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The field of cybersecurity spans across several domains, as it is appears to be a quite comprehensive territory. While IT-security primarily focuses on securing hardware and software components, there are further areas to uncover within this field. While security in general depicts methods to protect, it is equally important to analyze the counterpart, which is generally spoken crime. Like many other subjects, certain aspects of cybercrime are unique to the virtual domain, while others present additional layers of complexity. This analogy extends to financial crimes as well. Today’s article explores the criminal mechanisms of money laundering, particularly its evolution within the cyberspace, with a specific focus on cryptocurrency-related money laundering. To begin our enquiry, let’s start from the basics.

Pretty much all illegal activities generate profits, often in cash form, that criminals then attempt to launder, i.e. legitimize through various channels [6]. Money laundering plays a crucial role in all financially motivated crimes since it allows criminals to utilize the funds they obtain from their actions [8]. It is not only a crime in itself but also closely intertwined with other types of organized criminal activities, including terrorism-financing [6]. Without this process, there would be little reason to engage in criminal activities altogether [8]. This concept holds true within the dimension of cryptocurrency as well. The goal of money laundering in cryptocurrency is to transfer funds to addresses where their illicit origins cannot be traced, ultimately leading to a platform that permits the conversion of cryptocurrency into cash [8]. The extent of money laundering is hard to measure accurately but is considered to be substantial. Apart from organized criminal groups, some criminals provide laundering services as their primary business activity, called professional money launders [6]. According to the United Nations Office on Drugs and Crime (UNODC), approximately 2 – 5% of the global GDP is laundered annually, amounting to between EUR 715 billion – 1.87 trillion. In the end, the majority of criminal activities is primarily driven by a financial motive [6].

On union-level, the European Union is deeply concerned about money laundering and terrorism-financing, recognizing their significant threats to the economy. The new anti-money laundering regulation aims to standardize existing EU policies, ensuring more consistent application and better enforcement. It will also extend coverage to most of the cryptocurrency sector, requiring crypto-providers to perform due diligence on clients. Additionally, there will be an EU-wide cash payment limit of EUR 10,000 to hinder money laundering efforts, although member states can opt for lower limits if desired [9].

In the crime scene, the use of cryptocurrency is rising, and its adoption as a payment method is gaining momentum. However, the total volume and value of cryptocurrency transactions linked to crimes remain relatively small in comparison to cash [1]. In addition, occurrences involving cryptocurrencies in terrorism-financing remain relatively uncommon [1]. This can be traced back to the limitations associated with cryptocurrency use, with volatile price fluctuations being a significant deterrent for criminals looking for stable reserves [1]. Nonetheless, criminal entities have demonstrated an enhanced level of expertise in exploiting cryptocurrencies for their purposes [1]. Besides employing cryptocurrencies to conceal financial routes within progressively complex money laundering schemes, criminals are increasingly employing them as a vehicle for investment scams [1].

Across the globe, a few criminal entities have gained attention for their involvement in crypto money laundering, spanning regions from North Korea over Russia to Mexico. The Lazarus Group, assumingly linked to North Korea, has executed attacks targeting cryptocurrency exchanges, contributing to money laundering through unlawfully obtained digital assets [12]. Russian criminal associations, including the Russian Business Network (RBN) and Evil Corp, have engaged in wide reaching cyber-crimes such as ransomware attacks (DDOS) and cryptocurrency thefts [10]. In Mexico, drug cartels like the Sinaloa Cartel and Jalisco New Generation Cartel (CJNG) have used cryptocurrencies to launder money earned through drug trafficking (among other) [11].

Cryptocurrencies appeal to criminals due to two main reasons: anonymity and scalability [2]. Regarding scalability, it seems rational to focus on cryptocurrencies with the highest market capitalization, as professional money launderers and criminal groups require a large transaction capacity to support their activities [2]. When considering which cryptocurrency is most suitable for scalability, Bitcoin emerges as a compelling option for criminal entities. This is primarily due to its substantial market volume, established infrastructure, coupled with a widespread recognition and acceptance. After all, Bitcoin is globally popular as the leading cryptocurrency [2].

