It’s not only investors and traders who benefit from using cryptocurrencies. Security analysts emphasize that digital tokens are becoming a means for money laundering, tax evasion, drug trafficking, as well as an instrument for funding terrorism, totalitarian regimes and unrecognized states.
1. The perfect match for money laundering
A report by Europol highlights a very disconcerting trend: many people treat cryptocurrencies as an immaculate money laundering mechanism. Criminals often take advantage of anonymity assurance techniques to conceal shady deals and transactions.
European officials have done more than merely stating the fact, though. In late 2017, they adopted some strict cryptocurrency-related regulations aimed at preventing money laundering schemes and terrorism funding. The EU’s initiatives boil down to the following:
Mandatory user identification at Bitcoin platforms and digital wallet services.
Restrictions for prepaid card transactions.
Allowing investigators to access bank ledgers.
Providing authorities with on-demand access to data about trust property.
American law enforcement agencies have had significant success in exposing money launderers. Here’s a good example: A 37-year-old Russian businessman Alexander Vinnik, the founder of Russia’s major cryptocurrency trading platform BTC-e, was apprehended in Greece in summer 2018 at the request of U.S. authorities. He was accused of laundering $4 billion worth of Bitcoin in the U.S. The detectives claim he got some of these assets as a result of the Mt. Gox Bitcoin exchange hack in Japan, where the perpetrators stole and ran off with 850,000 Bitcoin.
As per the investigation, Vinnik was one of cybercriminal kingpins and the main beneficiary of the Canton Business Corporation owned by the trading platform and reportedly engaging in fictitious deals. The corporation’s funds would often end up on the entrepreneur’s accounts. The U.S. Internal Revenue Service representatives also claim the suspect stole customers’ sensitive data and operated a large-scale drug trafficking business.
2. Transactions are concealed from tax authorities
In some countries, including the United States, the authorities consider cryptocurrency to be a form of property that’s subject to taxation. Americans are obliged to pay taxes after selling or mining coins. However, despite penalties for evasion, only two percent of traders and miners share their income with the government. According to the official statistics, only 802 people declared their income from cryptocurrency deals in 2015, and just about the same number did so in 2016. However, the tax administration doesn’t ease the pressure: they have demanded that the Coinbase digital currency exchange provide access to all customer records. The confrontation ended with a trade-off: the fiscal institution has been allowed to only check the accounts where transactions exceed $20,000.
The situation is very similar in other countries. If the government cannot track down cryptocurrency deals and levy taxes on them, it imposes a prohibition of some sort. A common scenario is where virtual currencies remain in the economy’s “gray area,” the authorities refuse to recognize them and ignore their existence to a certain extent. The Belarus case is a rare exception. On December 22, 2017, a presidential decree gave the green light to cryptocurrency operations and made them untaxable until 2023. Australian authorities have made a yet bolder move, giving Bitcoin a tax exempt status altogether.
3. Drug trafficking
Drug dealers have used crypto tokens since their emergence. The world’s largest darknet marketplace known as the Silk Road, which allowed for drug purchases with Bitcoin, was founded by American citizen Ross Ulbricht.
The customers accessed this portal via Tor network, which kept their IP addresses secret. They could order heroin, cocaine, LSD and even fake IDs on it. At least six clients of this underground service reportedly died of overdose. The illegal trade turnover of the Silk Road was estimated at $200 million, with the chief admin’s assets amounting to about $18 million.
In October 2013, Ulbricht was arrested and the marketplace was shut down. The Silk Road creator was charged with conducting hacker attacks, drug trafficking, and money laundering. The FBI attempted to prove that he had ordered and paid for murders of six people. The court verdict was harsh: he got a double life sentence, not to mention 20, 15 and five years in jail for separate felonies. He lost a court appeal in 2016.
While the author of the Silk Road is serving his sentence, the type of craft he masterminded continues to thrive. One of the examples is the Russian Anonymous Marketplace (RAMP), which has been functioning over the Tor network since 2012. According to analysts’ estimates, the drug turnover on it amounted to 26 billion rubles in 2016 alone, which was a three to five percent share of the overall market. At least 14,000 people have bought or sold narcotics via RAMP. The number of such illegal online drug marketplaces is constantly growing.
4. Bitcoin coming to terrorists’ rescue
Terrorist groups benefit from virtual currencies in their own way as well. Their leaders sometimes come up with really creative schemes, taking out loans, buying crypto coins and transferring them to their bank accounts.
A 27-year-old Pakistani-born American woman Zoobia Shahnaz pulled off a scheme like that. When working in Jordan as a volunteer with the Syrian American Medical Society, she was influenced by the propaganda of the Islamic State (ISIS). Having returned to the United States, Shahnaz continued her career as a lab technician at a Manhattan hospital. In order to support ISIS, she engaged in fraudulent schemes to get several loans totaling $85,000. The woman then exchanged the money for Bitcoin and sent the funds to the accounts of Islamic State leaders.
Shahnaz was arrested in an airport before departing for Turkey – from there, she was planning to reach Syria and join the ones she had been supporting. She is now being charged with money laundering and loan fraud. It remains to be seen whether the investigators will manage to prove her affiliation with terrorists, though.
5. A bonus for the tyrants and a battering ram for the unrecognized
Cryptocurrency has become a lure for the leaders of totalitarian regimes and unrecognized republics. Having tried all the ways of circumventing international sanctions, they have turned to crypto tokens. Kim Jong-un, the leader of North Korea, and his special services have gone the furthest in this activity. American researchers have accused them of hacking South Korean cryptocurrency exchanges, stealing thousands of Bitcoins, compromising a news portal and extorting coins from the WannaCry ransomware victims. The hackers then exchanged the stolen virtual assets to fiat money in order to fund Kim Jong-un’s regime. For the same purpose, a lot of crypto mining farms have been deployed in the rogue state. Representatives of North Korean ruling elite sometimes make purchases for Bitcoin via VPN services.
The leaders of some unrecognized or partially recognized states (Northern Cyprus, Kosovo, Taiwan, Nagorno-Karabakh, Transnistria, Abkhazia, South Ossetia, Islamic State, Donetsk People’s Republic, Luhansk People’s Republic, etc.) appear to be inspired by this practice, too. International isolation and economic sanctions have encouraged many people living in such republics to buy cryptocurrency, keep their savings in it, and use it for online purchases. Meanwhile, a lot of experts claim that the ruling class can be involved as well without publicly disclosing their actual “crypto-activity.”