Disclaimer: Opinions expressed in this article do not constitute investment advice from Bitcoin Reserve.
Last week, we delved into the financial action task force's "red flag" indications of cryptocurrency criminal behavior. What we observed was a litany of vague "warnings," most of which appeared to penalize any semblance of financial privacy. But is this level of scrutiny justified within the bitcoin and broader cryptocurrency markets?
Among the plethora of FATF red flags lie any crypto transactions emanating from IP addresses associated with encrypted emails and virtual private networks (VPNs). The organization also highlighted vendors on peer-to-peer (P2P) exchange websites such as LocalBitcoins and Paxful. These, per the FATF, constitute potential grounds for criminal behavior such as money laundering or terrorist financing. The problem is many of these so-called "red flags" are innocuous and vague enough that they could reasonably implicate any investors. And in worst-case scenarios—potentially lead to the wrongful sequestering of funds if acted upon by exchanges looking to comply.
Which begs the question: Is the FATF's caution warranted?
Bitcoin Is a Bust for Criminals
Thanks to its semi-anonymous nature, bitcoin is often synonymized with criminal misdealings—especially by the mainstream media. And while it's undoubtedly true that criminals leverage cryptocurrencies for fraud, scams, and other such nefarious activities, bitcoin, in particular, is actually a fairly inappropriate choice for a master criminal or money launderer. That's because, rather than providing full anonymity, bitcoin simply renders pseudonymity.
Every single bitcoin transaction produces an immutable record that gets logged via the blockchain. As such, transaction data can instantly be traced back to the alphanumeric string of characters that make up a bitcoin address—and from there, potentially its owner. Anyone inquisitive enough to look can easily find where the funds originated and where they're headed.
Granted, bitcoin mixers—services that mix coins together to obfuscate their origin—can make it hard to trace funds, but certainly not impossible. For example, one way to keep tabs on mixed funds is by simply observing correlations between transaction amounts and fees on the other side.
Still, bitcoin didn't garner its criminal repute from thin air. In the early days, circa 2011, bitcoin found most of its adoption within escrow agreements on darknet markets such as Silk Road. And it's struggled to shake the stigma ever since. In reality, as of 2019, only $829 million in bitcoin has been spent on the dark web, accounting for just 0.5% of all bitcoin transactions, per data from blockchain analytics firm Elliptic.
But what of the FATF's primary mandate, money laundering, and terrorist financing?
In August, the US government seized approximately $2 million in bitcoin and other cryptocurrencies from alleged terrorist financing schemes. According to the New York Times, this money was to fund Al Qaeda, ISIS, and Hamas's paramilitary arm, the Al Qassam Brigades.
Ironically, authorities were alerted to the financing scheme by the terrorist organizations themselves, who attempted to wrangle funds from supporters on social media. It seems the terrorists fell victim to bitcoin's anonymity misconception, believing that, by using bitcoin, their identities would be concealed. Instead, they inadvertently led authorities directly to the funds.
Still, to the FATFs credit, a decent chunk of bitcoin is thought to have been laundered this year. According to on-chain security firm PeckShield around 147,000 Bitcoin, worth little over $1.5 billion, has been laundered via cryptocurrency exchanges such as Huobi, Okex, and Binance in 2020 so far.
Researchers spent the better half of a year compiling data on 'high risk' addresses linked to darknet activity, thefts, and hacks.
Per the report, an additional $1.59 billion in high-risk funds moved into mixers. Making a total of ~$3 billion presumed to be laundered via bitcoin this year alone.
In June, blockchain forensics firm CipherTrace similarly analyzed bitcoin's money laundering affair. The firm found that 12% of all bitcoin received by Finnish peer-to-peer exchange LocalBitcoins, emanated from criminal sources—giving yet more credence to the FATFs uneasiness.
Fiat Is Far More Problematic
A recent report by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) reveals that compared to fiat, bitcoin's money laundering problem is but a drop in the water.
The report, aptly titled "Follow The Money," reads:
"Identified cases of laundering through cryptocurrencies remain relatively small compared to the volumes of cash laundered through traditional methods."
Indeed, on September 20, a cache containing thousands of reports filed by major banks to financial regulators reveals that these institutions failed to act despite holding concerns of suspicious activity. In other words, they willfully facilitated trillions of dollars in terrorist financing and money laundering.
The reports known as the FinCEN files number more than 2100 suspicious activity reports (SAR) relating to over $2 trillion of transactions between 1999 to 2017. The banks in question include monoliths such as JPMorgan, Bank of America, Citigroup, Deutsche, Standard Chartered, and HSBC, among many others.
The principal findings detail such instances as Standard Chartered helping move funds for a Dubai-based firm with purported ties to the Taliban. In another SAR, JPMorgan and other banks appear to have shifted over $150 million for businesses tied to the North Korean regime. And JPMorgan transferred a further $1 billion for the alleged leader of a Ponzi connected to a Malaysian-based hedge fund.
So while bitcoin and the broader crypto markets aren't exactly squeaky clean, when it comes to money laundering, fiat and the major banks remain dirtier than ever.
Join us next week where we dive deeper into the controversies surrounding the FinCEN files.