Bitcoin Laundering Research Study

Bitcoin Laundering Research Study

For many Bitcoin non-believers, one of the most prominent anti-Bitcoin arguments is that it’s a currency used by criminals.

Such reasoning has been debunked by the Bitcoin community several times, but it would be interesting to see what the actual data stays.

The Foundation for Defense of Democracies’ Center on Sanctions and Illicit Finance, together with blockchain analytics firm Elliptic, recently conducted an extensive study to attempt to uncover how much of the circulating Bitcoin funds are used for illicit activities.

To make the data more manageable, the study narrowed the sample from 2013 to 2016. According to Elliptic, they used a forensic analysis tool to sort through the data.

The method generally makes use of known data sets that are linked to illicit activities, running the parameters through more than 214 conversion services like mixers, gambling sites and currency exchanges.

In all, the results were surprising to say the least. According to the study, only less than 1 percent of Bitcoin circulation is linked to illicit activities.

The study also published other compelling results. The researchers found that cryptocurrency exchanges received the highest amount of known illicit Bitcoins.

What’s more interesting is that 50 percent of the illicit Bitcoins went through two Europe-based cryptocurrencies. However, this is not really surprising as exchanges are responsible for carrying out large amounts of cryptocurrency conversions.

When it comes to Bitcoin laundering, the study shows that mixers and gambling sites are the go-to source for “washing” services. The data also shows that 97 percent of the volume going through mixing and gambling sites can be traced back to only three services.

And from that, half of the volume is linked to illicit activities.

Another interesting result, though not really surprising, is that 97 percent of the illicit Bitcoin circulates in darknet markets like the now-defunct Silk Road and AlphaBay. The only year that the 97 percent dipped to 80 percent was in 2016.

According to the 2016 data, the rise of ransomware was the cause of the shift. It’s typical for ransomware to ask for payment in Bitcoin. When the ransom is paid, the Bitcoin is then considered as illicit.

Since ransomware is not a darknet market, the circulating illicit Bitcoin picture also skewed.

What is surprising is that the data suggests that the flow of illicit Bitcoins going through darknet marketplaces is largely centralized.

For each year, over 50 percent of the illicit Bitcoins are linked to less than two darknet marketplaces.

In 2013, around 90 percent of the illicit Bitcoin were linked to Silk Road. In 2014, Agora and Silk Road accounted for 80 percent of the circulating illicit Bitcoins.

In 2015, almost half of the illicit Bitcoin was in Agora. In 2016, Nucleus Market and AlphaBay held 75 percent of the circulating illicit Bitcoins.

One of the main reasons why the Bitcoin laundering study was instigated is for better policy-making. The Foundation for Defense of Democracies gave a recommendation that law enforcement agencies should focus more on darknet markets, online gambling sites and Bitcoin mixers as these are the locations in which a huge portion of illicit Bitcoin circulate or are “washed.”

When it comes to online gambling and Bitcoin mixers, the Foundation recommends stronger anti-money laundering enforcement. On the other hand, darknet markets need a different approach as these sites don’t comply with such regulations.

Further, if one darknet site is shut down, another opens.

The Foundation for Defense of Democracies also recommended that law enforcement officials should shift their focus to exposing the security vulnerabilities of such darknet websites to deter people from using the sites.

For the Bitcoin community, the narrative that Bitcoin is used for criminal activities is weak to begin with. Bitcoin supporters are also quick to point out that banning Bitcoin on the grounds of criminal activity is not logical; after all, the U.S. Dollar is also used to fund criminal activities, and you’ll never hear talks about banning the dollar.

There are a lot of key points attached to this specific matter. For example, a lot of cryptocurrency supporters believe that governments have no right to regulate nor monitor a person’s financial activity.

Another key point is that Bitcoin itself is simply not designed to be a great way to conduct money laundering. This is because every Bitcoin transaction is in the public blockchain ledger. The receiver, the sender and the amount is available for anyone to see.

If you do enough investigation, it’s possible to trace the money trail that will lead to arrest. In fact, many Silk Road users have been arrested this way.

Lastly, the Bitcoin community is also quick to point out that darknet websites are also using Monero, an alternative cryptocurrency that puts a high priority on security and anonymity.

With the recent Bitcoin laundering report, the cryptocurrency community can finally solidly claim that Bitcoin is not “drug money” as there’s already a study that shows that illicit Bitcoin activity accounts for less than 1 percent of Bitcoin activity.


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