Bitcoin and Money Laundering – Challenges for Law Enforcement Agencies

Technological advancements have made life much easier than it was 30 years ago. One no longer needs to go into a bank to deposit, withdraw or transfer money from an account to the other. The advent of virtual currency has totally transformed the banking industry. Nowadays, one can use a cellphone or a computer to conduct all forms of financial transactions. Even more, the emergence of bitcoin has provided an encrypted, highly secure payment method that bypasses the centralized banking model. The problem is aggravated even more by the pseudo-anonymity of cryptocurrencies. These problems render it rather hard to enforce banking laws on cryptocurrency use cases. All these features of bitcoin, and cryptocurrency in general, represent a perfect atmosphere for money laundering, simply because it renders it very hard, or even impossible, for law enforcement agencies to prove who actually made a given transaction and where the funds originally came from.

Bitcoin usage has literally surpassed the daily transaction volume of Western Union and Paypal in terms of monetary values in 2015. The innate design of bitcoin strongly supports anonymity which attracts criminal money laundering. Traditional methods for buying bitcoins, through licensed exchanges, or money service businesses (MSBs), do not eliminate bitcoin’s anonymity, even though MSBs are required to obtain and report KYC, or “know your customer”, information for bitcoin transactions. Nevertheless, newer methods for buying bitcoins can totally endorse anonymity and facilitate money laundering; thus, presenting a challenge for law enforcement agencies. Such methods include peer-to-peer (P2P) transactions, property exchange services for bitcoin, and unregistered bitcoin ATMs.

The following represent ways for obtaining bitcoins that can be challenging to law enforcement agencies:

P2P transactions:

Peer-to-peer (P2P) transactions represent a growing trend that involves listing bitcoins for sale on specialized websites, such as localbitcoins.com which is by far the most popular website for buying bitcoin in such a way. The average transaction fee for buying bitcoin on localbitcoin.com is between 10-15%, which is impressively high when compared to a transaction fee between 1-2% when buying bitcoin from a licensed MSB bitcoin exchanger.

Bitcoin ATMs:

The popularity of privately owned bitcoin ATMs has grown massively, mainly due to bitcoiners’ desire to remain anonymous, especially that these ATMs sell bitcoins without obtaining KYC information. Many of such ATMs sell bitcoins in exchange for cash and very few collect any personal data from buyers. This is why the transaction fees of bitcoin ATMs are between 10-15% , which is much higher than those of MSB bitcoin exchangers.

Bitcoin tumblers or mixers:

Bitcoin tumblers, which are also known as bitcoin mixers or laundering services, obfuscate transactions to render senders and receivers of coins more difficult to trace by law enforcement agencies and other observers of the network. Bitcoin tumblers charge a fee between 5-15% for tumbling coins for a single transaction.

Bitcoin Property Exchanges:

Purse.io is an online service that facilitates the exchange of property, for bitcoins. The website offers a unique way for obtaining bitcoins anonymously, as it is designed to manipulate purchases on Amazon, the online retail marketplace, which doesn’t accept bitcoin as a payment method. A User who wants to buy a given item on Amazon, would include it on his/her “wish list” and list it on Purse.io’s marketplace. Now, individuals who want to buy bitcoins would find an item, on a user’s wish list on Purse.io, to purchase on behalf of the user who owns the bitcoins. The item is shipped directly to the individual selling his/her bitcoins.

The transaction is completed when bitcoins are transferred to the customer who paid for the merchandise on Amazon, by the user who asked for that item in the first place. The bitcoin buyer, who paid for the item on Amazon, would pay a 15% transaction fee to the seller, who actually received the item, for receiving bitcoin in an anonymous manner.

Monero and other novel challenges:

After Silk Road, the dark web marketplace, was infiltrated and its founder, Ross Ulbricht, was arrested, a considerable proportion of bitcoin users on the dark web became more concerned about their anonymity. Money launderers and dark web drug marketplaces started exploring other cryptocurrencies that can offer them increased anonymity levels.

Monero is an altcoin that utilizes a built-in tumbling technique to render transactions more anonymous. Many dark web marketplaces, have already started accepting Monero payments in addition to bitcoin. So, a user can now exchange bitcoin to monero and then use monero to buy illicit products from the dark web.

Moreover, other cryptocurrencies are proven to be more anonymous than bitcoin and so can represent a challenge for law enforcement agencies such as DASH and Cryptonote cryptocurrencies including Bytecoin, Boolberry and others.