What is the black market worth — and how much of it is crypto

The cryptocurrency market and the black market are linked not just in popular lore, but in actual fact, and there’s no denying that. However, what that actually means is different from what you might expect, and the relation is in no way linear. To clarify the tangled web, let’s make sense of our notions and facts.

What is the black market?

You’d be excused if the notion of black market suggested to you drugs, guns and hired killers. Most people think that. In fact, “black market” is a notion referring to “economic activity that takes place outside government-sanctioned channels”, as Investopedia puts it. Drugs, guns and hired killers are indeed part of it, but they represent a very small percentage. Most of the black market consists of things you are distantly aware of, though they may be happening all around you, mostly having to do with various forms of tax evasion: cash transactions that leave no taxable trace, hiring employees without a legal contract or under various fraudulent forms of contracts, prostitution services, as well as the sale of goods that may be banned in certain jurisdictions.

You yourself may be performing black market activities: paying a friend for babysitting or selling your collectibles to your high-school buddy without paying taxes is part of the black market inventory of fraud.

Of course, that’s not where the big money is. The top spots on the black market are taken by counterfeit drugs, prostitution and counterfeit electronics. Also, alongside the usual suspects like marijuana, cocaine and heroin, waste dumping, counterfeit aircraft parts (!) and fake diplomas make notable appearances.

According to Havocscope, the total value of products on the black market is currently at $1.63 trillion, and other estimates put the global black market at 20% of global GDP. So where does the cryptocurrency market stand?

Cryptocurrency and the black market: What is the connection?

Since its inception, digital currency has prided itself on secure anonymous or pseudonymous transaction capabilities. Together with the development of free anonymizing software like The Onion Router (Tor), crypto currencies enabled transactions to be carried out outside of government supervision and monitoring. A number of black marketplaces sprung up, the most infamous being The Silk Road.

The Silk Road was by no means the first web-based dark web marketplaces. The Hive, The CyberArms Bazaar, and The Farmer’s Market all enabled illicit transactions, primarily of drugs, before Bitcoin was even invented. Since whatever payments were made online were traceable, these forums and marketplaces were easily targeted and brought down by national and international law enforcement agencies.

With the advent of Bitcoin, however, the cryptocurrency market had its own version of Amazon for buying drugs and other illegal products and services, and various articles published in popular media, online and offline, merely served to increase awareness of both the dark web and the cryptocurrency market in general. When Gawker published an article in 2011, Google searches for Bitcoin led to a spike in the cryptocurrency market, and Bitcoin rose from $10 to $30 within just one week.

Once Silk Road fell following the arrest of its leader, Ross Ulbricht (though he still disputes his involvement to this day), it became clear that transactions were not quite as anonymous as the cryptocurrency market had believed. Either through Bitcoin’s pseudonymous nature or through Tor’s vulnerabilities, identities could still be unpeeled from the dark web. One by one, other dark web marketplaces fell. Some were shut down by government action, like Utopia, Babylon, AlphaBay, Hansa etc., others, like Evolution, through exit scams that emptied users’ wallets, taking advantage of valid e-commerce practices like escrow (meaning that customers would send their money to the marketplace instead of the actual vendor, and, once the goods were received as promised, the marketplace would release the funds to the vendor).

Bitcoin was indeed the medium of exchange for these purchases, from weapons to fake IDs, pharmaceuticals, drugs etc. The more cryptocurrencies evolved to cloak identity, the better they became at intermediating illegal transactions, and a number of coins nowadays pride themselves on privacy features that make it virtually impossible to pinpoint identity — from ZCash, Monero, and Dash to even newer privacy coins like CloakCoin or PIVX. While it is clear there are a number of legal uses that would still work better or more comfortably with anonymous transactions, it is undeniable that such coins are also very well suited for illicit uses.

What are tumblers?

Running illegal activities on the cryptocurrency market is potentially very troublesome, since crypto is by its very nature very transparent. Most cryptocurrencies out there adhere to Satoshi Nakamoto’s design, of a chain of blocks where every transaction is traceable back to block one. (Incidentally, this is how we know what Nakamoto did on the Bitcoin blockchain ever since its inception.) This traceability means that everyone interested in so doing could spot that block where you bought five grams of hashish from a user whose IP is somewhere in Groningen.

Even if you don’t use privacy coins, you can still clean up tainted currency by running it through a tumbler. This is a “laundering” service provided in order to obscure the origin of potentially problematic coins. The tumbler service charges a fee to repeatedly mix tainted coins with a pool of clean coins on the cryptocurrency market, so that the tainted ones get “lost” in the noise. This is a practice borrowed from fiat mixing techniques, usually conducted through banks in tax havens.

The proof, as they say, is in the pudding: think of all the crypto that gets stolen — either through crypto exchange hacks, through ICO scams or in ransomware attacks. We, every single one of us, can see where the stolen money is — at least for a while. We know, for instance, that the Petya ransom sat in a wallet for three days before it was mixed on the cryptocurrency market. We know where stolen money goes. Once a crypto tumbler gets it, though, it’s game over.

Who rules the black market world?

Dollars. Whatever you may think with all the negative hype around cryptocurrency, it is still fiat — specifically, dollars — that are the currency of choice for illegal activities of any kind.

As recently as a year ago, research claimed that 44% of Bitcoin transactions were for illegal activity. However, whatever research methods were used to come up with that figure, other sources seem to contradict it. When you tell people you’re on the cryptocurrency market and they raise an eyebrow, just explain to them that the FBI itself has acknowledged that the proportion of illegal to legal uses has reversed. Nowadays, it’s crypto traders that dominate the cryptocurrency market, and illegal crypto uses only account for 10%.

To give you a clearer picture of the proportions, sources estimate that black market deals by means of cryptocurrency could go as high as $1.5 billion this year. This sounds like a huge deal. And yet — compared to the total black market valuation of $1.63 trillion, that is beer money. The rest is fiat.