies, with a number of the world’s biggest countries signalling their intent to clamp down on these alternative currencies or ban them outright. Interestingly, though, they don’t seem opposed to the blockchain and cryptocurrency technology itself. Rather, the fact that they’re not subject to oversight by regulatory bodies seems to be their main concern

According to the Central Bank Digital Currency Tracker, nine countries have now launched their own Central Bank Digital Currency (CBDC) – virtual money backed and issued by a central bank. A further 14 are in pilot, 17 are in development, and another 40 are researching the feasibility of a CBDC.

The Reserve Bank of New Zealand, Te Pūtea Matua, is one of those exploring the possibility of a CBDC. The introduction of a digital currency wouldn’t prevent other cryptocurrencies like Bitcoin and Ethereum from being traded here, but a New Zealand CBDC would be centrally managed and could offer more protection than cryptocurrencies created on the open market.

Cryptocurrency crime is traceable

In recent cryptocurrency news a U.S. couple were arrested and accused of laundering a record $4.5 billion of stolen cryptocurrency. After their arrest, the pair were mocked for several operational security blunders: one of them allegedly stored the keys controlling those funds in a cloud storage wallet, which made them easy to seize, while the other flaunted their new-found wealth in a series of rap videos and a column in Forbes magazine.

However, the notoriety of their crimes obscured the fact that, despite using a number of multi-layered technical measures, U.S. agents were able to defeat their efforts and recoup most of the cryptocurrency. According to the tech website Wired, “In doing so, they demonstrated just how advanced cryptocurrency tracing has become – potentially even for coins once believed to be practically untraceable.”

Cryptocurrency gaining criminal attention

While this case illustrates that cryptocurrency isn’t the anonymous and untraceable alternative currency once believed, it still is a growing channel for criminals, including money launderers.

Most consumers buy cryptocurrency from an exchange. This involves opening an account and depositing traditional currency, like New Zealand dollars, before using the funds to buy their chosen cryptocurrency.

The cryptocurrency is then held in a digital ‘wallet’. This means the currency is assigned to the consumer’s account but it’s stored on the exchange on the consumer’s behalf. If criminals hack into the exchange and steal the cryptocurrency, unlike a bank, there is no financial claims scheme to guarantee deposits.

Cryptocurrency theft

Criminals can obtain cryptocurrency by stealing it, or tricking their victims into handing it over. According to Chainalysis, crypto criminals stole US$3.2 billion last year – a fivefold increase from 2020. However, this is overshadowed by scams, which enabled criminals to lure US$7.8 billion of cryptocurrency from their unsuspecting victims.

In New Zealand’s most high-profile crypto theft, start-up cryptocurrency exchange, Crytopia, was hacked in 2019, with $24 million of the exchange’s $250 million stolen.

Cryptocurrency scams

According to Cert NZ, cryptocurrency scams operate by sending out emails, or setting up fake websites, which advertise cryptocurrency investment opportunities with attractive returns. Other scams offer sales of cryptocurrencies, which aren’t transferred once the victim pays. 

With romance scams, a scammer creates a fake profile and matches with victims on a dating website or app. They may then ask for money in the form of cryptocurrency to help with a personal crisis, or may encourage the victim to get involved in cryptocurrency trading.

Cryptocurrency and money laundering

While cryptocurrencies aren’t currently a competitor to traditional currencies in terms of volume, their unregulated – or less-regulated – nature in many parts of the world makes governments, banks, regulators, and anti-financial crime authorities nervous.

At the 2019 meeting of the G20 Finance Ministers and Central Bank Governors, they noted: “While crypto-assets do not pose a threat to global financial stability at this point, we remain vigilant to risks, including those related to consumer and investor protection, anti-money laundering and countering the financing of terrorism.”

Crypto advisors continue to claim that money laundering with cryptocurrencies is complex and risky for criminals, which makes it a less attractive option compared to conventional money laundering techniques. 

They also say that digital transactions are, in fact, more transparent and accountable than some fiat currencies. The arrest of the U.S. couple and tracing of their proceeds of crime seems to bear this out.

However, criminals are inventive and remain highly motivated to find chinks in any financial system. Therefore, it is important to continue to search for loopholes in the cryptocurrency ecosystem that permit money laundering and other cybercrimes and shut these down.

For more on cryptocurrency, take a look at compliance in crypto with Alex McCorkindale at EasyCrypto.

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