Malicious Use of Bitcoin is Blown Out of Proportion

Japanese law enforcement agencies received a total of 346,595 reports about suspected money laundering between April and December 2017. Only 669 of these (0.19 percent) involved cryptocurrencies. These statistics nearly match the findings of the Washington, D.C. based Foundation for Defense of Democracies (FDD).

According to the research of this think tank’s Center on Sanctions and Illicit Finance (CSIF), less than 1 percent of all bitcoin transactions completed between 2013 and 2016 had illegal nature. This number decreased from 1.07 percent down to 0.61 percent over the three years, which shows the overall negative dynamics in the use of cryptocurrencies for malevolent purposes.

In spite of the above figures, the crypto community is still confronted with regulators’ statements where they condemn cryptocurrencies for being in cahoots with the criminal world engaged in drug dealing, arms trafficking, and terrorism.

For instance, Europol and Interpol actively advocated this perspective at the global workshop for financial investigators held in Basel, Switzerland, in mid-January 2018. The U.S. House of Representatives has proposed a separate bill to counter money laundering that involves cryptocurrencies. The Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) issued guidance back in 2013 stating that the virtual currency business was subject to financial monitoring.

However, the risks of money laundering and other illicit applications of cryptocurrencies might be overestimated. Here is why:

The Ratio Between the Total Cryptocurrency Volume and it’s Fraction Used for Money Laundering is Negligible

As a recap of the discussion at the workshop mentioned above in Basel, a Europol representative mentioned that about 2-3 billion Euros were laundered using cryptocurrencies since their emergence. Considering that the current market capitalization of all virtual currencies is approximately $500 billion, the ‘spooky’ figure provided by the law enforcement officer amounts to only 0.6 percent of its fiat equivalent.

Furthermore, given the gross volume of “dirty cash” smuggled in handbags, toothpaste tubes and car cladding, which has arguably reached $2 trillion, the share of Bitcoin in it is only 0.15 percent. That’s 60 times less than the percentage of Toyota vehicles with defective airbags that might pose a risk to drivers and passengers.

Lack of Secure Communication Channels and Low Computer Literacy Thwart the Mass use of Crypto for Funding Terrorism

Based on the findings of the CSIF center as mentioned earlier, about 90 percent of all illicit Bitcoin transactions were associated with large darknet markets, such as Silk Road, AlphaBay, and Agora. Most of these deals had to do with drug purchases. It is also common knowledge that large terrorist organizations are state-sponsored, and entities manufacturing weapons and possessing huge resources like oil do not need bitcoin to fund these groups.


The Center for a New American Security further elaborated on this point in their “Terrorist Use of Virtual Currencies” report released in May 2017. The researchers listed additional hurdles to the use of cryptocurrencies for funding terrorism, such as poor Internet connection and lack of expertise in the technology. The Center’s findings boil down to the fact that terrorists are interested in cryptocurrencies due to the growth of their value rather than the anonymity of transactions.

A disconcerting conclusion from the above is that, for example, most legal proceedings of the Ukrainian authorities regarding cryptocurrency transfers to criminal groups in the unrecognized Donetsk and Lugansk People’s Republics (DPR and LPR) might be a smokescreen aimed at obtaining criminal orders to visit a crypto exchange owner or mining center. The statement of Ukraine’s National Security and Defense Council from January 11, 2018, which seeks to address risks of using virtual currencies for funding terrorism in Eastern Ukraine, is nothing but ungrounded speculations.

The Vague Legal Status of Cryptocurrencies Makes it Hard to Classify Them as a Means of Money Laundering

The theory of financial crime singles out three stages of money laundering:

  • Incorporation of illicit gains into legal structures of the economy. For instance, mafia-obtained money from cocaine trade can be transferred to a nonprofit fund backing municipal initiatives.
  • Multiple transactions aimed at obfuscating the actual origin of the assets. The nonprofit fund from the example above can lend money to third parties and complete other loan-type transactions.
  • Integration of ill-gotten gains into the commercial domain, where perpetrators ultimately get ‘clean’ profit. For example, money from the nonprofit fund can be used to pay for services of companies indirectly owned by the criminals.

Meanwhile, the fact that cryptocurrency lacks a clear-cut legal status (e.g., money, goods, investment asset) complicates the classification of its use at each stage of the laundering process.

Some experts argue that the use of cryptocurrencies can play into the hands of those who want to launder money, while it can as well pose a risk to these individuals. With that said, successful use cases can be facilitated by the reluctance of traditional financial institutions to delve into the peculiarities of the blockchain technology. This tech, by design, provides virtually unrestricted capabilities for tracking transactions within the network itself. This hallmark is a godsend for AML (anti-money laundering) departments of financial institutions and the law enforcement.

It is worth mentioning that the Financial Action Task Force (FATF) inter-government body issued guidance for a risk-based approach to virtual currencies in 2015. This document highlights applicable measures to help players on the cryptocurrency market manage risks related to cryptocurrency transactions.


It comes as no surprise that some of the early cryptocurrency users were online drug dealers who cast a shadow over the technology that was originally aimed at changing the traditional financial system for the better. We should not forget, though, that some of the first ‘customers’ of the railway were gangs in the Wild West that transported stolen gold this way. The operators of top adult websites were among the first sellers of high-speed cable modems. An immature technology has to get over this juvenile ‘disease’ before it reaches the milestone of mass implementation.

For Eastern European states, using the new tech is a great opportunity to make a qualitative leap and raise capital. Last year, Japan demonstrated the effectiveness of a well-thought-out approach to regulating the market of virtual funds, which increased the country’s GDP by 0.3 percent. The authorities of some smaller countries, including Malta, Singapore, and Gibraltar, also realize the potential of using the decentralized technology and are prepping ad hoc legislation to innovate their economies.

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