- The analysis company Chainalysis has published a preliminary report on its “2020 Crypto Crime Report”, which reveals how much Bitcoin has been washed for criminal activities in 2019.
- According to the report, Over The Counter Brokers encourage criminal activity and make prosecution more difficult.
Especially in the early years, Bitcoin (BTC) has had a reputation as a instrument for funding crime and money laundering. This reputation did not come about by chance. Many refer to Ross Ulbricht’s legendary darknet platform, the “Silk Road”, as the first “real” use case for Bitcoin. Since the demise of Silk Road, however, Bitcoin’s image has gradually changed.
The last two years in particular have shown that Bitcoin has shed its bad reputation and is now accepted by financial institutions and Wall Street banks. Nevertheless, the argument of money laundering and terrorist financing is still one of the most popular among authorities and Bitcoin critics worldwide when it comes to criticizing Bitcoin.
The crypto analysis company Chainalysis got to the bottom of the myth in its “2020 Crypto Crime Report”. In a preliminary blog post to their report, the company writes that high-risk services include P2P exchanges, mixing services, high-risk exchanges and gambling sites. Illegal services range from ransom addresses, sanctioned entities, darknet markets and addresses associated with scams and stolen funds.
Over the course of 2019, Chainalysis has traced approximately $2.8 billion of Bitcoin brought to exchanges by criminal entities. Surprisingly, slightly more than 50% of this amount went to the two major crypto exchanges Binance (27.5%) and Huobi (24.7%). In total, according to Chainalysis, in 2019 slightly more than 300,000 individual accounts from Binance and Huobi received Bitcoin from criminal sources.
Huobi in particular should not come as a complete surprise to many industry insiders. The exchange was recently associated with liquidations of the Upbit hack and the PlusToken scam. As Chainalysis wrote in an investigation in mid-December, the people behind PlusToken have already liquidated 25,000 of 45,000 BTCs via Huobi’s OTC platform.
The analysis focuses on Binance and Huobi
As Chainalysis writes, a small segment of the addresses of Binance and Huobi is particularly active. The 2,196 accounts with the highest revenues received a total of almost 27.8 billion dollars in Bitcoin in 2019. The 31 accounts in the segment with the highest revenues alone received a total of just over $8 billion in Bitcoin in 2019, and each of these 31 accounts individually received between $100 million and $1 billion.
Chainalysis sees a big problem in the OTC (Over The Counter) brokers when it comes to money laundering. These encourage criminal activity and make prosecution more difficult:
The problem, however, is that while most OTC brokers run a legitimate business, some of them specialize in providing money laundering services to criminals. OTC brokers typically have much lower KYC requirements than the exchanges they operate on.
Many of them take advantage of this laxity to help criminals launder and withdraw funds, usually by first exchanging Bitcoin and other cryptocurrencies for Tether as a stable intermediate currency before presumably paying out in Fiat.
Chainalysis has compiled a list of 100 major OTC brokers who have received large amounts of cryptocurrencies from illegal sources and presumably offer money laundering services. The so-called Rogue 100 are extremely active traders. According to the studies, 70 of these OTC brokers belong to the group of Huobi accounts that receive Bitcoin from illegal sources.
32 of them are in the group of 810 accounts receiving the most illicit Bitcoin, and 20 of them received $1 million or more worth of illicit Bitcoin in 2019. In total, these 70 OTC brokers received $194 million in Bitcoin from criminal entities over the course of 2019.
However, as Chainalysis also notes, not a single Binance account is among the 70 of the Rogue 100.
How can the reputation of the crypto industry be further enhanced?
In order to further improve the reputation of the crypto industry, Chainalysis proposes concrete steps that “law enforcement agencies, regulators and crypto companies can take to prevent money laundering”:
It all starts with transparency. […] But with blockchain analysis tools like Chainalysis, we can analyze transactions recorded on the blockchain and get insight into how criminals are laundering funds much faster, as we show above. Law enforcement agents and regulators need to become experts in this technology in order to start fighting money laundering in cryptocurrency. […]
We also call on exchanges to carry out more extensive due diligence on OTC brokers and other nested services operating on their platform.
The full report is expected to be published later this month. This will hopefully also clarify questions about where the origins of the washed Bitcoins are and how much of them originate from exchange hacks and other scams, such as the PlusToken. Then the figure of about $2.8 billion of washed Bitcoin should “relativize” itself further in context.
Compared to the global money laundering in the fiat money system in one year, which is estimated by the United Nations (UN) to be around 2 – 5% of global GDP or USD 800 billion – 2 trillion, the amount can be considered small in direct comparison.
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