Bitcoin Laundering

Introduction

Bitcoin, the world’s first cryptocurrency, long obscured with a reputation as a fringe economic phenomenon, has gone mainstream. The skyrocketing price in late 2017 has made Bitcoin a household name. Proposed in a 2008 white paper by pseudonymous software developer Satoshi Nakomoto, Bitcoin was an attempt to enable peer-to-peer “electronic cash” as an alternative to conventional banking in the wake of the global financial crisis. When released in 2009, the digital currency had a value of less than one U.S. penny per “coin.” Now, just nine years later, one bitcoin recently almost reached $20,000, and the cryptocurrency’s market capitalization is over $200 billion.

Criminals – often early adopters of new technologies – quickly appreciated that Bitcoin has unique properties that could potentially serve their interest in evading law enforcement. Users of Bitcoin employ pseudonyms rather thannames, and it can be transferred without intermediaries and across international borders as easily as sending an email. However, what we know about Bitcoin’s illicit use is mainly based on anecdotal evidence, usually without supporting data, analysis of how it is used across geographical regions, or trends over time. While it is impossible to quantify exactly how much bitcoin is used illicitly, analyzing the laundering of bitcoins (where it can be identified) gives insight into criminals’ methods for hiding their illicit proceeds. To provide a more rigorous assessment of Bitcoin and its use in illicit finance, the Center on Sanctions and Illicit Finance, a program at the Foundation for Defense of Democracies, teamed up with Elliptic, a cryptocurrency analytics provider, to study Bitcoin blockchain data and illicit inflows into digital currency services. This study provides insights for policymakers and financial industry leaders who want to better understand illicit finance risks arising from Bitcoin and formulate ways to enhance Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) compliance among cryptocurrency businesses. A glossary is provided at the end of this document to define unique terms, concepts, and entities relating to the cryptocurrency industry found in this report.

Overview of Findings

Through extensive analysis of a narrow data sample of Bitcoin transactions between 2013 and 2016, this study identifies trends in the flow of bitcoins from clearly identified illicit activity to various digital currency conversion services.

The parameters of the study were purposefully narrow to keep the data manageable, which likely minimized the volume of illicit bitcoins considered for analysis. The amount of observed Bitcoin laundering was small (less than one percent of all transactions entering conversion services), but what is most relevant are the clear patterns we discovered relating to how illicit bitcoins are laundered.

We found that darknet marketplaces such as Silk Road and, later, AlphaBay, were the source of almost all of the illicit bitcoins laundered through conversion services that we identify in our study. Bitcoin exchanges received the greatest amount of identified illicit bitcoins out of all conversion services, but they also processed the majority of Bitcoin transactions overall. The conversion services with the highest proportion of Bitcoin laundering within their platforms were mixers and online gambling sites.

Looking at geographic patterns, conversion services based in Europe received the greatest share of illicit bitcoins out of identifiable regions, more than five times as much as North American services. And while Asian conversion services processed the highest share of all incoming Bitcoin transactions in 2015 and 2016, they accounted for a disproportionately small share of Bitcoin laundering during those years. Lastly, a large percentage of conversion services that receive illicit bitcoins appear to conceal their country of operations, making it a challenge to identify the legal jurisdictions responsible for their AML enforcement.