Debunking a crypto myth: “It’s a terrible way to launder money”

Globally, talks of crypto regulations have started with a focus on money laundering and terrorist financing. These were the primary areas which the Monetary Authority of Singapore (MAS) considered when addressing digital payment tokens (DPTs) in the Payment Services Act.

The anonymity of crypto transactions — where wallet addresses needn’t be linked with their owners’ identities — initially gave rise to such concerns. It appeared as if blockchain was the perfect avenue for illicit actors to store and move their funds with ease. As it stands, this idea seems to have been blown out of proportion.

At a recent fireside chat, Binance’s regional head Richard Teng said, “If you look at traditional media, you’d think the biggest thing happening in blockchain is money laundering. But if you look at data released by the US Office of Financial Crimes, only 0.15 per cent of the money laundered annually — between US$800 billion and US$2 trillion — is done in crypto.”

“If you dive down into the details, you’d know it’s not that much,” Teng added. “Why is that the case? Because it’s traceable. You’ve got global providers which can [trace funds] and [monitor them using] on-chain and off-chain surveillance.”

TRM Labs is one such provider which looks into crypto forensics and transaction monitoring. At the Token2049 conference held in Singapore last month, the company’s Head of Legal and Government Affairs, Ari Redbord, offered a similar view to Teng and provided some additional insights.

Is money laundering a real concern in crypto?

In January 2022, Chainalysis reported that US$8.6 billion worth of cryptocurrency was laundered in 2021, up 30 per cent from the year prior. Europol also noted a rising trend in the use of crypto by launderers.

It might only make up a small proportion of global money laundering activities, however, it’s apparent that the problem exists. Redbord acknowledges this saying, “The same qualities that make crypto such a force for good — [it’s] permissionless, decentralised, [enables] cross-border transfers — also make it susceptible to illicit actors.”

Being able to move funds at the speed of the internet is an appealing notion to all. However, for bad actors, fast and permissionless transactions come with an undesirable tradeoff: a paper trail which is impossible to delete.

“Open blockchains are transparent and immutable, so you can follow the flow of funds in ways you never could [when looking at traditional finance].”

Redbord spent 11 years working as a prosecutor at the US Department of Justice. During his time there, he dealt with cases involving hawalas, shell companies, real estate, and high-value traditional art. “There was no TRM Labs for those things,” he says. “You couldn’t follow the flow of funds.”

While crypto provides new avenues for money laundering, it also provides ways to combat it. Weighing the two against one another, it can be argued that, in reality, laundering money over the blockchain is more trouble than it’s worth.

“You had the Bitfinex hack in 2016. Five years later, the stolen funds — [US$3.6 billion] — were seized. It was the largest seizure in US history. That’s extraordinary,” says Redbord.

The reality is that those people tried to move those funds for five years across blockchains and through mixers, but they could never off-ramp the funds. It’s a terrible way to launder money.

Redbord believes that this aspect of blockchain technology — which offers the ability to trace funds — is often overlooked by regulators in conversations about crypto and money laundering.

How should regulators approach the crypto space?

Several countries around the world have set up special regulatory units to address cryptocurrency and digital assets. However, as the space grows, this might not be enough. “It’s great to have a virtual asset unit, but every unit is going to have to understand crypto,” Redbord explains.

“There is no cryptocurrency crime. Crypto is just used in the commission of other crimes — just like cash is. Every agent across every agency globally will need to understand how to trace funds, interact with DeFi protocols, NFT marketplaces…”

Blockchain isn’t inherently good or bad. One might argue that it’s not the technology which needs regulating but rather, the activities that it’s being used for.

Earlier in August, the US Treasury outlawed the Tornado Cash DeFi protocol. The protocol offered a way to make blockchain transactions difficult to trace, and had been used to launder over US$7 billion in the past three years.

In response, crypto company Coinbase backed a lawsuit against the US Treasury, claiming that this was in violation of the US Constitution.

“We have no issue with the Treasury sanctioning bad actors,” Coinbase wrote in a blogpost. “But in this case, the Treasury went much further and took the unprecedented step of sanctioning an entire technology instead of specific individuals.”

Redbord believes this is a pivotal moment for the future of regulations in the blockchain space. Regulators need to find a balance which allows them to stop bad actors without disrupting everyday users.

“With Tornado Cash, there were lots of regular users looking for some degree of anonymity and they were dramatically affected by these sanctions.”

“This is the moment where we’re going to have that conversation globally that we had post-9/11 about security and privacy. Before, we had that conversation about airports. Now, we’re going to have them about blockchains. What level of privacy are you willing to give up for security and vice versa?”

Featured Image Credit: Token2049

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