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Although cryptocurrencies have been around for 15 years, there are still many misconceptions about the ways in which the technology intersects with criminal activity and the implications for society.
That’s why I decided to write a new book on the subject. U Crypto Launderers: Crime and Cryptocurrencies from the Dark Web to DeFi and Beyond, published by Wiley on December 28, 2023, I draw on my decades of experience working at the intersection of cryptocurrency, regulatory policy, and the law to demystify and shed light on the often misunderstood world of crime and cryptocurrency. With a foreword by Elliptic CEO Simone Maini, The Crypto Launderers provides an in-depth look at the past, present and possible future of crime and cryptocurrency and provides a comprehensive narrative of the key cases, controversies and debates surrounding the topic.
The book covers issues ranging from evolution dark web markets, to the birth of the crypto mixerto the intersection DeFi and regulations, until discussions about privacy and surveillanceand much more – offers much for people interested in these topics professionally or otherwise.
I hope that the book can encourage a more informed and balanced discussion about the complex intersection of technology, regulation and crime – and that it can help educate people about this incredible space.
To that end, here I’ve outlined five key themes from the book that readers can expect to encounter as they read The Crypto Launderers.
Despite countless challenges, law enforcement agencies have shown incredible ingenuity in fighting crime in the crypto space in a relatively short time.
Reading news reports about random cases of scams, scams and hacks in the crypto space, one can very easily conclude that crypto remains an unbridled Wild West. But when reviewing the history of crime and cryptocurrency, one thing becomes clear: Law enforcement agencies have made impressive and, in some cases, incredible strides in dealing with this new technology, achieving great success along the way.
The first major criminal case related to cryptocurrencies was the case of the infamous Silk Road marketplace. Silk Road was the first truly large, successful illegal marketplace to operate on the dark web—and relied solely on Bitcoin to facilitate transactions for drugs, stolen credit card information, malware, and other illicit items.
The emergence and rapid rise of the Silk Road caused enormous concern for law enforcement agencies, who were gravely concerned about the implications of this new environment for illicit trade. However, when they began investigating the Silk Road case, US law enforcement agencies made an important realization: They could gather financial intelligence about the market and its operators by tracking transactions on the blockchain, Bitcoin’s public ledger. Although Bitcoin uses pseudonymous addresses when recording transaction data, investigators realized that its blockchain could reveal critical information that could support their investigations when combined with other sources of intelligence. Indeed, due to its public nature, blockchain offered law enforcement a source of information that was in many ways more transparent and accessible than more traditional sources of financial data.
The story of Silk Road is well known by now: US law enforcement agents were able to identify and arrest its founder Ross Ulbricht, successfully prosecute him on money laundering and other charges, and seize his assets.
What is most significant about the case is that it was an example of the incredible ingenuity of law enforcement agents in dealing with new technology. It is this mindset of ingenuity and adaptability that has allowed law enforcement agencies in the US and elsewhere around the world to score major victories against a new generation of criminals trying to abuse cryptocurrencies.
Whether chasing hackers, North Korean cybercriminals, Ponzi schemes, drug dealersor other illegal actors, law enforcement agencies now routinely monitor the flow of cryptocurrencies used in crime, identify and arrest perpetrators, and seize billions of dollars worth of assets.
These facts are essential to understanding the evolving nature of how crypto and crime intersect and should inform public policy debates on the topic. The Crypto Launderers offers a tour of major criminal cases in the crypto space up to the present day.
Unregulated crypto exchanges remain the biggest vulnerability in trying to prevent money laundering in the crypto ecosystem.
One of the biggest challenges facing any illegal actor who acquires cryptocurrencies is how to cash them into fiat currencies, such as the US dollar or the euro, without attracting attention. For most of the history of cryptocurrencies, illegal actors have relied on a vast network of unregulated crypto exchanges to allow them to launder funds.
Efforts to regulate crypto exchanges for anti-money laundering and anti-money laundering (AML/CFT) purposes date back to March 2013, when the US Treasury’s Financial Crimes Enforcement Network (FinCEN) issued guidance clarifying that US exchanges must comply with AML/CFT laws. . This has had the important consequence of ensuring that US crypto exchanges can withstand a robust defense against financial crime.
Most other jurisdictions, however, have taken much longer to implement AML/CFT regulations for cryptocurrencies. It wasn’t until the Financial Action Task Force (FATF) issued guidelines on virtual assets that most countries around the world began to regulate the crypto space – and even then, regulation remained patchy in some parts of the world.
Those gaps in the international regulatory perimeter have allowed the rise of rogue exchanges: crypto exchanges that are often complicit in facilitating billions of dollars in illicit activity, and in some cases in direct collusion with the criminals whose money they launder.
