Cryptocurrency is rapidly growing in popularity.
This rapid rise could be due in part to an increasing number of individuals and big companies that are beginning to adopt, use, and trade cryptocurrency in their businesses and day-to-day transactions.
However, in recent years there have been a number of cases where the use of cryptocurrency for illicit purposes has come into question.
One critical one is money laundering.
This guide will go in-depth on everything you need to know on cryptocurrency and money laundering.
As we adopt cryptocurrencies locally, we are also seeing international usage increase – also within illegal trading channels such as drug or weapons trafficking on darknet markets.
Cybercriminals don’t just use cryptocurrency for online transactions anymore; they’re also using it to fund their operations through ransomware attacks that demand payments in cryptocurrency.
Lets get started!
What is Money Laundering?
Money laundering is the process of taking money from illegal activity and trying to make it look like it came from a legitimate source.
It’s done so that criminals can hide their profits and avoid being traced by law enforcement organizations.
The key point, however, is this: if you’re using cryptocurrency in combination with other fraudulent activities or transactions on darknet markets, then you are more likely than not committing money laundering as well.
Over the years, money laundering has evolved from being solely a physical process to a digital process.
In this day and age, it’s easy to launder money digitally in any number of ways:
- a person might set up an offshore account in another country and deposit money into that account.
- they’ll then use services like Liberty Reserve, Perfect Money, or Western Union to take payments from others outside of their country for goods or services rendered locally.
This way, it’s less likely that the authorities will be able to trace where the funds are coming from due to all of these intermediary service providers masking who is sending how much money and where it came from originally.
But with a ton of intelligence and investigation – it could be discovered.
In cryptocurrency networks however, this process isn’t possible as there is no central authority controlling everything – it’s decentralized by nature.
You know the bad aspect?
The decentralized nature of crypto even makes it more difficult to track the funds and makes money laundering even easier.
You’ll discover why and how soon.
Cryptocurrency and money laundering risk
In recent years, cryptocurrency has become more and more popular. However, it also carries a high risk for money laundering because of its anonymity.
Cryptocurrency is now providing criminals with the perfect opportunity for laundering money while at the same time making it harder than ever before for law enforcement agencies to catch them in the act.
The first thing you need to know is whether or not cryptocurrency really matters in terms of potential harm when it comes to money laundering schemes: yes, it does matter quite a lot.
Though there are other ways through which criminals can launder their money – such as conventional fiat currencies like the U.S dollar – cryptocurrencies offer some unique features that make them uniquely attractive for these purposes:
- they’re highly portable
- they allow user privacy by hiding transaction history from the public eye
- and they’re difficult to be traced
The second thing you need to know is what cryptocurrency actually is, in order for you to understand how it can fit into a money laundering scheme.
Cryptocurrency are digital currencies that have no physical form but which allow users to make payments almost anywhere in the world.
Without going through banks or other financial institutions – essentially cutting out the middleman when making transactions of any size possible (except for those involving large sums).
And because cryptocurrencies don’t involve such entities, there’s much less risk that someone will try skimming off part of your transaction funds by using these third parties as an intermediary.
Furthermore, cryptocurrency also doesn’t require verification from a bank before initiating a payment
There are many people who believe cryptocurrency networks should be regulated in order to stop money laundering – and there’s a strong argument behind that point of view as well.
However, if cryptocurrency were censored or shut down entirely, they would also destroy billions worth of wealth and investments from millions around the world- which isn’t something anyone wants on their conscience.
It will take some time before we figure out how best to solve these problems while still preserving what crypto brings us: freedom from centralized economic control by banks and government entities alike.
Can Blockchain prevent money laundering?
Yes, it is possible that blockchain could prevent money laundering. Whenever a cryptocurrency transaction is made, the details are written onto blocks which are then spread across all of the network’s nodes.
This means that it would be very difficult for someone to alter any records without leaving evidence in another block on the chain and every node will know if something has been tampered with because they will no longer match up with what other nodes have stored.
Do Cryptocurrencies actually have a high money laundering risk?
The short answer is: no.
The risks that cryptocurrency poses are more related to the way it is used, rather than making cryptocurrency high-risk for money laundering purposes.
The process of converting dirty or “black” cash into blockchain assets through something like Bitcoin requires a third party and can be tracked by authorities with access to both ends of the transaction.
In other words, one would need some kind of intermediary service (such as an exchange) in order to make this happen.
This means that while cryptocurrency transactions do have public ledgers which outline how many units were transferred from address A to address B, there’s not much information about why those transfers happened at all or what their purpose was outside of a single sentence description on block explorer sites.
Final Thoughts on Cryptocurrency and Money Laundering
Money laundering is a huge problem worldwide.
Criminal activity is expected everywhere, and cryptocurrency exchanges and markets as a whole are no exception.
Bitcoin, cryptocurrency and other digital currencies have been used to fund terrorist activities for example. It all started with laundered funds.
Cryptocurrency can be exchanged between anonymous parties.
Without disclosing their identities or locations which makes it easier to launder money with cryptocurrencies than with fiat currency.
However, there are also ways of tracing transactions on the blockchain if you know what you’re looking for so its not as easy as people think to just use cryptocurrency in order to launder money from illicit activity.
But it’s still something that needs more research into how we might better tackle this issue through new technologies like quantum computing and AI algorithms that may one day soon provide law enforcement authorities with powerful tools they need in order to combat today.