Crypto-laundering – Not a Washing Machine. Yet

Despite all the perception that crypto-atheists, naysayers and some movie-makers have, and spur, about crypto technology being a laundering nightmare, the truth is still tucked well inside some grey pile somewhere.

So the movie is out. People in the crypto community have run out of eggs and tomatoes. People who are still catching up on what the word even means are trying to make up their minds. But despite all the polarizing reactions the Kurt Russell starrer ‘Crypto’ minted, its plot (that was all about the use of cryptocurrencies by a clandestine network for primarily laundering money) should make us think about the big issue in a way that is neither black or white, neither blue nor pink – which is, by neither dissing cryptocurrencies nor deifying them.

For let us not forget what an Economist article reminded – it is possible (as per a United Nations Office on Drugs and Crime reckoning) that around $800 billion to $2 trillion is put in a rinse cycle every year. That is money that is as good as two to five per cent of the entire planet’s GDP

And what goes into this rinsing? A complex set of swaps and switches where the source of money is changed, disguised or painted into something new.

So far, this was happening by using, works of art, precious metals, mis-stated invoices, casinos or secrecy-friendly banks, but now the likes of Rob Wainwright, head of Europol, have, reportedly, surmised that as much as three to four per cent of the continent’s annual criminal takings ($4.2bn-5.6bn) can be getting crypto-laundered.

A Financial Action Task Force (FATF) report on Professional Money Laundering (July 2018), also contended that “payments for illicit drugs purchased online are transferred to e-wallets held in fiat currency or in virtual currency. Afterwards, virtual currency is transferred through a complex chain of e-wallets, which may include the use of mixers and tumblers to further enhance the anonymity of the virtual currency transactions. Funds are then sent back to the e-wallet of the Organised Crime Group (OCG); and subsequently transferred to bank cards and withdrawn in cash.”

In fact, this independent inter-governmental body – that majorly works on policies to protect the global financial system against money laundering- cited a case from 2017, where a grand jury in the Northern District of California indicted BTC-e, a widely used digital currency exchanger. As per an investigation that was illustrated in this paper, BTC-e could have received over $ 4 billion worth of virtual currency over the course of its operations.

Then there are fears that ransomware attacks are also abetting this trade via micro-laundering wherein money is atomised in tiny quantities and then reassembled into a complex path all over.

Barking the wrong tree, are we? Can money-laundering be the crypto world’s next Thanos and so soon?

Where is the Starch Baby?

The major elements of any laundering process are these – placement (where dirty money is inserted in a legit place), layering (where a series of transactions and hop-scotch ensures that money changes its trail and form as desired) and integration (where the money is poured back into the clean-money universe).

Does cryptotechnology make any of these parts easier? Yes, immutability and speed of transactions can be tapped well for illicit purposes. Despite being a so-called private money? Yes.

As Siddharth Sogani, Founder, CEO, CREBACO reasons, “There is a privacy protocol that bitcoins follow so they are traceable in some way. Other currencies on Ethereum blockchain can also be traced for its transactions.”

Also, when one converts his black money into crypto and shows exponential profits from cryptos by declaring in his books, nobody really doubts it because people have made 1000 per cent Profits and once you pay the tax, it’s all white and untraceable, Sogani unravels a major tempting spot here.

If you ask Neeraj Khandelwal, founder, CoinDCX, he brings the contention of regulatory oversight to the discussion. “If you go to a traditional exchange, listing a security requires you to do a lot of formalities, audits etc. but this is missing at a global level for crypto-money. That is why there are a lot of companies that can create tokens and pay money to an exchange to list it. All this can happen without the need for any proof of accounts, offices, or even products. An exchange gets a handsome listing fee and can, hence, may ignore critical checks. Rest is taken care of by aggressive marketing done by these companies that issue too-good-to-be-true tokens. People end up buying tokens without any real value. When prices rise, companies can sell off these tokens and common people end up losing their money.”

He also reminds the need for self-regulation that is vital for an industry that is still evolving. Not all listings or exchanges are stained, some have good value, but we need some regulatory machinery or rigor to keep the bad folks away, he suggests.

“Of course cryptocurrencies are helping these folks. Actually, I see us at the behest of governments going pretty much all digital (though government) currency. Their reasoning will be to stop money laundering, criminal activities, etc., but they have an ulterior, non-public motive: when interest rates go deeply negative in the next recession, people will want to hoard cash. By pushing everyone into digital, people’s ability to hoard cash will be restrained. Furthermore, government’s command over taxation, etc., will be much easier in an all-digital world.”

Sogani avers that money laundering is a major problem and for another reason that evades this debate usually. “We are working with regulators to take into cognizance the flip side of not recognizing cryptocurrencies. This aspect is the main one in that discussion.  Even now, without coin-mixers, laundering is happening. We hear about the activity of BTC converted to fiat currency and vice versa in cash. If regulation acknowledges this space fast then we would be able to curtail this conversion. Right now, this sceptical stance of the government is only nudging people towards these grey alleys and black-markets for cash-conversion.” The market is at it’s bottom and distress sales are happening and this is why people need legit options so that black money is not moved Sogani cautions. 

So that means crypto-technology is just the laundering machine the bad world was waiting for? Maybe. But also, maybe not.

White Socks, Red Shirt – Pink Socks

The first question that should be pegged well here is the traceability of cryptocurrency, per se. If crypto-money was indeed the invisible cloak that could launder bad money, well, we would not have so many coin-mixers in the industry already. As much as we would like to believe otherwise, most crypto-currencies are still not that private and anonymous. Perhaps, a good explanation of why currencies like Monero are gaining their own fan-clubs so fast.

There are people – privacy enthusiasts, wealthy people who want to escape a hacker’s eye, companies discreet about their business strategies, and of course, criminals who are using coin-mixing for what it offers – a way of making cryptocurrency transactions hard to trace.

Interestingly, despite all the innovations happening on this side, even mixers are not the chocolate factory that this market might have dreamt of. They charge fees and they can not exactly be trusted for the possibility always exists that one fine day/night, they could just run off to the hills with all the dirty money.

If we look at a paper, ‘CoinShuffle: Practical Decentralized Coin Mixing for Bitcoin’, Tim Ruffing, Pedro Moreno-Sanchez, and Aniket Kate from Saarland University, we can also note that coin-mixing is not necessarily water-tight. “While such public mixes are deployed in practice, they suffer from two severe drawbacks: First, the mix might just steal the money and never return it to the users. Second, the mix learns the permutation of the output addresses. Thereby, the user’s anonymity relies on the assumption that the mix does not log or reveal the permutation.” The authors explained while making an argument for a mixing alternative that was compatible with existing Bitcoin network and wiped away the need for a third party.

As it was said well in this paper, “The linkable pseudonymity provided by the Bitcoin system leads to significant privacy concerns for its users.” This very pseudonymity also interrupts one’s thought when one is about to jump to the conclusion that crypto is every launderer’s fantasy-come-true.

Yes, it can be a part of the global money dry-cleaning dance happening as we speak and that should definitely be addressed with every firm action possible. But to assume that it is the ‘only’ or the ‘biggest’ scrubbing brush out there, that is going to only slow down the lather we need to fight the big stink of money laundering. 

There could be more dryers out there. And who knows some iron-boards that smoothen out stubborn creases too. If only we knew how to unfold just as well as we know how to fold.