Whenever I'm presenting and I'm asked why Bitcoin is used by criminals / whether it is all about money-laundering I always recount how, when I interviewed Stuart Davies, Head of Financial Crime at Scotia Bank during the ADC Forum, and I asked him for comments on the use of cryptocurrencies in money laundering. His answer:
The full extent of the use of cryptocurrencies in money laundering isn't known;
He doesn't believe it is any worse than the use of cash; because
Cryptocurrencies are the worst possible choice for a criminal seeking to remain anonymous.
Naturally, a national newspaper reported the next day "Head of Financial Crime: We don't know how much money-laundering bitcoin is used in" and conveniently left out points 2 and 3.
What may shape up to be a sound example of point 3 is emerging now, with the US Department of Justice announcing they have arrested Larry Harmon, an Ohio resident, who was involved in running a Bitcoin tumbler system called Helix.
A tumbler is the name given to a system which can make bitcoin transactions more private than the normal pseudononymous system which applies to normal transactions.
A tumbler takes a payment which one person is making and "tumbles" it with a large number of other payments other people are simultaneously making on the Bitcoin blockchain (or bounces the initial payment through sufficient Darkweb hosted wallets to make it difficult to track), creating a more difficult trail to follow for someone who was seeking to track the payment through to the end destination.
The operators of tumbler services take between 1-3% of a transaction for their service, and while tumblers they have a perfectly valid privacy enabling use, they are fairly clunky to use, and they have been historically exploited by those wanting to accept payment online for drugs and other illicit material available on the Darkweb.
The unsealed indictment alleges that Mr Harmon not only operated Helix, which the Department of Justice says is an unlicensed money transmission system with knowledge that the source of funds Helix was mixing was criminal, and also that Mr Harmon operated at least one illegal darknet market which used Helix to pay vendors, a drug market known as Grams.
The DoJ alleges between 2014 and 2017, Helix processed over USD$300,000,000 (at then prices) of Bitcoin transactions in breach of Federal Law, with most of the funds being connected to Darkweb makets, including the now shut down AlphaBay. The present value of that Bitcoin would be measured in billions.
Special Agent in Charge Mr Timothy Dunham of the FBI said:
The perceived anonymity of cryptocurrency and the Darknet may appeal to criminals as a refuge to hide their illicit activity...However, as this arrest demonstrates, the FBI and our law enforcement partners are committed to bringing the illegal practices of money launderers and other financial criminals to light and to justice, regardless of whether they are using new technological means to carry out their schemes.
The DoJ has been active in using the traceability which public blockchains offer to prosecute criminals for some time, with the takedown last year of the Welcome to Video website resulting in a mass of simultaneous arrests around the world, a feat only made possibly by the immutable nature of transactions on the Bitcoin blockchain.
Comments in the Bitcoin community have lit-up on Twitter, with Matt Corallo, a core Bitcoin contributor, saying:
Setting precedent that tumblers (aka “still-worse-privacy-than-cash-machines”) are illegal to own/operate would be the beginning of the end.
The indictment does lead with the actual criminal activity which Mr Harmon is alleged to have been involved in, so it is unlikely to lead to any meaningful guidance for those involved in privacy enabling cryptocurrency projects. What is sure is that old transactions on the Bitcoin network continue to be a source of evidence for law enforcement against criminals.