Laundering the Proceeds of Crime: Crypto’s Killer App?
With the US approving spot bitcoin ETFs, can cryptocurrencies move beyond their shady reputation? What do current transaction volumes say about the true use case for cryptocurrencies?
ChainArgos recently published joint research with Chinese blockchain intelligence firm Bitrace that proves overlap among scammers and scam-proceeds-laundering service providers with victims in both China and the United States.
Our work established that the same sorts of scams are run in both places, by related groups, and that the proceeds are laundered through common service providers.
We achieved this by matching on-chain and public-record evidence.
Nobody will be surprised to hear the main token used in such scamming, by far, is USDT otherwise known as “Tether.”
Our research also proved connections between the groups we studied and those reported on by Reuters extensively.
Now we are going to connect a few more dots to argue that scamming and the laundering of scam proceeds was not just a use case for cryptocurrencies in Asia, but likely a major driver of flows through several well-known industry players.
This may well even be, empirically, crypto’s killer app.
The South East Asian Setup
To start, note that in our prior work we found that FTX was involved in processing over US$250 million in flows downstream from scams and Bitkub, Thailand’s largest crypto exchange, was involved in over US$100 million.
We know from other reporting that FTX had connections to strange off-ramp activities in Thailand.
Further, per widespread reporting, FTX was heavily entangled with an OTC operator called Genesis Block.
We know FTX announced a partnership in July 2020 to build a trading platform for Genesis Block’s clients.
In an interview, Genesis Block’s head trader confirms they were active in Thailand and around Southeast Asia, doing what they themselves described as gray-area OTC and banking business.
The Financial Times reporting further tells us Genesis block was active in the Cambodian OTC markets.
Why mention Cambodia?
Because Bloomberg connects the scams Reuters found to Cambodia too.
Lastly, it is essential to know that Citibank Thailand will open a USD account with a minimum balance of 1 million THB or about US$30,000.
“Western middle class” assets or income are sufficient to get USD banking in Southeast Asia.
While there certainly are unbanked and under-banked people in Southeast Asia, and access to dollars is not pervasive, it is becoming increasingly apparent that the primary drivers of dollar-based stablecoin use isn’t from this segment of society.
Comparing the sizes of some of Southeast Asian economies where it’s claimed that stablecoins provide access to dollars, and the relative sizes of scam-related flows uncovered and it becomes harder to argue that the underbanked are driving this demand for stablecoins.
Cambodia’s population is only 16 million, with a per capita GDP of about US$1,600 — it’s hard to imagine Cambodia driving hundreds of millions of dollars worth of stablecoin flows.
Genesis Block
Genesis Block, and by extension FTX and Alameda Research, were clearly active in a space at least adjacent to “pig-butchering scams.” But is there public evidence for closer connections?
Can we get beyond just plausible?
Yes.
We know from the interview linked above that FTX built a trading platform for the Genesis Block “client base and certain fiat markets that they (FTX) do not have access to.”
Here is a press release detailing how:
Alameda Research will also provide the technology that acts as the backbone for Genesis Block’s new OTC portal and RFQ system.
So FTX /Alameda Research and Genesis Block’s trading and fiat on/off-ramp systems were at least partially integrated, by their own admission.
And what do we know of Genesis Block’s clients?
In the same video, Genesis Block’s head trader explicitly talks about scam proceeds leading to bank account freezes and how they actively manage this problem.
So Genesis Block were clearly a downstream service provider and knew that at least some of their clients were, or at least were dealing with, criminals.
With regards to Genesis Block’s Chinese client base, in a different interview the same person says:
We’ve been seeing a lot of our partners pretty much disappear…a lot of our friends over there are kind of in big trouble…it’s not really about crypto it’s more about the source of the RMB… [which was] a lot of pyramid schemes, a lot of scams.
Genesis Block were clearly dealing with people who were either criminals themselves, or service providers to criminals, and Genesis Block appeared comfortable talking about such activities on camera.
As for that US$250 million processed by FTX— how might that have been off-ramped to fiat currency?
Genesis Block OTC was on the Signet client list, as were many of the other exchanges referenced in our earlier work.
A service provider that talked openly about dealing with criminals was active on a platform another commentator described as “a walled garden filled with snakes.”
That service provider (Genesis Block) was integrated with FTX/Alameda Research), which was both the largest recipient of new USDT and a major exchange operator with myriad, sometimes-remarkably-creative, schemes to access fiat currency.
So?
Now ask yourself two questions:
- How many large OTC clients are there in Cambodia that cannot use normal banks (Zeke Faux’s book provides interesting insight into this world)? and
- Where did Genesis Block have client and fiat access that FTX did not?
Freelancers in Southeast Asia looking to be paid in a USD equivalent currency and avoid taxes were not off-ramping via these services at scale.
People with at-least-some money that are included in the normal financial system were not using these services.
So it is entirely plausible that:
- Genesis Block’s client base included many of these scammers and/or crimionals;
- the outsized involvement of FTX was this flow; and/or
- so was the Bitkub flow, via Genesis Block or otherwise;
and this isn’t just plausible, it’s provable, because the illicit flows documented in our prior work were laundered by someone.
If it wasn’t this route it means there is at least one more multi-billion-dollar laundering pipeline connected to this activity we know nothing about.
That is possible of course, but seems unlikely.
Certainly the simplest explanation is that no second as-yet-undiscovered group of scammers or criminals exists and it’s all the same organization.
Now remember these actors specifically mentioned that the traditional financial system was blocking them and freezing their accounts.
This is not an instance of, “Well what about TradFi? Banks launder money all the time!”
We are looking at a gigantic amount of bad flow that was caught by banks and how cryptocurrencies were used to circumvent those controls.
The contents of those frozen accounts could have been, and at least partially would have been, sent back to the victims instead of being irreversibly exfiltrated.
So this may well be crypto’s real killer app — irreversible cross-border transfers for criminals.
