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MONEY LAUNDERING: CRYPTOCURRENCIES AND FIAT COMPARISON

MONEY LAUNDERING

April 22, 2021 | 

JOHN K MWANIKI |  0 Comments| 

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Cryptocurrencies come with many benefits to investors, traders, and institutions since they facilitate more secure transactions and better access to financial services and products. More than 90% of money laundering goes on without being detected, which heavily costs the global economy. 

While technology has brought many advancements, it has also led to the development of new tools that criminals use to carry out money laundering undetected. However, governments, banks, financial companies, and other authorities continue to use technology to discover more transaction attributes that help in identifying fraud.

Money laundering with cryptocurrency

''Bitcoin is a tool for money launderers and terrorists.'' At least, that is what most of the elected officials believe. But the $400million of NEM stolen from Coincheck proves that laundering huge amounts of cryptocurrencies is difficult, while laundering fiat is easy if someone knows how to. Currently, no blockchain tracks the movement of the US dollar in real-time. Many criminals launder small amounts of money through casinos or cash-based businesses to launder large volumes of cash.

Crypto assets refer to digital representations of value that the investor can trade or transfer digitally and use as a form of payment. In media, bitcoin has been often associated with the first online modern darknet marketplace that criminals used to buy illegal drugs and weapons anonymously. Following that, the US federal bureau of investigation closed the market's initial iteration. 

What makes laundering money through cryptos difficult is that blockchain monitors and records every transaction, making it easy for observers to identify any disbursements of stolen money. For instance, when the NEM hackers started moving the stolen haul, they experienced difficulties finding exchanges that would accept it.

According to SWIFT, the traditional channels, including using cash mules, cash businesses, front companies, and illegal drug trade, remain the leading forms of money laundering, but the use of cryptocurrencies remains minimal. However, some individuals invest in crypto for criminal activity. A good example is a hacking entity- Lazarus Group, believed to be controlled by North Korea that steals money, converts it into crypto, and redirects it back to the state. 

Other unidentified Europen hacker groups use stolen money to purchase prepaid crypto debit cards. The prepaid crypto debit card holds digital asses and converts them into fiat when the holder makes a transaction. According to SWIFT, the use of crypto to launder stolen bank funds is more likely to increase in the future. 

Other factors fueling money laundering with crypto are the increasing number of virtual currencies in the market that provide complete transaction anonymity. Some online tools such as mixers and tumblers, which mix cryptocurrency transactions with genuine transactions for concealment reasons, are also a looming threat. Other privacy-focused cryptos such as Monero are very hard to monitor because they obstruct transactional addresses, which may be a possible threat.

How about banks?

Another commonly used tender for payment is cash. Banks still use the traditional identification systems using the less volatile forms of user information to transfer or wire money. National regulations strictly restrict the transfer of physical currency and processing times.

The truth is, financial institutions who are the gatekeepers of the financial systems are also associated with money laundering. Globalization promotes the development of dubious money transfer methods that take advantage of the financial gap between countries. We have seen cases of financial institutions being heavily fined for failing to uphold strong regulations against money laundering. For instance, the HBSCs $881 million money-laundering scandal was highly publicized by the media and even became one of Netflix's documentaries.

An example of a money laundering process

If a criminal is paid money in cryptocurrency, they have to get their final payout in cash, and that means obscuring where the money came from. Here is an example of a money-laundering procedure:

Placement as a starting point

This is a movement of the cash from its source. The money is triggered to circulate within the existing financial system by passing through intermediaries like casinos, shops, financial institutions, and currency exchanges. For instance, purchasing assets, currency smuggling out of a country, bank complicity, etc.

Layering

This second stage is to make it hard to uncover any hints of activities involving money laundering. As such, criminals need to layer their spending to make the trail of illegal money unidentifiable. That includes converting the cash into monetary things or buying assets with the money to resell them.

Integration

In the final stage, known as integration, the laundered money gets back to the economy via the banking system and is therefore considered clean money. For instance, through property dealing, false invoices, foreign banks, etc.

Why is bitcoin difficult to use in money laundering?

Bitcoin may seem like the appropriate option in the placement and layering stages of money laundering. For placement, bitcoin could be a starting point to exchange fiat currency for bitcoin. Then bitcoin to fiat currency to move the funds from one country to another. The problem, however, is the last part of the integration. Since many criminals receive money in bitcoins, the challenge is integrating the money back into the economy while hiding their identity.

Given the preconceived perception of anonymity, many think that bitcoin is a more accessible tool to launder money. However, that is a misconception. Identities on the bitcoin blockchain are pseudonymous rather than anonymous. Every identity is trailed by an alphanumeric string known as a private key. It is okay to say that bitcoin offers some layer of protection over the identity of users, but the transactions are actually public. All the transactions on the blockchain are shared among teams whose consensus is necessary to validate the string of transactions.

CONCLUDING THOUGHTS

The purpose of money laundering is to come up with a string of transactions that can't be traced. Cryptocurrencies rely on an indelible public record of transactions making money laundering difficult. Again, the prevalence of virtual currencies is lower than fiat making cryptocurrencies more difficult to launder than fiat currency.

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