On October 10, CipherTrace – a developer of cryptocurrency AML, bitcoin forensics, and blockchain threat solutions – released its Cryptocurrency Anti-Money Laundering Report – Q3 2018 (the “Report”).  The Report analyzed 45 million bitcoin transactions involving the top 20 global cryptocurrency exchanges to produce some sobering findings regarding the level of criminal activity at crypto exchanges and the effectiveness of AML regulation.

Some key findings are summarized below.

  1. 97% of bitcoin payments made directly from “criminal sources” (e.g., dark market sites, extortion, malware, mixer/tumbler/money laundering sites, ransomware, and terrorist financing) to exchanges were made to exchanges located in countries with poor AML regulation and enforcement.
  2. 95% of bitcoin paid to criminal sources were from exchanges located in poorly regulated jurisdictions.
  3. 7% of all bitcoin sent to exchanges in poorly regulated jurisdictions comes directly from criminal sources.  This compares to 0.12% sent to exchanges in jurisdictions with active AML regulation.
  4. Cryptocurrency money laundering on top exchanges involves a significant amount of bitcoin – some 380,000 bitcoins or $2.5 billion at the time of the Report.
  5. In the first three quarters of 2018, $927 million of cryptocurrency was stolen by hackers.  Cryptocurrency theft for the first three quarters of 2018 is 3.5x larger than the whole of 2017, which totaled $266 million in theft.
  6. New cryptocurrency crime threats continue to emerge, including highly targeted mass cyber extortion, SIM swapping, and advanced cyberattacks on exchange personnel.

Regulators and industry professionals have always known that cryptocurrency poses a new and significant money laundering threat.  However, the numbers that are beginning to emerge from reports and studies are deeply concerning.  Earlier this year, a report from the Center on Sanctions & Illicit Finance (the “CSIF”) analyzed bitcoin transactions from 2013 to 2016 and provided some of the first data on how cryptocurrency is channeled from criminal to legitimate sources through digital financial corridors.  The CSIF study, along with the CipherTrace Report, indicates that bitcoin laundering has grown at an alarming rate from 2013 to 2018.

As we have recently reported, the U.S. SEC has repeatedly declined to approve bitcoin ETFs.  Other global regulators consistently issue warnings about the risks of using cryptocurrencies.  These reports certainly lend credence to those concerns and will undoubtedly require global regulators to develop new means to combat these new risks.

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Patrick Dennien is an associate in the Firm’s Washington, DC office. He practices in white collar crime and corporate investigations, sanction systems of international organizations, money laundering risk and AML regulation, cryptocurrency risk and regulation, and corporate compliance programs. Prior to joining the Firm, Patrick worked for the World Bank’s anti-corruption arm, where he assessed the compliance programs of multinational companies, and advised on the development and implementation of effective compliance programs.