Enthusiasts of Bitcoin and other cryptocurrencies are trying to position the digital currencies as legitimate means of exchange, but crypto’s tendency to be stolen and then laundered by thieves is not only well-known, it’s growing worse.
The total estimated value of cryptocurrency pilfered from exchanges worldwide came to almost $800 million in the first half of this year, about triple the sum stolen in all of 2017, according to a report released this week by CipherTrace Inc., a Menlo Park, Calif.-based vendor of anti-money-laundering tools for digital currencies.
In sum, about $1.2 billion in cryptocurrency has been stolen from exchanges since the start of 2016, the report says. It adds that the Federal Bureau of Investigation said the value of cryptocurrency mentioned in theft complaints the bureau fielded from 2015 through 2017 grew sixfold.
“All of these illegally obtained funds are laundered by criminals to help hide their true identities and avoid arrest,” says the report. “In addition to these criminal actors, we have seen an increase in terrorist financing and nation state actors as well as a continued use of cryptocurrencies, especially bitcoin, for payment of drugs and … weapons.”
To launder these ill-gotten funds, the criminals use a netherworld of digital accomplices and methods known variously as “mixers,” “tumblers,” and “chain hopping.” These services obscure the origin of the currencies, making them harder to trace, according to the report.
“The more dirty crypto money that goes into the systems and the more it moves around, the harder it becomes for investigators to see through the web of action and trace a path back to the source,” it says. “Additionally, the pseudo-anonymous nature of virtual currencies makes it exponentially more difficult to trace these funds as compared to cash.”
The last step is to “integrate” the funds into the legitimate world, the report says. This step, which allows the thieves to access their booty, is not without some risk, as exchanges and other players involved in the transaction may issue a so-called Suspicious Activity Report, which pinpoints a high-risk transaction.
In response to the rise in this illicit activity, authorities are cracking down. The U.S. Financial Crimes Enforcement Network (FinCEN) is widely expected to beef up enforcement action globally against money-laundering services and other facilitators of crypto theft, CipherTrace says. Also, the international Financial Action Task Force (FATF) is reportedly discussing making mandatory what are now voluntary rules calling on exchanges to be registered or licensed and to verify customers’ identities, act against money laundering, and report dodgy transactions.
“Until now, the lack of regulatory guidance has hindered the broader adoption of cryptocurrencies. Now we are seeing the big guys coming together asking for cryptocurrency anti-money laundering regulation—it is inevitable, it will be unified, and it will be global,” said Dave Jevans, chief executive of CipherTrace, in a news release. “There will be little room for privacy coins without AML or mixers in these Know Your Customer and Anti-Money Laundering regulated regimes. This will also be a wake-up call for virtual currency exchanges and financial institutions, exposing them to the risk of facing stiff penalties.”