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Crypto-Laundering Paranoia

WSJ journalist LARPs as investigator and confuses many years’ exchange customer transfers for mass laundering by an exiting exchange executive.

There is a wide-spread idea that cryptocurrencies make not only global money transfer easy, but also money-laundering. Many are unaware that in fact, the path from stolen cryptocurrency to (seemingly) clean fiat money is littered with traps and obstacles apt to trip even the craftiest scoundrel.

The Wall Street Journal’s Paul Vigna and Shane Shifflet, for example, continue to imagine that cryptos are untraceable, implying hackers send their loot to an exchange and effortlessly trade it for some other cryptocurrency, never to be seen again. A particular obsession of the Journal’s appears to be with the ShapeShift exchange, which “according to a Wall Street Journal analysis of publicly available transaction data” is “an exchange often associated with money launderers” — an association that, like the present case of money laundering, is largely a matter of a journalist’s imagination.

Given Shifflet’s other work, it’s not surprising to see this lack of quality in his crypto “reporting,” but honestly Vigna should know better. We have to wonder if Vigna got burned in a scammy ICO and now seeks retribution by lobbing baseless accusations at crypto companies.

They claim that “between US$10.1 million and US$24.7 million worth of the cryptocurrency ether left the online accounts of Quadriga and moved through [ShapeShift]” in the aftermath of the collapse of Canadian exchange QuadrigaCX, which claims to have lost the private keys to access its wallets while many suspect its (allegedly deceased) owner of having absconded with customer funds and faked his own death. What could perhaps have allayed the Journal’s anxieties is to learn that ShapeShift’s compliance team had been investigating these transactions since the troubles surrounding Quadriga became known and found these transactions have the appearance of ordinary user transactions. They appear to be simply withdrawals that Quadriga’s users had made over the course of the last three years, and by and large resulted in perfectly traceable non-private cryptocurrencies like Bitcoin. It is worth noting that ShapeShift found the amount of ether sent from Quadriga wallets to them in December 2018 (within 30 days before Quadriga’s collapse) to be exactly zero.

Reporting that a total of 1.4 million ether were apparently sent from Quadriga to other exchanges (a number we have not verified), the Wall Street Journal appears to be unaware that it is a perfectly common practice for people to send their cryptocurrency directly from one exchange to another and that the flow of funds they tracked was years of ordinary user activity. This norm was entirely disregarded by the journalist, who presumed any transactions from a wallet with Quadriga attribution to a wallet with ShapeShift attribution, regardless of date, had a malicious purpose — a presumption based upon nothing.

ShapeShift is a so-called non-custodial exchange, which means that it does not keep accounts with customer funds. Rather, customers send a transaction to ShapeShift for immediate exchange and instantly receive the target currency back to a wallet of their choice. This arrangement makes it impossible for customer funds to be lost, embezzled, or stolen when the exchange becomes the victim of a hack — a venerable tradition in the cryptocurrency space most recently continued by the Cryptopia exchange.

The great irony is that ShapeShift’s model was designed to prevent exactly this kind of catastrophic customer loss, and yet the Journal uses the tragedy of Quadriga victims to slander ShapeShift.

While strict KYC requirements on ShapeShift were newly introduced in October 2018, the exchange is known in the industry for its transparency, not only keeping a public record of trades with target addresses enabling tracing of cross-chain exchanges, but also providing information from their site’s access logs upon lawful request, thus making its utility for laundering laughable, even prior to KYC implementation. The Wall Street Journal conspicuously fails to mention this relevant information, reporting instead that “[m]ost cryptocurrency exchanges operating in the U.S. say they follow federal rules to combat money laundering[,] ShapeShift didn’t do so until October 2018, when it began requiring identification.”

Much the same, of course, is true of many other exchanges, especially those that are big enough to support the volume that would be needed to exchange the quantities of cryptocurrency that result from a large hack or scam. Far from despairing, the knowledgeable investigator rejoices upon seeing suspicious funds deposited for a trade.

Another swing and miss from the Wall Street Journal in what seems to be a recurring compulsion to take a jab at ShapeShift whenever reporting on (predominantly negative) events involving the cryptocurrency industry. Journalists would do well to involve a subject matter expert or professional investigator in order to avoid making absurd and easily refuted claims — and on this topic of Wall Street Journal’s lack of journalistic integrity, we will be conveying more in the coming days!



-- — Blockchain Investigation & Cybersecurity Agency

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