Cryptocurrency & its uses in Criminal & Terrorist Activities

Cryptocurrency has been on the rise of popularity ever since the invention of Bitcoin in 2009. Following the 2008 financial crisis, it was created to allow people to have full independent control of their money. Meaning the avoidance of all “typical” avenues of financial management, including the reliance of banks and or governments.

Cryptocurrencies work by having various digital currencies that hold a monetary value, the value of which is determined by the supply and demand of their current market. There are no banks or governments involved in the upkeep of these markets, this is solely managed by supply and demand.

Due to its rising popularity, Bitcoin is now one of many hundreds of other cryptocurrencies that has also been developed, such as Ethereum and Litecoin to name a few. As prices continue to skyrocket because of their expanding popularity, many cryptocurrencies now act as an investment hub. Bitcoin is currently the most valuable cryptocurrency, with 1 Bitcoin having a value of 23,589.52 Pound Sterling (as of 23rd July 2021), peaking up to 46, 418.97 Pound Sterling (as of 13th April 2021)

Now that an initial understanding has been established of what cryptocurrency is, it is time to investigate how these currencies are used within criminal and terrorist activities and organisations.

An important aspect to understand about Bitcoin specifically is that all transactions are posted to a centralised database, which is called “Blockchain”. This database stores every Bitcoin transaction ever made and is freely accessible to anyone. Therefore, any transaction completed through Bitcoin can be viewed by anyone, anywhere. This sounds ideal from an AML/CTF (Anti-Money Laundering/Counter-Terrorist Financing) point of view, but there is no way to establish who owns each transaction or transactional address and there are no regulatory ID&V (Identity and Verification) or KYC (Know Your Customer) requirements, resulting in completely anonymous ownership of transactions. Due to the lack of onboarding documentation, this creates a massive issue from a compliance perspective, and it makes it extremely difficult to regulate these activities.

These payments, therefore, provide a layer of security and is one of the main attraction points for criminal/terrorist activities due to the inherent disguise and anonymity applied to the ownership of a transaction. This is because the above-mentioned procedure can be used as a substitute for a business front in the placement step, and as a layering technique in the money laundering process. This is due to the inherent anonymity provided, and the ability to operate within various cryptocurrency markets.

However, it is important to note that when virtually depositing and withdrawing cryptocurrency from, or into “real money”, there are KYC documentation requirements, as these transactions must be completed through a third-party process service provider called an “Exchange”. There are many exchange providers to choose from, for example, Binance. For any exchange chosen, an account must be created and verified with the correct ID&V documentation, in order for a customer to then virtually deposit or withdraw.

Some other methods include buying pre-paid credit/gift cards or the utilisation of Bitcoin ATMs. Bitcoin ATMs can be found readily available in many countries through a Bitcoin ATM map (in the UK there are nearly 280). They charge a fee for use and can require KYC information in order to deposit or withdraw. This could include scanning identification, but this is dependent on the volume of the transaction. (Note that this KYC is only used in the deposit/withdrawal, any further payments made have their ownership disguised).

The compliance and regulatory issues arise with the anonymity of all transactions within the blockchain. There are no ownership trails or payment addresses assigned to any transaction completed within a specific crypto market. This results in difficulty when investigating this type of financial crime as it substitutes typical methods from the money laundering process, the process of which would typically be reverse engineered as a means to catch these criminals. But due to cryptocurrency markets acting as both placement and layering steps within the money laundering process, this can create issues for regulation enforcement. New techniques and processes must be developed if cryptocurrencies are desired to be upheld to the same regulatory standards as is with our current financial industry.

These currencies are still a fairly new concept to the financial industry, but due to their speed of growth and popularity, it is hard to not have a shift of focus to cater towards this. As more investigative work and analysis takes place, steps will be taken to further understand what can be done to combat the illicit activities occurring.

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