How much of crypto is criminal activity?

If you’re reading this then you probably use cryptocurrency and you are ahead of the curve in the use of this new digital money. Anyone using crypto at this point in time is a first mover, a pioneer and leader in the field, compared to the mainstream herd who know little to nothing about crypto and who may even fear it, as we do regarding things unknown to us. So well done for your bravery in stepping into the supposedly high risk world of potentially unregulated, untried cryptocurrency.

graph thanks to Chainalysis

Many avoid crypto because they think it’s something only used by criminals. That stigma stems from the very early days of bitcoin, when only geeks, and cyberpunks were using it. Or those on the so-called “dark web” who purchase illicit item using cryptocurrency. However, today bitcoin and the crypto industry has matured enough to dismiss that old reputation. And the statistics concur. The myth that crypto is used mainly by criminals due to its untraceable nature, is firstly untrue, since bitcoin transactions are traceable on the open distributed ledger, and only a few altcoins, like Monero, Zcash and perhaps some others, are fully private.

The reality is that in 2019, according to the reputable firm Chainalysis, criminal use of crypto accounted for only 1.1% of all transactions by volume. Chainalysis is a firm that provides blockchain data analysis to governments, exchanges and financial institutions in 40 countries globally, so they are the most informed and up to date on the real stats of blockchain activity in general. So the stats speak volumes regarding the actual use of crypto today, thanks to the very nature of the blockchain and its transparency.

I would presume that the fiat dollar currency is used for way more illicit activity than cryptocurrency at this stage, so that argument does not hold any water regarding the ethical status of crypto as a whole. Despite that, the Chainalysis figures do show that in 2019 $2,8 billion in BTC was moved by criminal entities to exchanges, and the main receivers of these illicit funds were Binance and Huobi, the top two exchanges globally at present. Binance received almost 28% and Huobi 25% while all other exchanges received a total of almost 48%, or all the rest.

So cyber criminals do exist, but not in the proportions that we may think. $2 billion is still a lot of stolen money of course, but it is a drop in the ocean compared to the mainstream dollar usage on the black market or dark web today. Bad actors also use “mixers” or services where one can do a type of crypto money laundering. You send BTC to them and they mix it up with all the other BTC they have and send you the same amount back, but now it’s untraceable. As a result a trend has emerged for some to prefer “clean” Bitcoin, or freshly mined Bitcoin that may have less risk of being used illegally.

Of course, Bitcoin is “fungilbe”, meaning one BTC is just the same as any other BTC, like a dollar bill is equal to any other dollar bill. But this novel concept of “clean Bitcoin” is a curious development. Another question that arises points fingers at the exchanges themselves who accept this “illicit crypto” because there are times when one can actually trace the movement of stolen or illegally used crypto simply by checking the blockchain ledger. The beauty of Bitcoin and the blockchain is its transparency. You may not know the wallet owner, but we can all see the wallet. Every transaction is visible. Which Bitcoin moved where and when is all listed with timestamps, so if any crypto is hacked or stolen, it is possible to observe its movement from one wallet to the next or to an exchange. And this is where the exchanges should ideally be able to refuse to accept dubious deliveries from bad actors or wallets.

I’m no expert but that is my understanding of the matter. Please add any insight you may have in the comments. Apparently OTC (over the counter) trading of bitcoin does also account for a lot of the movement of crypto, and that may be harder to track and certainly harder to identify the owner of the wallet, I would presume. These OTC brokers may require much lower KYC standards, or sign up ID, and some of them are deliberate sites for illicit dealers. Nevertheless, the investigative site Chainalysis does actually have what they call a list of the “Rogue 100” OTC brokers who deal in illicit bitcoin, so even they are not hidden. And these OTC Rogues have their accounts at Huobi exchange. So I believe the exchange also needs to be held accountable for this kind of criminality.

The problem is that these Rogue traders have a huge impact on the bitcoin ecosystem. Exchanges want the business, since they make profit on the fees for each transaction, and whales who move such large amounts also affect the trading market by volume or liquidity and can thus affect the price. The total illegal crypto traded each month may only be 1% of all crypto moved but the dollar value of it is growing exponentially, so this is a growing concern.

To clean up the industry, as well as the overall reputation of cryptocurrency, exchanges really need to be more responsible regarding accepting funds from big OTC traders. And the OTC traders need to improve their KYC to become more legitimate in their practice. The beauty of the open blockchain ledger is in our favor, compared to legacy or traditional systems of fiat banking, but these big players need to also improve. By cleaning up their acts, the crypto industry will appeal to so many more people eventually, as well as keep the government regulators happy. Money laundering can be stopped thanks to the blockchain technology that we use, the system just needs to be refined slightly. I have great hope and confidence in the future of blockchain technology, cryptocurrency and bitcoin. We can do this.

To find out more, check out https://blog.chainalysis.com/reports/money-laundering-cryptocurrency-2019