Money laundering is alleged to be the most feasible illicit use of cryptocurrencies. It would appear as though cryptocurrencies are ideal for converting ill-gotten earnings into something like Monero with no loose ends. But let’s see just how true this supposition is.
How is money laundered?
The three-stage process of laundering criminal proceeds is considered a basic model when describing laundering schemes. It was identified by the U.S. Customs and Border Protection agency. It is interesting to note that the Americans studied money laundering schemes in drug trafficking. In fact, they found that the illegal drug trade is carried out exclusively in cash, mainly in small bills. This casts some doubts on the notion that cryptocurrencies are used in drug trafficking.
The question arises: Isn’t it easier to sell illegal drugs using cryptocurrencies than cash as even newspaper articles claim? No, it’s not. The police, criminals, and terrorists all know that the only form of money that is truly anonymous, convenient for calculations, leaves no traces, and is totally legal is cash in state-produced banknotes. And the most secure transaction is the transfer of cash from hand to hand.
Crypto projects find this fact hard to grasp as they spend years developing more and more anonymous cryptocurrencies in hopes that drug traffickers and fundamentalists will fund them with billions.
Transferring cash into non-cash form is the riskiest stage in laundering. Cryptocurrencies offer no viable workaround here since you can’t just take them and put them in a laptop, turning them into Bitcoin.
As research shows, criminals sometimes invest in securities or other assets. But in the majority of cases, money, in cash, is placed into bank accounts. Hence the first stage in laundering is called placement.
The next stage of money laundering is called layering. At this stage, criminals carry out numerous financial operations with the aim of taking the financial footprint as far away from the real investors as possible. One may think that this is where cryptocurrencies can be indispensable.
There are two fundamental problems.
The first is that law enforcement agencies have known about this for a long time. Crypto transactions involving huge sums of money immediately arouse interest and prompt them to find the “entry point” of this money and find out why a person is trying to withdraw a supposedly honestly earned billion in such a strange way.
The second problem is that withdrawing money into crypto does not make it legal. This is thus an unnecessary and unsafe laundering step to take. Cryptocurrencies themselves need a kind of “laundering”, in the sense that they need to be transformed into traditional financial instruments.
The next step, integration, is the consolidation of assets from various origins and introducing them back into the legal economy. In most cases, the money is credited to an account at a bank, and not just any bank, but a highly reputable bank, preferably in a very developed country. If this step is successfully completed, then the laundering process is complete and the money enters legal circulation.
Banks are therefore the key link in laundering, i.e. the legalization of proceeds from crime, at all stages of laundering.
At no stage in any of the described ways do cryptocurrencies have any advantage over banking instruments or simple cash exchanges.
No central bank in the world provides any statistics on money laundering through cryptocurrencies, but they all keep talking about what a great money laundering tool it is, while the banks themselves are the main, and often the only necessary element in almost all money laundering schemes.
The main conclusion is simple: cryptocurrencies are neither the main nor any significant medium of exchange in the criminal world. Cryptocurrencies are not used on a notable scale in drug or human trafficking.
There are often talks about the use of cryptocurrencies in the arms trade, but even in this business, there is a low probability of crypto being used on a large scale. This is an extremely conservative business, where connections and methods have been perfected over decades and no cryptocurrencies with their volatile prices are needed.
The accusation that cryptocurrencies are used in financing terrorism is likewise doubtful.
In any case, the use of cryptocurrencies in any criminal activity cannot be compared with the extent to which ordinary money is used.
The main reason for the unsuitability of cryptocurrencies for crime is that all their cypherpunk properties are applicable only within the crypto-currency ecosystem and subculture. As soon as some criminal money goes beyond the ecosystem, it instantly loses all such properties, starting with anonymity.