Bitcoin, Ethereum and other cryptocurrencies have given criminals yet another way to hide their dodgy dealings. But can we use the same tools to fight digital corruption as in the analog world?
Typically, traditional currencies have been used in the process of money laundering – that is, disguising the true origin of illegally obtained funds so that they can be spent without arousing suspicion.
In theory, however, anything that acts as a store of value and can easily be converted into cash can be used to launder ill-gotten gains. For example, recently it was uncovered that items in the popular computer game Counter Strike: Global Offensive were being bought and sold for money laundering purposes. So it should come as no surprise that as cryptocurrencies have grown in popularity, they have also increasingly been used in the world of financial crime.
Money laundering is often used by corrupt dictators, warlords and other criminals to distance themselves from the true source of their loot and evade justice. It’s why we’ve put so much work into campaigning for governments and institutions to crack down on this practice, so any new innovation which could allow the corrupt to bypass anti-money laundering measures is a cause for concern.
Blockchain – a new tool for transparency?
In some ways, cryptocurrency has the potential to be more transparent than regular currency. The blockchain technology which is a feature of several cryptocurrencies, most notably Bitcoin, essentially acts as a digital ledger. It stores a permanent record within each Bitcoin of every transaction that coin has been used in, allowing a level of traceability that would be inconceivable with physical cash.
However, this transaction record doesn’t as yet store any information which would give away the identity of who’s spending or receiving the coins. The cryptocurrency industry is currently contemplating solutions which would enable the collection of personal information, but the patchy (sometimes non-existent) government oversight of cryptocurrencies gives them little incentive to cooperate. Unless that changes, the usefulness of blockchain for tracking down criminal activity is limited.
A digital disguise
When laundering money, the aim of the game is to make it as difficult as possible to connect your name with the proceeds of your crimes. One way of doing this is to use complex corporate governance structures, with ownership passing from person to person through layer upon layer of overlapping anonymous companies (also known as shell companies), and registered in tax havens where critical information is kept secret or simply not given in the first place, and it is very difficult for law enforcement agencies to gain access.
The real danger of cryptocurrency when it comes to corruption is that it could provide yet another layer of complexity and anonymity, making the already difficult task of tracing dodgy payments back to their source all but impossible.
One of the appeals of cryptocurrencies such as Bitcoin is its decentralised nature – it operates without the need for any kind of coordinating authority like a central bank. However, this means that when things go wrong it’s harder to find someone to hold accountable. We’ve made real progress in pushing national governments to put financial transparency measures into place, making it harder for the corrupt to hide their activities. But when it comes to cryptocurrency, we’re reliant on privately owned online exchanges to regulate themselves while national governments try to find ways to exercise their authority in the digital realm.
Our latest investigation shows that this approach is not working. The popular Bitcoin exchange BTC-e allowed users to buy and sell Bitcoin while providing nothing more than a username and email address, enabling them to bypass the usual checks involved when transferring large amounts of money between bank accounts. Perhaps unsurprisingly, this attracted drug dealers, financial criminals and even a Russian state-sponsored hacking group to the platform to launder their illegal profits. The FBI has described it as a ‘hub for cyber-crime’. The amounts involved were substantial – in October 2014 the site’s users held more than $30 million worth of Bitcoins in total, worth around $680 million at November 2019 exchange rates.
When it comes to regulating cryptocurrency, governments still have a lot of catching up to do.
URL meets IRL
While it could be thought that cryptocurrencies exist in the digital ether, free from the usual rules of the physical realm, like all digital entities they do still have a real-world footprint. Cryptocurrency exchanges have owners, servers and registered offices where usual jurisdictions apply and where laws can be enforced.
In the case of BTC-e, the reason why the site’s operators were able to get away with their dubious operation for so long was because they hid their identities using the favoured tool of analog money launderers: anonymous companies. As long as shady shell companies are allowed to exist, the fight against corruption will be seriously hindered.
And so tackling digital corruption requires first and foremost a very terrestrial solution: end the use of anonymous companies so that we can find out who owns and operates cryptocurrency sites. Once we know who they are and are able to hold them accountable, we will be able to step up to the new challenge of pushing for effective regulation to make sure that cryptocurrencies don’t become a byword for corruption.
