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One of the (many) times I have been heckled during a panel on crypto was when I argued that it shouldn’t be thought of as money. The only reason to use it other than for speculation, I said, was to buy drugs on the internet. This was a preposterous idea, the heckler retorted; crypto is used for so much more than that.
Crypto enthusiasts argue that it’s wrong to claim that it enables crime because the technology itself is “neutral” so cannot be blamed for any illicit activity. But this simply isn’t true: crypto was designed as a censorship-resistant payment mechanism that operates outside the traditional financial system and beyond the remit of regulators. Crypto transactions are not subjected to the same fraud detection, anti-money laundering or suspicious activity checks that traditional ones are. Operating outside the system is its very raison d’être. And one only has to look at how the crypto industry behaves to see that crime is not a bug; it’s a feature.
Take the world’s biggest crypto exchange Binance, for instance. In a lawsuit filed last month against the exchange, the Commodity Futures Trading Commission alleges that Binance’s former chief compliance officer said of certain Binance customers: “Like come on. They are here for crime.” The exchange’s money laundering reporting officer, according to the CFTC, agreed: “We see the bad, but we close 2 eyes.”
It would be funny if it weren’t so flagrant. “These exchanges know exactly what they’re doing,” Stephen Diehl, co-author of Popping the Crypto Bubble, tells me. “They’re basically creating a dark transnational payment network and, not surprisingly, that will be used by criminals. They’re purpose-built for that.”
Last year was a turbulent year for crypto, with collapsing prices wiping about $1.5tn from the industry’s “market cap” and with several high-profile businesses imploding. But despite the market downturn, it was also a record year for crypto-based crime: illicit crypto transactions topped $20bn in 2022, according to data analytics firm Chainalysis, up from $18bn the previous year, after a huge increase in transactions involving companies targeted by US sanctions (the majority coming from Russian-based exchange Garantex). Ransomware attacks were down a little on the year, but still accounted for almost half a billion dollars.
Not only is that figure a “lower-bound estimate” — the number is very likely to grow over time as the company identifies new crypto wallet addresses associated with unlawful activity — but it also only includes “on-chain” activity, meaning only transactions that are recorded on the blockchain. It wouldn’t include, therefore, the “massive fraud” that allegedly took place at crypto exchange FTX, nor the proceeds of drug trafficking in which crypto has been used as the means of payment.
Nor does the figure include $23.8bn worth of money laundered via crypto in 2022 — a 68 per cent increase on the previous 12 months. In the UK alone, the National Crime Agency estimates that over $1bn of illicit cash is transferred overseas using crypto each year.
“What we’re seeing is that crypto is used as part of the money-laundering methodology now — it’s integrated into it,” says Adrian Searle, director of the National Economic Crime Centre. Searle says that while the proportion of money laundering done in crypto is still relatively low, it is expected to increase rapidly, and is facilitating international criminal networks on an unprecedented scale.
Crypto backers like to argue that crypto can be used for good, too. This is true enough — Blockchain data analytics company Elliptic told the FT this month that $200mn in crypto has been donated to pro-Ukraine causes since the war broke out, with more than $80mn of that sent directly to the Ukrainian government.
But that has to be put in context: the positives will always be outweighed by the negatives. Of the estimated $3.8bn worth of crypto that was stolen by hackers last year — another new record — some $1.7bn was stolen by North Korea-linked hackers, according to Chainalysis. This money is channelled, the UN claims, into the country’s ballistic missile programme.
On the Dark Web — which is “predicated on the use of cryptocurrency”, according to DCI Phil McInerney, who leads on cyber crime at the National Police Chiefs’ Council — crypto is used not just to buy and sell illegal substances, but 3D-printed firearms, compromised banking credentials, forged documents and child sexual abuse materials.
So in a funny way, my heckler was right: crypto isn’t just used for speculating on and buying drugs on the internet: it’s used for much murkier criminal activities, too.
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