New Research: Laundering of Illicit Funds Less than 1% of Bitcoin Transactions
The Foundation for Defense of Democracies' Center of Sanctions and Illicit Finance in conjunction with blockchain analytics company, Elliptic, has published a study seeking to track the circulations of illicit funds within the bitcoin economy from 2013 to 2016. The research concludes that the share of funds of illicit origin comprises less than one percent of all bitcoin flows, and has exponentially declined as the cryptocurrency has gained increasing adoption and popularity.
Study Seeks to Track Illicit Bitcoin Flows From 2013 to 2016
“The research intends to provide insights for policymakers and financial industry leaders who want to better understand illicit finance risks arising from bitcoin,' in order to greater inform the development of legislation addressing the 'Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)' concerns pertaining to bitcoin – which largely stem from 'Users of bitcoin employ[ing] pseudonyms rather than names,' and cryptocurrency being 'transferred without intermediaries and across international borders as easily as sending an email.'
The study examines 214 conversion services, 'including virtual currency exchanges, gambling sites, and mixers,' in addition to bitcoin circulations originating from 102 illicit entities. The illicit entities considered include 30 darknet marketplaces, 6 darknet services, 16 darknet vendors, 5 identified Ponzi schemes, 19 ransomware schemes, and 26 entities engaged in fraudulent activities
Money Laundering Comprises Less Than One Percent of Bitcoin Circulations
The research states that 'Bitcoin exchanges received the greatest amount of identified illicit bitcoins out of all conversion services' – likely owing to the fact that exchanges 'process the majority of bitcoin transactions overall.' Of the 120 exchanges included in the study, 50% of illicit volume is attributed to just two European Union (EU)-based exchanges.
Online gambling sites and mixers, however, are identified as processing 'the highest proportion of bitcoin laundering with their platforms.' The findings state that 97 percent of incoming transfers to gambling and mixer websites can be attributed to just three services – which in turn account for almost half of the illicit volume analyzed.
The Majority of Illicit Bitcoin Transactions Were Processed in Europe
The report also identifies that whilst 'Asian conversion services processed the highest share of all incoming bitcoin transactions in 2015 and 2016,' such 'accounted for a disproportionately small share of bitcoin laundering during those years.' Despite the findings, it is recognized that 'a large percentage of conversion services that receive illicit bitcoins appear to conceal their country of operations.'
Darknet Markets Account for Vast Majority of Illicit Funds Transferred Using Bitcoin
The research indicates that the flow of bitcoins via darknet marketplaces is highly centralized – with over 50% of illicit funds originating from no more than two anonymous marketplaces during each year. During 2013 it was estimated that almost 90% of illicit funds came from The Silk Road, whilst in 2014 Agora and Silk Road 2.0 accounted for over 40% of illicit bitcoin flows respectively. In 2015 the share of illicit funds across individual darknet markets became more pluralized, with four sites accounting for between approximately 9 and 14 percent of black market bitcoins, although Agora's share increased to almost 48% during that year. Following the collapse of numerous darknet markets in 2016, more than 75% of illicit funds identified in the study were deemed to have originated from either Alphabay or Nucleus Market.
Emphasis is placed on the need for regulatory institutions to mandate that 'European virtual currency exchanges […] improve AML practices.' The report states that the absence of clear legislation pertaining to cryptocurrency-to-cryptocurrency exchanges results in EU-based exchanges adopting robust AML policies out of choice, rather than obligation. It is noted that the European Union has begun to take steps designed to tackle such, as evidenced by the updating of the EU's '2015 Anti-Money Laundering Directive so that its regulations cover virtual currency exchanges and custodian wallet services.” However, the research concludes that “even the updated language has loopholes that could permit significant cryptocurrency laundering.'
Lastly, the researchers advocate that 'The U.S Congress should mandate a National Commission for Digital Currency Preparedness and help develop a national blockchain technology innovation strategy' in order to 'counter state actors aiming to use cryptocurrencies to circumvent U.S., EU, and UN sanctions.'
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