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Black Money: Does Bitcoin Make Life Easier for Criminals?

 7 min read / 

Bitcoin, the most widely known cryptocurrency, has been a media sensation and an investment fad recently, reaching highs of $2,000 per bitcoin. However, for all of bitcoin’s potential for financial good, it lends itself well to illicit goals. It can be a tool for cycling black money and money laundering.

Simply put, the technological innovation of cryptocurrency, accompanied by its positive attributes, has ushered in a “dark side” in which its most fundamental idiosyncrasies – speed, secure transfer and value with limited personal data exposure – are exploited by hackers and criminals to secure illicit objectives and carry out cybercrime. Most notably, bitcoin can be used to trade in illegal substances, weaponry and cycle black money, which is, ‘money that is earned through any illegal activity controlled by country regulations..’

Bitcoin imposes no obligation on users to verify their identity, operating without charge and without any centralised vetting procedure. There is no requirement of proof of identity, legal name or address. There is no central oversight and no third party to secure transactions as it is an entirely peer to peer system. Consequently, it lends itself well to users who need to make transactions without trusting the other side.

The lack of a central intermediary means it is less amenable to regulatory oversight than other forms of payment. Further, bitcoin does not restrict the sales of items as compared to credit cards, which can restrict types of sale in certain instances. Lastly, bitcoin payments are irreversible, as the system does not grant an avenue for a payer to reverse an accidental or unwanted purchase.

Crime and Bitcoin

With bitcoin came the ability to conduct several types of crime: bitcoin-specific crime, bitcoin facilitated crime and money laundering. Bitcoin can suffer from attacks to its infrastructure, such as theft and denial of service attacks aimed at influencing the exchange rate of the currency.

The lack of central authority presents law enforcement agencies with difficulties due to the novelty of the situation such as: what jurisdiction is responsible, the technical complexity as well as the extent of the crime. Bitcoin can also be used to facilitate crime, most notably in its use as payment for unlawful services, from illegal goods to extortion.

Criminals are perhaps drawn to bitcoin due to the lack of authoritative oversight from a central figure, the irreversible transactions or the anonymity it provides. This can facilitate money laundering, as users can utilise multiple accounts to increase the difficulty of tracing funds on the ledger, thus whilst the ledger is visible publicly, there could be an underlying set of records hidden from law enforcement on the criminal’s side of operations

This can facilitate money laundering, as users can utilise multiple accounts to increase the difficulty of tracing funds on the ledger, thus whilst the ledger is visible publicly, there could be an underlying set of records hidden from law enforcement on the criminal’s side of operations

Moreover, one could seek to use bitcoin as a tool for tax evasion. With no central banking system, users are anonymous, and thus it is very easy to not report personal income in bitcoin on an individual level, facilitating people’s activity in the shadow economy.

This presents a growing issue because unless someone voluntarily reports their income, there is no way of knowing if income is taxable and this growing ‘freelance economy’ may prove very hard to track if they start transacting in bitcoin. However, the risk for bitcoin to be used on a large scale is low, as Princeton’s Edward Felten commented in a panel discussion in 2014, ‘The conspiracy to not report income has to be too large in a sizeable company, and the consequences of getting caught [for] the leaders are too large.’

On the other hand, bitcoin can also facilitate tax havens. Traditionally, Governments have defeated tax havens by working with foreign states to target links between institutions. Yet, bitcoin undermines the modern process through a series of anonymised, private transactions. A series of transactions that mix the bitcoins from input to output through a series of exchanges can break the link between the two addresses. Whilst bitcoin currently is too volatile to reliably conduct such an exercise on a large scale, the potential very much remains.

Silk Road: An Example of Black Market Usage

Silk Road was a notorious online black market, renowned as a platform for selling drugs. The site used a combination of technologies, including bitcoin, to protect the identity of high-value sellers, whereas buyers had to provide a physical shipping address for the services or product.This meant that should law enforcement officials infiltrate the site, there was very little chance of identifying sellers.

Further, the site was also run as a TOR hidden service on the dark web, meaning that ‘outsiders’ would be unable to trace the IP addresses of users or of the site itself. Eventually, through a series of mistakes by the site’s founder and operator, the FBI closed down the market and seized some 144,000 bitcoins, worth $28.5m.

This case serves as an exercise to show that if the human mistakes been removed, bitcoin and the underlying site would have remained completely capable of hiding the identities of the users.

Double-Edged Sword?

The paradox of bitcoin is that, whilst providing a pseudonymous system for transactions, it also leaves all transactional history in a publicly visible ledger, thus providing anonymity users need with an un-editable, total transactional history. This is a publicly available paper trail. Sarah Meiklejohn, a computer scientist at University College London, offers a helpful analogy:

“If you catch a dealer with drugs and cash on the street, you’ve caught them committing one crime, but if you catch people using something like Silk Road, you’ve uncovered their whole criminal history.”

The traceability and permanence of bitcoin are what can give law enforcement an edge. Should an investigator discover the address of a suspect, they have the entire transactional record in front of them, without a subpoena. Additionally, the ledger is ‘borderless’ and not subject to jurisdictional boundaries, relieving the investigator of the task of going through foreign governments.

Furthermore, should one want to exchange bitcoin into another currency, they will ultimately leave a trail when changing into fiat currency. Whilst users could have multiple bitcoin accounts, their ability to have a large roster of bank accounts is substantially limited. Moreover, bank records can be retrieved through a subpoena.

Regulatory Options

The key challenge for regulators is where to impose constraints. Firstly, it is an insurmountable challenge to attempt to regulate all bitcoin users in the network due to the quantity, geographic distribution and nature of the peer to peer system.

In this sense, regulators would be drawn to moderating intermediaries due to the volume of users going through them. However, this could lead to users avoiding such intermediaries or routeing funds through other accounts to prevent detection. Additionally, the lack of a central body regulating bitcoin increases the difficulty of this exercise.

Yet the entirely online system facilitates a somewhat easier way to regulate stolen funds, for example. Offline, it is difficult to avoid stolen or forged currencies entering circulation, yet, with bitcoin, the funds cannot be forged and the ledgers provide and un-tampered history of transactions, allowing authorities to trace the funds, albeit with the difficulties discussed above.

The Crux of the Matter

Bitcoin and blockchain undoubtedly brought a new age of economics and innovation to the table, but, as with every technological development, there are individuals that would seek to subvert the advancements for their own gain. As shown above, bitcoin, and cryptocurrencies, in general, can be used as a tool to cycle black money, avoid tax and pursue illicit goals due to the anonymity the system provides.

Yet, as identified, this is also a double-edged sword as the publicly available ledger provides a full, unalterable history of a user’s transactions. This technology, along with its potential in elections, 10 has yet to be fully understood.

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