Arms, Drugs and Bitcoin: How Much Illegal Activity Is Financed?


Facts, the Whole Facts and Nothing But the Facts.


One of the most common, but incorrect, misconceptions regarding cryptocurrency is that it is primarily utilized by criminals for unlawful purposes. We’ve heard similar stories from the Treasury Secretary, the New York Times, the President of the European Central Bank, and leaders of major corporations like Berkshire Hathaway’s Charlie Munger. We’ll look at the facts and figures to discover how much of this is accurate.

Bitcoin & Crypto Mainly Used For Illegal Activities?

Yes, there is a widespread assumption that the Bitcoin market is plagued with illegal activities, with many citing many high-profile events as evidence. One such event occurred in 2013, when the illegal Silk Road dark net market (DNM) was shut down and the FBI recovered more than 26,000 Bitcoin. Silk Road, for those who are unfamiliar, was an online black market with 10,000 products for sale, 70% of which were drugs. However, based on real evidence, sweeping generalization regarding Bitcoin’s role in criminal financing are greatly exaggerated.

According to a recent study by blockchain analytics firm Chainalysis, published on a chart above, illicit activity among all cryptocurrencies as a percent of total cryptocurrency activity from 2017 to 2020 was less than 1 percent. For Bitcoin specifically, blockchain analytics firm CipherTrace estimates that illicit activity makes up less than 0.5 percent of total transaction volume.

Furthermore, scams account for the vast majority of cryptocurrency related crime — not money laundering, terrorism, trafficking, or other unlawful activities.

The graph above from analytics firm Chainalysis, shows which crime types received the most cryptocurrency in aggregate from 2017 through 2020. Furthermore, Chainalysis found that, in tandem with the rise of the cryptocurrency market, cryptocurrency-related crimes are decreasing and remain a little fraction of the entire cryptocurrency economy.

Crypto & Bitcoin VS Current Financial System

Because everything is recorded and is pseudo-anonymous, blockchain is not the best place to carry out large-scale serious criminal operations like terrorist funding or illegal arms trade. Former CIA Director Michael Morell, a 33-year veteran of the organisation who produced an independent study on the matter, backs up this assertion, saying:

“The blockchain ledger on which Bitcoin transactions are recorded is an underutilized forensic tool that can be used more widely by law enforcement and the intelligence community to identify and disrupt illicit activities. Put simply, blockchain analysis is a highly effective crime fighting and intelligence gathering tool.”

The reality is that if crypto opponents were to “follow the money,” they would be confronted with an unsettling truth: major illegal activities such as extortion, arms trade, and terrorist financing are all carried out through traditional financial systems.

In a report released in September 2020, the United Nations stated that over $1.6 trillion in cash is laundered annually through the global financial system, accounting for 2.7 percent of global GDP, and $2 trillion in transactions revealed how some of the world’s largest banks have allowed criminals to move dirty money around the world.

Prominent examples include, Westpac agreeing to pay $920 million fine, the largest fine in Australian corporate history, to settle a lawsuit that revealed more than 23 million breaches of the country’s terrorism-financing rules; or HSBC paying $1.9 billion and signing a deferred prosecution agreement with the US Department of Justice after it was found to have violated US sanctions and admitted its accounts were used to launder money for criminal networks, including $881 million for Mexican drug cartels.

Cryptocurrency Makes Financial Crime Law Enforcement Easier

According to US Department of justice journal of federal law and practice, Volume 67, published in September 2019 in ‘Tracing Cryptocurrency’:

“Cryptocurrency, despite the purported anonymity it grants criminals, provides law enforcement with an exceptional tracing tool: the blockchain. While the blockchain’s historical ledger will not list the names of parties to transactions, it provides investigators with ample information about how, when, and how much cryptocurrency is being transferred. Moreover, this information is publicly available; no subpoenas or warrants are required to obtain it.”

Because data recorded in the blockchain cannot be changed retroactively, it provides law enforcement with immediate, significantly more accurate information than a cash transaction, such as the date, time, and amount of the transaction, as well as the type of cryptocurrency used, the wallet address involved, and the unique transaction identifier. When compared to monetary transactions, this sort of information might take months or even years to get, necessitating subpoenas and court orders.

Case of Mehmet Akti

In reality, law enforcement has already reaped the benefits of collaborating with private analytics organisations to monitor blockchain transactions in order to identify persons involved in criminal funding. One famous example is Mehmet Akti, who has been linked to terror funding schemes by law authorities.

This abstract comes from the United States District Court for the District of Columbia, and it concerns the case Mehmet Akti:

Once the Hamas accounts and addresses amassed BTC from fundraising efforts, law enforcement determined through blockchain analysis, that the accounts typically converted the virtual currency to traditional fiat currency or exchanged it for something of value, such as a gift card, so that the al-Qassam Brigades could spend the funds on its terror campaign. Using blockchain analysis, law enforcement also traced at least one transaction from Hamas Account 2 to Akti’s account at VC A (“VC Account 1”).

Because of blockchain technology, the US has been able to quickly seize millions of dollars in bitcoin meant to finance terrorist organisations. This example, along with the recent Colonial Pipeline ransomware incident, in which the Department of Justice announced that it had recovered 63.7 bitcoins (roughly $2.3 million) from the ransom payment, and many others, demonstrate that crypto is not a haven for criminal activity or illicit financial dealings, but rather a medium for a wide range of secure, traceable transactions.

In the end, data and facts must take precedence over emotions and headlines. Whatever your feelings on cryptocurrencies, bitcoin, or blockchain, to claim that it is replete with unlawful activity and aids criminals and terrorists in achieving their nefarious aims is, to put it mildly, uninformed.

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Arms, Drugs and Bitcoin: How Much Illegal Activity Is Financed? was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.