Among the first and most notorious of these fake exchanges was BTC-e, a Russian-linked exchange that managed several billion dollars worth of cryptocurrencies for cybercriminals and other illegal actors.
US law enforcement agencies successfully dismantled BTC in 2017, in part using intelligence from the blockchain, and its founder is currently awaiting trial. However, other false exchanges followed. U The Crypto Launderersyou can read about the history of these fraudulent exchanges and the various efforts by law enforcement and regulatory authorities to take them down.
The rise of ransomware has been a complete game-changer in shaping how policymakers view cryptocurrencies.
In the first few years after Bitcoin was created, the problem of crime and cryptocurrency was primarily viewed through the lens of law enforcement: the problem of people using crypto to buy and sell narcotics and other illicit items on the dark web was seen as a serious concern. , but one that could be solved by police measures.
That changed in May 2017 with the launch of the WannaCry ransomware attack – in which North Korea’s cybercriminal group, the Lazarus Group, crippled IT systems in businesses and public sector agencies around the world, and demanded Bitcoin payments to regain access. While not the first ransomware attack to use crypto, WannaCry has become the most prominent ransomware attack ever in terms of the damage it caused and the involvement of North Korea.
Above all, the WannaCry attack was a pivotal moment because it forced policymakers to view the nexus of crime and cryptocurrency through the lens of national and international security. In the wake of the WannaCry attack, ransomware attackers based in countries like Russia and Iran have launched increasingly lucrative attacks, generating hundreds of millions of dollars in revenue, and reinforcing the view among policymakers that the fusion of cryptocurrencies and illicit activity demanded a stronger response. , and it was not purely a police matter.
This paradigm shift has been instrumental in shaping the response to ransomware and other illegal activities that exploit cryptocurrencies. In particular, the rise of ransomware prompted the US Treasury’s Office of Foreign Assets Control (OFAC) to begin blacklisting crypto addresses associated with cybercriminals and other threat actors. The Crypto Launderers recounts the history of these efforts to impose sanctions on the crypto space and the political debates involved.
The growth of DeFi has made cryptocurrency laundering more complex. . . but also more visible.
The birth of the Ethereum network was a pivotal moment in the evolution of the crypto ecosystem as it offered a dynamic platform to deploy and use an exciting array of crypto-powered applications.
In particular, Ethereum has inspired the development of innovations in decentralized finance (DeFi), or intermediary-less financial applications that allow users to access services such as asset exchange, lending, insurance, asset management and more – all using crypto assets. The growth of DeFi, however, has had significant implications for the evolution of criminal activities involving cryptocurrencies.
First, as the tightening of the regulatory perimeter makes it more difficult for criminals to launder funds through centralized exchange services, illegal actors are increasingly turning to services connected to the DeFi ecosystem – such as decentralized exchanges (DEX). and crossed chain bridges – for washing funds. North Korean cybercriminals in particular have shown inventiveness in using the DeFi ecosystem to try to move cryptoassets – including using Tornado Cash mixing service.
Second, DeFi presents a major challenge for regulators. Since DeFi is characterized by a lack of traditional, centralized intermediaries, regulators are grappling with difficult questions about where and how to apply AML/CFT and other rules to the DeFi space.
However, there is an important mitigating factor to the challenge of crime in the DeFi space. Because all activity in DeFi is recorded on the blockchain, there is often a greater level of transparency in DeFi transactions than there is in the more centralized components of the crypto space. Law enforcement agencies can leverage this information as they pursue criminals throughout the DeFi ecosystem—efforts detailed in The Crypto Launderers.
The emergence of Web 3.0 and the metaverse will present new challenges, but ultimately we have the tools to disrupt crypto crime in the future.
Looking to the future of the crypto space, there is so much to be excited about. The emergence of Web 3.0 and the metaverse is causing society to reimagine the nature of the online experience. Innovators are increasingly combining crypto and blockchain with innovations in virtual reality, artificial intelligence and other fields with exciting possibilities.
As with any technological development, it is inevitable that criminals will try to take advantage of these innovations. Crime in the metaverse is currently mostly a hypothetical problem – but that is changingand there are cases of scams, hacks and other illegal activities involving crypto that are starting to appear in the metaverse.
The confluence of crime and new digital worlds raises important questions. How can he regulations apply in the fully digital realm? Will it be possible to strike a balance between privacy, freedom and crime prevention in these environments? Can we even begin to imagine what crime might look like in a new kind of experience?
The Crypto Launderers looks deep into the future and concludes that despite these problems and challenges ahead, there is reason to be optimistic that society can solve them – in part by using the knowledge and experience gained to date in disrupting criminals who abuse cryptocurrencies.
Should read Crypto Launderers, I hope you find it interesting and worthwhile reading. If you want to learn more, be sure to sign up for Elliptic’s webinar on February 6where I will talk about these and other topics in more detail.
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