• J McGlynn and M Bacina

Where is the dark side of digital currencies?



The link between digital currencies and criminal activity are the most well reported aspect of Bitcoin as the price rises and more people enter the marketplace. While Bitcoin was heavily used in connection with the online "ebay for drugs", the Silk Road, the immutable nature of transactions and the constant uncovering of wallet addresses has been nothing but a source of pain for criminals.


Despite Bitcoin and public ledger based digital currencies being one of the worst possible technologies for laundering money due to transactions remaining visible forever, criminals seem to take the path of convenience and still use Bitcoin in particular as part of scams and other crimes. But how widespread is this use?


Recent law enforcement actions


Just as law enforcement seizes cash during raids, so digital assets are being seized. The US Internal Revenue Service (IRS) recently recovering US$1 billion in stolen bitcoin. These bitcoins were thought to be proceeds from the early days of the dark web drug marketplace Silk Road and connected to the ongoing Mt Gox saga, where a hack led to the collapse of the Mt Gox exchange.


Additionally, the Ontario Securities Commission has recently released a review of the failure of QuadrigaCX, a trading platform which collapsed following the death of its founder. Initially reported as a case of lost passwords causing the loss of digital currency, investigators used the immutable trail of blockchain transactions to discover that met its downfall due to "old fashioned fraud wrapped in modern technology" with the founder funding his lavish lifestyle using CAD$169M of other peoples' money while his own health failed and he ultimately died.


The simple truth is that a blockchain system is just a super secure ledger, and like any tool which can transfer measures of value, like cash, it can be used for good or for crime. What is being seen however, is a greater ability for third parties to monitor what is going on, without being shut out of the trails of payments which are usually hidden behind bank secrecy and privacy laws.


In the Welcome to Video takedown, payments of (then) $730,000 in Bitcoin made to an illegal child exploitation site were traced back to real users, who were then charged for their illegal activities and the largest exploitation marketplace in the world was shut down.


Research into the misuse of digital currencies shows a small number of bad actors account for almost all illegal activity, something which doesn't align with the oft repeated narrative that "Bitcoin is for criminals".


Darknet market trends


Blockchain analytics company Chainalysis has recently released a preview of their 2021 crime report documenting the hot spots of “crypto-crime” involving darknet marketplaces, which are marketplaces similar to the Silk Road which operate using encrypted browsers and offer mainly drugs for delivery to users. The report notes:

  1. In 2020, the growth in darknet market activity was largely attributed to a single site known as 'Hydra Marketplace'. This darknet marketplace only serves Russian-speaking countries and is associated with over 75% of darknet market revenue worldwide in 2020.

  2. Excluding Hydra, total darknet revenue has stayed consistent with 2019 (demonstrating the magnitude of Hydra's role. Oddly, Hydra is planning to sell rights to revenue sharing from their platform via a clearly illegal upcoming token sale).

  3. Ordinary digital currency exchanges are the source of approximately 46% of the total darknet market revenue (up 16% from 2019) while the share of peer-to-peer / decentralised exchanges has substantially declined. Chainalysis believe this is because:

standard exchanges tend to be more popular and easier to use, this could suggest that darknet markets attracted more first-time customers who are new to cryptocurrency in 2020

This is a curious trend, as it again underscores the foolishness of criminals using digital currency. Almost all centralised exchanges require KYC checks to be cleared during onboarding


Finally, Chainalysis reports that there has been a significant surge in the number of customers using mixers - which are “third-party services that 'mix' different transactions to obscure history and strengthen privacy”. These mixers can be used by nefarious actors to conduct their transactions, indicating a desire to exercise even more caution, perhaps “following law enforcement crackdowns”


Individual company misconduct or nefarious darknet actors are not reflective of the broader digital asset industry, however, it is a reminder of the risks. When engaging with new platforms it is important that customers understand what the platforms risk management procedures are and their operations. Separately, and as previously mentioned, triangulation of law enforcement agencies cannot be understated in its importance to combat international crime.