Regarding anonymity, achieving a high standard involves the application of two distinct techniques: Ring Confidential Transactions (RingCT) and stealth addresses [2]. The Ring CT protocol is distinguished by several key features: it (1) eliminates the need for a trusted setup, (2) conceals the recipient’s identity in a transaction, (3) safeguards the originator’s identity in a transaction, and (4) obfuscates the transaction amount [4]. This protocol underpins a highly decentralized cryptocurrency without any privileged entities, offering security regarding the disguise of transaction details including amount, origin, and destination [4]. Stealth addresses, on the other hand, have as primary objective to enhance privacy in transactions by concealing the recipient’s identity and the full transaction record [3]. These addresses represent a privacy-centric feature within blockchain technology, facilitating anonymous receipt of funds for users. Unlike typical public addresses, stealth addresses generate unique, disposable addresses for each transaction. When a sender uses a stealth address to transfer funds, the recipient’s actual address remains hidden, ensuring anonymity while broadcasting the transaction to the network [3]. Conventional cryptocurrencies like Bitcoin or Ethereum offer pseudonymous anonymity, meaning that wallet addresses are dissociated from real identities, yet transaction histories remain traceable [5]. Conversely, privacy-centric coins such as Monero or Zcash aspire to achieve a heightened level of anonymity by ensuring that both the sender and recipient of a transaction remain fully anonymous and hereby untraceable [5]. For any cryptocurrency aiming to emulate cash-like anonymity, like Monero, the attributes of a Ring CT protocol are crucial [4].

The dilemma between privacy and transparency regarding cryptocurrencies is a hot-blooded issue in the crypto-financial field. On one hand, anonymity can be appealing to those who value financial privacy and wish to protect their transactions from nosy eyes. However, this same anonymity has also raised concerns about illegal activities not only money laundering, but also including tax evasion, another topic not touched upon in this article. On the other hand, there is a growing demand for greater transparency in cryptocurrency transactions, especially from regulatory institutions. Main argument here is that increased transparency would help prevent criminal activities and ensure compliance with regulations such as anti-money laundering (AML) and know your customer (KYC) governance. Some cryptocurrencies, like Ethereum, are exploring ways to incorporate more transparency through technologies like zero-knowledge proofs and smart contracts, which can provide visibility into transaction histories while still preserving user privacy to some extent.

In the end, the topic of money laundering is not a new one, despite the current upward trend in cryptocurrency. I think it is important to lay out the facts and status-quo to so that readers will be able to form an educated opinion for themselves. While this topic is certainly a niche area, I tried to express my knowledge in an accessible manner. The field of cyber security spans a wide range, including criminal activities such as money laundering in the cyber space, and one example here presents cryptocurrency. While both, money laundering and cryptocurrency are two subjects that may co-exist fully independently, it is important to discuss the risks and overlaps, at least in my opinion.

Jennifer-Marieclaire Sturlese
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[0] Cover Picture

[1] Europol

[2] Cryptocurrencies for Criminals

[3] Coin Telegraph

[4] Noether, S., & Mackenzie, A. (2016). Ring confidential transactions. Ledger1, 1-18.

[5] Liu, Z., Nguyen, K., Yang, G., Wang, H., & Wong, D. S. (2019). A lattice-based linkable ring signature supporting stealth addresses. In Computer Security–ESORICS 2019: 24th European Symposium on Research in Computer Security, Luxembourg, September 23–27, 2019, Proceedings, Part I 24(pp. 726-746). Springer International Publishing.

[6] Europol

[7] Cryptorank

[8] Chainalysis

[9] Concilium Europa

[10] Circleid

[11] Linkedin

[12] Coindesk

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