Blockchain – a money laundering haven?

Blockchain is a digital, public ledger that is distributed across its users. It collects and stores information in “blocks.” When a “block” is full, it closes and is linked to the previous “block.” This data is linked and form a chain. Thus, the name “Blockchain.”

The first project on blockchain was bitcoin, the first-created cryptocurrency. The bitcoin network was a new, innovative, peer-to-peer platform where users could exchange electronic cash directly between them, without using a financial institution. 


Is blockchain anonymous?

Blockchain transactions are performed using wallet addresses that are created on the bitcoin network without requiring users’ personal information. As a result, blockchain was initially perceived as an anonymous method to exchange and move funds in various jurisdictions quickly.

Criminals took advantage of this perceived anonymity and used the bitcoin network to conduct transactions and exchange funds with the use of illegally-derived funds.


Criminal activity on blockchain

Criminals always try to find new ways to exploit blockchain technology for illegal purposes. Here are only a few common criminal activity that takes place in the crypto industry:

  • Hacks: cybercriminals gets unauthorized access to a company’s or a person’s computer, gets access to the private key and steals the crypto

  • Ransomware: a cybercriminal gets unauthorized access to a company’s or a person’s files, encrypts them. The cybercriminal requests a “ransom” in crypto to decrypt the files.

  • Darknet market activity: criminals buy illegal services from the dark web which can be accessed with the use of a specific open-source software which enables anonymous communication.

  • Investment scams: Fake websites that impersonate legitimate websites or provide investment services in crypto that seem legitimate. The fraudsters take investors’ funds and disappear.

  • Rug pull: Crypto projects that appear legitimate however, the developers of the projects take the investors’ money and disappear.

  • Money laundering: criminals use mixers and tumblers to conceal the owner of the crypto. In some cases, criminal use the services of professional money laundering networks.

  • Terrorist financing: Crypto transfers from people who provide support to terrorist groups or terrorist groups use the crypto industry to fund their activities.


Are indeed blockchain transactions traceable?

Blockchain transactions are not anonymous – they are pseudonymous. The blockchain users and the wallets’ owners can be identified using specific blockchain analytic tools. 

In recent years, law enforcement identified and detected a lot of criminal activity on the blockchain. Some examples include:

  • In February 2022, a couple was arrested for stealing $4.5 billion in crypto from the 2016 hack of Bitfinex, a virtual currency exchange.
  • In November 2022, $3.36 billion worth of cryptocurrency was seized by law enforcement which was unlawfully obtained from the illegal Silk Road dark web internet marketplace through wire fraud.
  • In January 2022, the UK police seized bitcoin and other cryptocurrencies valued at $435 (£322) million.
  • In July 2021, UK police seized $250 (£180) million worth of cryptocurrency as a result of criminal investigations.

These seizures are proof that transactions on the blockchain are traceable. The reason is that blockchain is immutable, transparent, and irreversible. Transactions conducted and approved by the network cannot be erased or amended from the ledger. The information is there, publicly available for anyone to view. Although the users transact using wallets (a mix of numbers and letters), the owners of the wallets can be identified.


How investigators conduct research

Investigators are now able to trace the movement of funds. By “following the money,” they can seize or retrieve stolen or illegally derived crypto. In addition, with the assistance of blockchain analytic companies and dedicated experts, law enforcement can convert raw data from the blockchain into valuable information, and ultimately link addresses with a criminal group, a terrorist organization, an entity, or an individual.


Blockchain is not a money laundering haven

Even if the criminals commit a crime and stop moving their funds on the blockchain to avoid detection, at some point, when they attempt to bring the funds into the real world. They will try to convert crypto into fiat currency and at this point, law enforcement can identify the funds’ owners by using the KYC information obtained by most cryptocurrency exchanges.

The immutability and transparency of blockchain enable investigators to follow the money until the funds reach the real world. As a result, no matter how complex transactions are and how many anonymity-enhancing tools are used, law enforcement agents are in a better position to fight financial crime on blockchain than ever.

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