Bitcoin is often thought of as the preferred currency of cyber criminals, from purchasing illicit goods using bitcoin as a payment method, to ransomware attacks where payments by bitcoin are demanded.
So, why is bitcoin so appealing to criminals? The answer appears to be a combination of the level of anonymity it affords, ease of use, and ability to circumvent international borders and legislation.
With criminals generating large amounts of money from cybercrime activities, they need to find a way to ‘cash-out’ without being detected by authorities. In addition to being a common enabler of cybercrime, criminals are also starting to use bitcoin in their cash-out strategy to launder proceeds of crime.
A recent paper1 Bitcoin money laundering: mixed results? investigates this development, and the factors involved including the use of advanced technologies and professional facilitators. We explore some of the key issues identified in this paper.
Bitcoin mixers and exchanges
Two key components of money laundering using Bitcoin are Bitcoin mixing services and Bitcoin exchanges.
Bitcoin mixing services aim to disassociate bitcoins from their source, which is often of a criminal nature.
Bitcoin exchange services aim to anonymously convert bitcoins to spendable money.
How do cybercriminals use bitcoin mixing services?
Bitcoin is based on the blockchain – a public ledger where all transactions are recorded. Transaction C can be linked to transaction B, which can be linked to transaction A. The reason criminals can operate with a relative level of anonymity is that bitcoin addresses are not registered to individuals, and are only accessible by the owner who has the login details to the bitcoin wallet. In other words, even if it was suspected that these transactions were related to criminal activities, authorities would have a very hard time tracing it back to any particular person or entity.
But what happens when it’s time to cash out? If the transaction that is used to cash out somehow identifies the criminal, this can potentially be linked back to the transactions that are associated with illegal activity, such as the receipt of a ransom or selling of illegal goods. Bitcoin mixing services help criminals to hide the origin of crime proceeds, disassociating them from the criminal activities so that they can cash out safely.
How do bitcoin mixers work?
Bitcoin mixers typically provide customers with a newly generated bitcoin address to make a deposit. The bitcoin mixing service pays out other bitcoins from its reserve to bitcoin addresses provided by the customer, after deducting a mixing fee. Some randomness is applied to the frequency and amount of payments/fees, to create a guise of legitimacy.
How is the effectiveness of the bitcoin mixing service measured?
The blockchain allows cyber criminals to identify the percentage link between the deposited and received bitcoins following the mixing process, known as ‘’taint’’. If the bitcoin mixing is performed correctly, there is no link (“zero per cent taint”). Some bitcoin mixing services are able to ensure that returning customers (i.e. frequent launderers) who have previously been issued a tainted bitcoin are not issued the same bitcoin again in future transactions.
How reliable are bitcoin laundering services offered on the dark web?
The study included an experiment where different bitcoin mixers and exchanges were tested, to see how viable the respective services were as a combined approach to money laundering through bitcoin.
The conclusion was that bitcoin mixing services on the dark web are partly scams and partly operational services. Of the 5 mixing services tested, 3 were scams (accepting bitcoin but not returning anything) and 2 were operational. Reviews of these services are available online, and can reduce the potential of being scammed.
In terms of bitcoin exchange services, the majority operated as promised, however with differing levels of anonymity afforded. For example, one exchange service connected the mixed coins directly to a bank account, which would expose criminals to law authorities.
To maximise anonymity, criminals will prefer to utilise output platforms such as PayPal, allowing them to receive money with minimal registration requirements that may provide a link to their identity.
How much does it cost to launder proceeds of crime through Bitcoin?
The study concluded that the total cost of this type of cash-out strategy is less than 15% of the proceeds of crime, very low compared to other money laundering methods which can cost up to 50%.
Bitcoin laundering is a practical and cost-effective option for cyber criminals to launder proceeds of crime, and is therefore highly likely to be utilised in money laundering schemes now and into the future. While the low 15% commission makes it a cost-effective option, some services may block transactions that exceed a certain threshold, for example $5,000 or $10,000. It is therefore not certain whether this cash-out method will be a viable option when larger amounts of money are laundered.
1 Rolf van Wegberg, Jan-Jaap Oerlemans, Oskar van Deventer, (2018) “Bitcoin money laundering: mixed results?: An explorative study on money laundering of cybercrime proceeds using bitcoin”, Journal of Financial Crime, Vol. 25 Issue: 2, pp.419-435, https://doi.org/10.1108/JFC-11-2016-0067
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