2017 was the year of the Bitcoin, Blockchain and the year that everyone could become rich by investing in crypto currencies. 'Experts' had high expectations and price rises of thousands of euros per day were no exception. Unfortunately, crypto currencies also have a downside: it lends itself perfectly to all kinds of different forms of fraud. Today the fourth topic in this series: crypto currencies as a means of payment for criminal activities.
2017 was the year of the Bitcoin, Blockchain and the year that everyone could make a fortune by investing in crypto currencies. 'Experts' had high expectations and price increases of thousands of euros per day were no exception. Crypto currencies also have a downside, though: they lend themselves perfectly to all kinds of fraud. This five-part series highlights the various forms of crypto currency related fraud, including shady exchange offices, market manipulation, money laundering, crypto currency as a means of payment for criminal activities and Initial Coin Offering (ICO). Today we will discuss the fourth topic in this series: crypto currencies as a means of payment for criminal activities.
As we discussed in the previous blog, bitcoins and many other crypto currencies are not necessarily anonymous, but they can be used to hide or launder money with the right techniques (BLOG 3). This is one of the reasons why crypto currencies are popular with criminals for different types of payments.
Crypto currencies are often the currency of choice, for example when trading drugs and other illicit goods. Take Silk Road for instance, an online trading platform that sold weapons, drugs and much more, until the FBI took the website offline in 2013. On Silk Road, payments were made in bitcoins. But the alleged anonymity of bitcoins on the dark web turned out to be insufficient to stay ahead of the law. In fact, the U.S. government eventually used the disclosure of the bitcoin transactions in the Silk Road investigation to identify and convict corrupt federal agents involved in the inquiry Link.
2017 was the year of major ransomware incidents. The WannaCry virus not only brought the British NHS to a standstill but also caused great damage in the Netherlands. It ruled the news for days. According to the information that is available on this form of extortion, it is a billion-dollar industry that has been growing rapidly for the last couple of years. In order to recover your infected files, you usually have to pay a ransom amount in a crypto currency. But exactly why do criminals prefer these crypto currencies for their ransom payments?
Firstly, for anonymity reasons. Even though payments in bitcoins are not 100% anonymous, they are still many times more anonymous than centrally registered transactions through banks. And there are also crypto currencies specially designed to ensure anonymity, such as Monero. Secondly, transactions in crypto coins are very poorly monitored compared to bank transactions. Where sudden payments that have no direct economic justification can still be identified by a bank before the actual transfer, crypto coin transactions are never analysed. This is because there are no parties with liabilities, such as banks, in the middle of the counterparties that conclude the transaction. In the past, banks were by-passed using cash or valuable goods. But here, a physical transfer must take place, which means a crypto currency is an attractive alternative.
It did not take long for organised crime to embrace the crypto currency technology. From drugs and arms trafficking to cyber crime, the coins lend themselves well to all kinds of shady purposes and they make it harder for the authorities to investigate. On the other hand, the underlying Blockchain technology of some coins also give the investigative authorities some options. For instance, since all Bitcoin transactions are publicly accessible at Blockchain, the investigative authorities can follow the coins and even use them as evidence in court, as they did in the case of Silk Road. In next week's blog we will talk more about crypto currency and the investigate authorities, when we are going to discuss fraud with Initial Coin Offerings.
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