The American organization «the Foundation for defense of democracies» and financed by the U.S. government on blockchain company Elliptic has published a report on the ecosystem of «bitcoin laundering». To track illegal money flows in the period from 2013 to 2016 the study used a retrospective analysis of the Bitcoin blockchain, the Elliptic, as well as other publicly available data.
«The aim of this work is to determine where people turn when they want to cash out bitcoins or transfer acquired from illicit sources, and to understand the typology of criminals «launder» bitcoins», the study says.
Laundering bitcoins is described as a special kind of money-laundering in the bitcoin network, in which users move bitcoins to new addresses by hiding the original source of the funds. Converting bitcoins to Fiat currency on exchanges does not apply an adequate policy to combat money-laundering (AML) rules and «know your customer» (KYC) can also be categorized as money laundering.
In addition to describing the General mechanisms of laundering bitcoins and explain that this activity is a small percentage of the total number of cryptocurrency transactions that are sent to the stock exchanges and other services conversion, the report also contains recommendations for law enforcement agencies to prevent the hiding of illicit proceeds in the network of Bitcoin.
Ecosystem launder bitcoins
A significant part of the study, called «bitcoin Laundering: an analysis of illegal streams in the digital currencies,» focuses on the use of «service conversion». In fact, these services represent the platform through which users can convert bitcoins into Fiat currency or other cryptocurrencies (cryptocurrency exchange), as well as move bitcoins to another available address. As a result of such action has no possibility of monitoring or tracking of funds in the public blockchain.
According to the study, the main sources of funds sent to the services convert to launder bitcoins, are the markets of the dark web.
From 2013 to 2016, the number of illegal services that can act as a source of «dirty bitcoin» has increased five times. While the study notes that the sources of illicit funds in the services of conversion, are fairly centralized.
«Nine of the 102 illegal organizations were a source of more than 95% of all laundered bitcoins in our study. All nine were darknet markets».
Despite the fact that the most common type of conversion service is exchange, much more illegal money goes to bitcoin-mixers and gambling sites.
The study says that, like the sources of illicit funds, services convert to these funds are also highly centralized. 97 per cent of the total illegal transactions at the mixers and sites online gambling pass through three different organizations. Additionally, two platforms in Europe account for half of all illegal remittances received in exchange.
The volume of laundering bitcoins is small and gradually decreases
Another important aspect of the study is that the level of the launder bitcoins in relation to the total number of payments to be sent to the services of conversion remains low.
«The amount of laundered bitcoins is small (less than one percent of all transactions in the services convert)», — stated in the work.
On the other hand, the report States that actual illegal transactions in bitcoin are sent to the services of conversion, «almost certainly much more» than show the data of the research, as it does not address the mediation of the transaction. In other words, the work covers the only transaction that is sent to the conversion service directly from an illegal source, for example, the market depth of the Internet.
The study also noted a gradual decrease in the number of illegal bitcoin transactions, entering the services of conversion.
«Most likely, the percentage of entrants on the services of converting illegal bitcoin has fallen due to the increasing popularity of cryptocurrencies as a speculative investment, and the emergence of new techniques of money laundering, the report said the decrease may also reflect the strengthening of compliance services conversion policy, AML/CFT, including the use of analytical services analysis of the blockchain to identify the source of clients ‘funds».
Recommendations for law enforcement
The report contains a number of recommendations for law enforcement agencies in relation to what they can do to counter the laundering of bitcoins.
First, the report refers to the need to apply appropriate KYC and AML policies on the websites of the gambling and bitcoin mixers with the possibility of anonymous use.
«The fact that the majority of mixers and gambling sites hide their location, says that, most likely, they seek to circumvent regulation».
It should be noted that the impact on such services is almost impossible because over time they become increasingly decentralised. Decentralized platforms, like JoinMarket, TumbleBit and ZeroLink, do not provide law enforcement authorities the possibility to affect bitcoin, as all these decisions act as a network of individual nodes, and not as services.
The report encourages increasing the compliance of AML and KYC on the European exchanges. In particular, the mentioned amendments to the AML / CFT Directive of EU in 2015 in respect of the exchanges working in pairs Fiat-cryptocurrency. According to the authors, this way is also to regulate and exchange, working in pairs crypto-crypto.
It is worth noting that the most problematic — at least from the point of view of law enforcement — is the formation of a decentralized cryptocurrency exchanges. Using miloshenkova atomically swaps the Lightning network, users will be able to trade between different scriptactive without a trusted third party.
The work calls for a campaign against the use of the darknet markets.
The underlying markets the Internet represent another area of the bitcoin ecosystem, which is becoming more decentralized with the help of platforms like OpenBazaar. Despite the fact that illegal activity in the OpenBazaar network are limited at the moment, its popularity can greatly increase against the background of strengthening of control over the centralized darknet markets on the part of law enforcement.
In the project promoted by the financial authorities in the USA to regulate the exchange similar to companies carrying out transfers and conversion of funds. The authors of the document are to launch similar services around the world.