Since the advent of blockchain technology that ultimately gave birth to cryptocurrencies, many experts and regulators are worried about the kinds of people that are using this new technology for illicit and illegal transactions. Although many in the cryptocurrency community tend to dismiss this conversation, their concerns are however valid.
Senator Elizabeth Warren for example, is a United States’ senator and due to her influence as the chair of the Senate Banking, Housing, and Urban Affairs Committee’s Subcommittee on Economic Policy, many have misinterpreted her ‘grandstand’ against cryptocurrencies as an attack against the space, however, she has raised genuine concerns about how cryptocurrencies are being used.
In a letter to the U.S Securities and Exchange Commission (SEC), although she explained that cryptocurrencies are the “wild west” of the financial system, she however further stated that the entire cryptocurrency space, “desperately needs rules of the road and common-sense oversight in order to protect the stability of our financial system and ensure that every investor has access to a safe cryptocurrency marketplace.”
Data from Chainalysis, a blockchain analysis platform, estimates that ransomware payments in the year 2021 hit at least $602 million. The report further stated that the actual number could be much higher because looking at ransomware payments of 2020, the firm initially reported $350 million stolen at the beginning of 2021 due to, both underreporting by ransomware victims and our continuing identification of ransomware addresses that have received previous victim payments. At the end of 2020, the figure grew by 97.71% to now stand at $692 million. This shows that these concerns are very much valid.
There is this idea of cryptocurrencies being the go-to currency for criminals and the space is one for illicit and illegal transactions. This narrative has been peddled by many central banks and politicians alike. Speaking at a Senate Finance Committee, Janet Yellen, President Joe Biden’s pick for Secretary of the Treasury, stated that cryptocurrencies are “a particular concern” when it comes to criminal activity and terrorist financing.
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She explained stating, “I think many (cryptocurrencies) are used, at least in a transaction sense, mainly for illicit financing. And I think we really need to examine ways in which we can curtail their use, and make sure that anti-money laundering (sic) doesn’t occur through those channels.”
Asides from Yellen, many even go as far as comparing cryptocurrencies to paper money stating that criminals can get away with cryptocurrencies more so than with paper money. In this article, we will look at the traceability of these distinctively two means of payment/transaction.
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Is paper money traceable?
According to Madhuri Thakur, an author for Wall Street Mojo, she explains that paper money is “a country’s currency in the form of bank notes which have a specific value and are used to pay for goods and services. Paper money holds the backing of a country’s government while the central bank keeps a control over the note’s printing and circulation.”
According to Europol, the European Union law enforcement agency, almost all crime types make use of cash to facilitate money laundering at some stage, not only traditional crimes which generate cash profits, but also threats now arising from new technologies such as virtual currencies, where cash is used as an instrument to disguise the criminal origin of proceeds.
The reason why cash is the go-to currency for criminals is because although cash has serial numbers, there is no way to keep track of who owns what bill in real time. Because of this issue, many organizations have stopped accepting cash payments from individuals and have put in place systems where credit cards, debit cards or online payment gateways can be easily used for payments in other to have a record of transactions that has occurred. Ultimately, cash is traceable, however, it is not effective enough when it comes to real-time tracking.
Are cryptocurrencies traceable?
Cryptocurrencies are built on a Distributed Ledger Technology (DLT) called a blockchain and the blockchain offers permissionless and borderless access to anyone who wants to use it. This also comes with real-time recording of transactions on the blockchain in question, which is being used for transactions. Although the narrative of cryptocurrencies being the currency for the underworld, the fact remains that it will be stupid to use cryptocurrencies for illicit and illegal transactions such as money laundering dirty money, according to Ben Weiss, CEO of crypto ATM operator CoinFlip.
“It’s not anonymous. It’s pseudo-anonymous. You can’t buy any large amount of bitcoin without KYC or ID or driver’s licenses,” Weiss said, referring to “know your customer” and similar identification checks. He went further to say that “Bitcoin is actually more transparent in many ways than typical things in the financial system.”
A major ransomware attack in 2021 to note is the attack on attack on oil pipeline giant, Colonial Pipeline by hack syndicate group DarkSide. The attack was the most noteworthy ransomware attack in 2021 because the attack caused fuel shortages in some areas in the U.S, which were exacerbated by subsequent panic buying as word of the attack’s impact spread.
However, the Colonial Pipeline attack turned into a success story, as the U.S. Department of Justice (DoJ) was able to track and seize $2.3 million of the ransom that Colonial paid to DarkSide. This shows that there is a possibility to track and seize cryptocurrency related payments, putting all ends to the argument of cryptocurrencies being ‘untraceable’ currencies.
Another noteworthy news that shows just how transparent the cryptocurrency space is, is the retrieval of 94,000 BTC of 119,756 BTC, which was stolen from Bitfinex due to a hack in 2016. The 119,756 BTC worth $72 million at the time hack in August 2016, is now worth approximately $5.2 billion. The DoJ stated that was able to gain access and seize about 94,000 BTC worth approximately $4.1 billion.
In fact, since the 2016 hack, the individuals connected to the stolen coins have periodically moved small amounts of BTC in separate transactions, leaving the bulk of the funds untouched. The DoJ reported that it had traced 25,000 BTC of these transferred funds to financial accounts controlled by the perpetrators.
What the experts are saying
Adetayo Adesola, a marketing specialist at Bybit, gave his thoughts on the subject matter. He said, “The question of whether cryptocurrencies are more traceable than fiat is a bit contentious. But in recent times we have seen many instances where authorities are able to ‘follow the money’ so far they are looking in the right direction. Yes, there are no names attached to particular wallet addresses but there is still a paper trail that is in most cases more transparent than the current banking system.
“Have you ever wondered why many hacks in cryptocurrency almost always result in the perpetrators negotiating for a fraction of the money they transferred out?
“When you then look at it from a centralised exchange perspective – which in my opinion function as banks and financial institutions. There is a reason they have verification requirements, tiered withdrawal limits based on your KYC level. In simple terms, the reason is because if the law so-requires (in their registered jurisdiction) they are able to block certain accounts or retrieve funds that might have been ill-gotten.”
Ajibola Lawal of Kaicho Capital stated, “For the most part, it would seem that because there is a shroud of anonymity to Crypto transactions, the easy assumption would be to believe that anybody can try to move money around without traceability. This is for the most part, false. The very nature of the design of cryptocurrencies is total visibility. And with that visibility comes traceability. We don’t have that level of visibility with cash.
“With that said, counterarguments can be made of situations where users deploy privacy-enhancing technology as provided by mixers or through the use of privacy-focused cryptocurrencies like the Secret Network or Monero in an attempt to shield their transactions from scrutiny. However, even these solutions sometimes suffer from scalability issues and are beyond the kern for most users.
“In a nutshell, yes, cryptocurrencies are far more traceable than cash.”
The fact remains that although the number of ransomware attacks linked to crypto seems staggering, it is dwarfed by comparison to the use of fiat currencies in similar crimes. In 2020, the criminal share of all cryptocurrency activity fell to just 0.34%. In comparison, 2% and 5% of global gross domestic product ($1.6 million to $4 trillion) annually is connected with money laundering and illicit activity.
Considering how difficult it is to trace paper money as well as the anonymity associated with it and the continued improvement of policing capabilities, it is clear that cryptocurrencies should actually be encouraged to be used as means of payment rather than cash.