Does Crypto Have a Money-Laundering Problem?
GM friends, let’s chat criminal!
I’ve already spoken plenty in the past about crypto’s mass adoption problem: Crypto has the reputation of being used for money laundering, fraudulent and terrorist activities, and purchasing illegal goods and services. From drugs, hitmen services, to human trafficking — if you’ve ever scoured a dark web marketplace out of curiosity, you’ve certainly come across some dark sh!t.
Scrolling through Twitter this morning, I stumbled upon a video I had seen a few weeks ago: Senator Elizabeth Warren (a.k.a. The Grinch of Crypto) questioning Jonathan Levin, Co-founder of Chainalysis, a blockchain data company supporting governments, agencies, and businesses engage with cryptocurrencies. The video shows Warren interrogating Jony on whether crypto makes it easier for Russian oligarchs to circumvent sanctions and hide their money. When I first watched the video, I had to laugh. Not the good, fun type of laughter, the this-is-absurd type of laughter. Without spoiling it for you, here’s the video.
What a man Jony is, keeping his cool. Lizzie on the other hand, needs to be taught some manners. How does someone live 72 years without learning to not interrupt others when they speak? Also, how is she telling an expert on crypto traceability that he didn’t understand her question on crypto traceability? I think the words you’re looking for are rude AND stupid (not my words though, in case you’re reading this, Lizzie)
Anyway, let’s acknowledge that Lizzie did ask a legitimate question:
Does crypto make it easier to circumvent governments and agencies?
To best answer this question, let’s have a look at the use of crypto to launder money. In 2021, criminals laundered an estimated $8.6 billion of cryptocurrency, according to Chainalysis (yes, Jonathan Levin’s Chainalysis :) According to UNO, the estimated amount of total money laundered globally is somewhere between $800 billion to $2 trillion. Crypto then merely accounts for 1% or less of all money laundered, while the majority of money is still being laundered however money has been laundered before crypto existed. This may confirm my suspicion that half the restaurants in London are money laundering fronts — not sure how else some of these restaurants would survive.
Oh also, you may have heard the myth that 90% of all US dollar notes have traces of cocaine on them. How many people, on the other hand, have sniffed cocaine using a blockchain? Thought so, but you don’t see Lizzie talking about that 😛
As Jony Levin explains, blockchain technology actually makes fraudulent activity more traceable. We love to talk about how blockchain technology creates more transparency — let’s see how exactly, by looking at a transaction. Assume you want to send money from your wallet to mine (which I kindly encourage you to do). The record of the transaction will then look something like this.
Let’s pretend you just sent 1 DOGE from one of your wallets to one of mine. This exact snapshot of the transaction is now on the blockchain and can be viewed by anyone who wishes to play detective. Pictured is a unique transaction hash, the confirmation that the transaction went through + the number of block confirmations at the time. Here’s the really nifty part: Under “From”, you can see your wallet ID. Anyone that knows your wallet ID can check your balances and all transactions from and to that wallet. The same holds true for my wallet (receiving wallet). This is precisely what we mean when we talk about “more transparency.”
You may not be amused by the idea that anyone can see your balances and transactions, even when you don’t have anything to hide. People tend to break up their balances on multiple wallets anyway, so you’ll never see someone’s ENTIRE balances and transactions or net worth by looking at a single wallet. Either way, privacy is not really a problem in the first place: unless you tell people your wallet ID(s), no one can connect your wallet(s) to your identity as your personal information isn’t displayed anywhere.
If I now want to spend the 1 DOGE that you sent me, I will have to sell the DOGE on an exchange (like Binance) for fiat currency and then withdraw fiat to my bank account. If anything about my withdrawal seems suspicious, the complete transaction history can easily be traced back by anyone that knows my wallet ID. If questionable activity is suspected, the responsible authorities could simply request my wallet ID(s) and inspect my transactions.
You might think: OK this makes sense, but having a bank monitor your withdrawals, raising red flags, and tying your funds to your identity only works when crypto ultimately needs to be changed to fiat currency. If you could purchase all your stuff with crypto, who would monitor your transactions? Although you are totally correct, don’t kid yourself. Do you really think the banks inspect your transactions because they care? Half of them probably launder money themselves (see HSBC). Governments force banks to implement certain monitoring systems that flag suspicious activity. Once crypto is widely adopted, governments will surely impose regulations that help them monitor for suspicious activity as well. I wouldn’t be concerned about governments finding ways to continue snooping around in our lives.
How then, is it even possible to launder money using crypto?
There are a few ways to wash your money (apparently), with the main destination being Centralised Exchanges. Here’s the problem with centralised exchanges: Transactions can occur off-chain, when the value of the underlying asset is moved outside the blockchain. Let’s again assume you (Wallet A) want to send me (Wallet B) shmoney through a centralised exchange. On a centralised exchange, this won’t be a direct transaction and hence not validated on the blockchain. Instead, your wallet will transfer value to the ledger of the exchange (+; inflow to exchange), while the exchange will display that value on my account (—; outflow from exchange). Only when I send that value from the account on my exchange to my wallet outside the exchange, a transaction on the blockchain occurs (this time between the exchange and my wallet).
The public will be able to see both the transaction from Wallet A to the exchange and the transaction from the exchange to Wallet B—both as separate transactions. There is however no way to connect both transactions to each other. As such, the problem of money laundering in crypto is specific to centralised exchanges, not to crypto itself. The majority of money laundering in fact occurs on a very limited number of exchanges, which are known to have extremely lenient guidelines. Shutting these exchanges or enforcing stricter rules and background checks could greatly diminish money laundering activity. Some exchange like Binance already have quite strict verification guidelines: When I first opened my Binance account, I had to pass a passport, photo, and video verification plus proof of residency. Other exchanges however don’t have such stringent verification processes in place.
As an aside: money laundering may also occur through “mixers” or online gambling platforms; if you’re interested, you can read more here.
To conclude, (1) crypto only accounts for a tiny fraction of all money laundered and (2) money laundering activity is specific to a limited number of platforms such as centralised exchanges. Someone pls share this with Lizzie, she might learn a thing or two.
Take care,
Team Lithium x Seb
