How Can Bitcoin Be Leveraged for Money Laundering?

money laundering

How Can Bitcoin Be Leveraged for Money Laundering?

Bitcoin, the first digital currency in the world, has been accompanied by a lot of negative stigmas since its release. The three keywords that surround bitcoin are ledger, decentralization, and anonymity. The bitcoin transaction system is supported by the blockchain, a decentralized digital ledger where every detail of transactions is recorded in it, cannot be changed and can be seen by all users. Unlike conventional transaction, bitcoin does not require intermediaries in such a manner that there is no need to verify the user’s identity. In addition, the identity displayed in the ledger is in the form of a code.

This anonymity makes bitcoin stigmatized as a criminal transaction tool, including money laundering. Is it true that bitcoin offers full anonymity? Actually, it does not. Although the identity is only displayed in code, all transaction details – the amount, the source and the destination of transacted funds – are stored in the blockchain and cannot be changed. Details of this recorded transaction become an audit trail.

The perpetrators realized that bitcoin anonymity is not sufficient to keep their transaction in private. If the perpetrators want to leverage bitcoin as a laundering tool, they need to tweak the process with at least two things as follow:

  1. Transaction to Altcoin

If the perpetrators want to use digital currency for money laundering, then they need to exchange the fiat money with bitcoin and exchange their bitcoin with altcoin – a digital currency other than bitcoin. Altcoin can only be purchased with bitcoin.

Nowadays, there are many emerging altcoins that offer much better anonymity than bitcoin – for example, Monero, Dash and Zcash. Altcoins are often used as illegal transactions, including money laundering. Based on data from ChiperTrace, a data security company, the amount of money that has been laundered through cryptocurrency throughout 2018 reached 761 million US dollars, equivalent to around 11 trillion rupiah.

Why altcoin is superior in terms of anonymity compared to bitcoin? Altcoin is indeed designed to excel in terms of transaction confidentiality by implementing ‘zero-proof technology’. This technology eliminates audit traces in large blockchain books so tracking is more difficult. The first digital currency to implement this technology is Zcash. This mode is usually combined with another mode which is using ‘coin mixer’.

  1. Coin Mixer

Coin mixer is a paid service that offers the secrecy of bitcoin or altcoin transactions by “mixing” our digital coins with other users’ digital coins to eliminate traces of funding sources. As if our coins and other users are put into a tumbler and then it was shaken so the coins are mixed and we don’t know which coins come from our wallets and other users. Coin mixers are also called coin tumbling, bitcoin tumbling or bitcoin washing.

Implementing at least two steps does not necessarily make the flow of money safe. At one point, the perpetrators will disburse bitcoin to fiat currency, which means they have to deal with banks that need an identity verification process. Plus, analysts can also monitor related transaction anomalies to report the existence of a red flag. Blockchain, if tagged with a monitoring tool, increases the chance of visibility of the activity of bitcoin users. That is why blockchain implementation is actually a good approach in the Anti-money Laundering (AML) system – the transparency aspect.






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