This is one of the early misconceptions latched onto by mainstream media while Bitcoin was establishing itself as an alternative monetary network. Although it has been thoroughly debunked multiple times (much like the ‘Bitcoin is a waste of energy’ argument) it still pops up every now and then. Indeed, it is particularly common among the general public who haven’t yet had much exposure outside of mainstream headlines, therefore it is still important that we break the question down and provide additional clarity.

Why Bitcoin?

Firstly, we should look at the properties of Bitcoin that may make it seem, on the surface, a useful tool to criminals.

  • Pseudo-anonymity: When participating in the Bitcoin network users are represented by Public Key addresses. As such no direct personal information is stored or referenced by the network, which gives the illusion of anonymity. Note that anonymity is not something that should be considered as criminal, the rights to privacy that Bitcoin encourages are fundamental human rights.

  • Payment Finality: Bitcoin transactions are irreversible in nature due to the robust security of the network, provided by the Proof-of-Work consensus algorithm. Once a transaction has been mined into a block and that block has had several other blocks built on it, the work (and cost) required to be able to reverse this would be so much that it is considered highly unlikely that the blockchain will be modified. As time goes on this gets more and more costly. Note, this is in direct contrast to traditional finance where often transactions (facilitated by intermediaries like banks) can be reversed many days, or even weeks, after the initial date they took place.

  • Peer-to-Peer: As mentioned previously, Bitcoin does not require intermediaries. Instead, it is built out as a peer-to-peer payment network. This means that no permission is needed from a third party for people to transact with one another on the network. This lack of permission is one of the key elements that make the network censorship resistant. But it does also mean that, without having gate keepers to their money, individuals are solely responsible for managing their own finances and security.

  • Global Accessibility: As an open network Bitcoin offers global reach. This means that anyone anywhere in the world with an internet connection, and in some instances without, can participate in the network by creating a Private/Public key pair and using this to send and received bitcoin.

In summary, with Bitcoin we have a system of making quick, secure and pseudonymous payments that doesn’t require any central authority to set up an account and can be done from anywhere in the world. Sounds like a perfect channel for illicit activity and money laundering right?…wrong! Anyone who believes Bitcoin to be a criminals playground misunderstands it at a fundamental level and should remember: Bitcoin is secure, but it is not private.

Crime Doesn’t Pay.

In the early days of Bitcoin a well known trading site popped up called the Silk Road. As an open trade platform some users saw an opportunity to use it for buying and selling restricted substances (among other illegal activity). However, the individuals taking part in this illicit trade failed to consider that, due the open auditability of the Bitcoin ledger, and in spite of their assumed anonymity, all of their on-chain activity was and still is traceable. Indeed, there have been numerous cases of bitcoin being tracked (using chain analysis tools) by the authorities back to individuals. Here are just a few of the more well-known examples:

As we can see, Bitcoin as a payments network has the potential to be more traceable than traditional payment infrastructure. It may be true that this nascent technology is seeing increased use for illegal activity. But far more illegal activity takes place in traditional finance. Reported in some research by as much as 800:1.

If we want to see evidence of this, we need only look at what authorities are saying about Bitcoin vs. traditional finance, and in particular cash as a tool of crime.

While the world is looking with concern at the possible misuse of virtual currencies by criminals, this report may seem somewhat unusual in that it is not highlighting a new phenomenon or an emerging risk: money laundering and cash have been the stock of criminals for decades. However, this is precisely what makes the findings of this report of interest: in spite of the changing face of criminality, with significant threats now stemming from new technologies, money laundering schemes detected by law enforcement are still largely characterised by traditional techniques, in particular the use of cash.

– Europol (Dec2021): Why is cash still a king? A strategic Report on the use of cash by Criminal groups as a facilitator for money laundering

In a futile effort to maintain digital anonymity, the defendants laundered stolen funds through a labyrinth of cryptocurrency transactions. Thanks to the meticulous work of law enforcement, the department once again showed how it can and will follow the money, no matter what form it takes.

– Department of Justice (Feb2022): Two Arrested for Alleged Conspiracy to Launder $4.5 Billion in Stolen Cryptocurrency

While the use of virtual assets for money laundering remains far below that of fiat currency and more traditional methods, as noted below, U.S. law enforcement agencies have detected an increase in the use of virtual assets to pay for online drugs or to launder the proceeds of drug trafficking, fraud, and cybercrime, including ransomware attacks (see previous sections on threats), as well as other criminal activity, including sanctions evasion

– Department of the Treasury (Feb2022): National Money Laundering Risk Assessment

Summary

It is clear from the information provided above that, as with all aspects of our lives, with Bitcoin there is not freedom from crime. Nor is there an increased prevalence of criminal activity as a result of Bitcoin. Indeed, there is substantial evidence that individuals who choose to leverage Bitcoin as a tool in illegal activities create a permanent paper trail that authorities can use to trace and punish them. One may wonder, therefore, where the ‘Bitcoin is for criminals’, narrative comes from. Well, if I were to hazard a guess, I would say that this misinformation was being echoed by those with the most to lose in a Bitcoin world (though who that may be is outside the scope of this article). Suffice to say that when someone says to you in future that ‘Bitcoin is for criminals’ you can remind them that, in reality, there is nowhere for criminals to hide on the Bitcoin network.

Additional Reading: