A new study published on January 24, 2018 has suggested that almost half of all bitcoin transactions till date have been used for illegal activity.
According to a research paper published by the University of Sydney, the University of Technology Sydney and the Stockholm School of Economics, one in four bitcoin users is associated with illegal activity.
Bitcoin is an international currency that is not associated with any country or central bank. Bitcoin and other virtual currencies are based on the blockchain protocol which provides pseudonymity. This way, the real identity of the sender and receiver are never publicly revealed. Some users who send or receive money in their digital wallets misuse these privacy oriented features.
According to the study, a rising number of transactions over the dark web are now using bitcoin to transfer money. The darknet is a network similar to the internet, with the bonus of greater anonymity as it can only be accessed through particular communications protocols. Bitcoin has become a reliable, convenient and scalable payment system for sending and receiving money over the dark web. Cryptocurrencies have proven to be a boon for illegal trading activities.
A total of $8 billion is held by accounts involved in illicit activities. Such users also made 36 million transactions per annum, amounting to a total of $72 billion.
Countries across the globe have now begun taking stringent measures against cryptocurrency exchanges. Central banks are also trying to regularise and streamline bitcoin transactions while making sure that investors are paying all relevant taxes.
The research paper further suggests how authorities are trying to find ways to track these illicit trades. Most honest people involved in trading cryptocurrencies are either speculative traders or investors, hopeful of selling the asset at a higher price than what they bought in at. Accounts or wallets belonging to such individuals tend to hold positions for longer durations.
The shady accounts, on the other hand, repeatedly trade in smaller transactions with the same accounts. These accounts have low balances and also transfer money to a bank account immediately after receiving it from somewhere else.
South Korea, one of the early adopters of blockchain technology and also home to many virtual currency miners and traders has already started taking steps to regularise bitcoin. South Korean authorities had even raided cryptocurrency exchanges to obtain tax information regarding their users. China has banned its citizens from both trading and mining cryptocurrencies and also from participating in Initial Coin Offerings.
The research paper co-published by Sean Foley, Jonathan Kalsen, and Tālis J. Putniņš stated:
“… illegal users are estimated to control around 38.21 percent of bitcoin addresses and account for about one-fifth (20.30 percent) of the dollar volume of bitcoin transactions. In dollar terms, illegal users conduct approximately $378 billion worth of bitcoin transactions. Because illegal users account for a larger share of transactions than their share of dollar volume, they tend to make smaller value transactions than legal users.”
The authors of the study devised their own formula to detect illegal transactions on the Bitcoin network and proposed future research to study the wider informal market using their methods. By including ‘the street’ as well as online, they suggested it is possible to uncover whether there is a migration away from street-level crime to cybercrime or whether this just represents a general expansion of the market.