Referred to as the currency of crooks in some circles, bitcoin’s reputation is not solely positive.
Yet for those who know bitcoin, it may be difficult to imagine how laundering money through it is possible.
Every bitcoin transaction leaves a trail, with the history permanently stored on the blockchain; Bitcoin’s public ledger of historical data dating back to its introduction in 2009.
Further to that, bitcoin is incredibly well encrypted. So securely, in fact, that hacking the bitcoin system would be “infeasible until computers are built from something other than matter and occupy something other than space,” according to security expert Bruce Schneier.
How, then, is bitcoin such a key element in money laundering?
Here are a few ways in which bitcoin is being laundered undetected.
Purchasing bitcoins with dirty money, selling them for clean money
Bitcoin is a highly traded commodity. Millions of people buy and sell it every day, each transaction making up nothing more than an inconspicuous link on the blockchain. Although not untraceable, it goes a long way towards covering up a trail and making it difficult for authorities to notice.
If the person then claimed the bitcoin income originated from mining, it would be problematic for authorities to investigate.
It also becomes harder for links to be made once bitcoin is transferred through various wallets. Most wallets do not require identification from their users, which allow for anonymity.
Breaking transaction trails through exchanges
Once a bitcoin is sent to an exchange, the transaction trail is broken. Clients can then transfer bitcoin to other currencies, or simply cash it out to a different wallet address.
Provided that the person’s real identity is not linked to the wallet, the transaction looks no different from any other withdrawal by any other client of the exchange.
Using platforms such as iTunes as intermediaries
In a recent article by The Daily Beast, it was uncovered that bitcoins are being laundered through Apple iTunes. The lengthy process involves creating music, paying a publishing company to list it on iTunes, and buying the music themselves using stolen bitcoin or ill-gotten vouchers.
The unscrupulous individual then receives a generous royalty check from Apple with legitimate money.
Apple was disinclined to comment on the occurrence.
This is one of the methods of exchanging stolen bitcoin for fiat currency, the last step in the money laundering process.
Why is bitcoin chosen as a preferred money-laundering method?
The main reasons for bitcoin as a money-laundering platform are its relative anonymity and lack of regulation. Cryptocurrency exchanges keep limited information on their clients, making it significantly easier for clients to perform their illegal activities undetected and untraced.
Transactions can be hidden in a number of ways, creating hurdles for those trying to trace them. Bitcoin mixers (also known as tumblers) combine transactions, effectively mixing stolen coins with authentic ones but are increasingly under threat by blockchain analytics companies.
Further to that, transactions done over the TOR network are harder to trace as the IP address the transaction originated from is hidden, due to the traffic being routed through various stations.
What happens when bitcoin launderers are caught?
At this stage, it is difficult to say. Due to the decentralized nature of cryptocurrency, it is not a simple matter to determine which jurisdiction a case would fall under (if any).
Also, anti-money laundering laws apply to fiat currency. Bitcoin has not officially been recognized as such by the majority of governments around the world.
If transactions are spread across different countries, which anti-money laundering laws were broken?
It is clear at this stage that there is an urgent need for the integration of bitcoin, the blockchain, and cryptocurrency into the standard laws and regulations of countries around the world. Until such a time, illegal bitcoin activity and prosecution thereof remains a grey area.