By Bitcoms
Today, Bitcoin is for cartoon criminals
Under a cartoon of a criminal with a mask in the shape of the Bitcoin ₿, the Financial Times recently proclaimed that 2022 “was a record period for crypto-based illicit transactions” and that crime is a crypto “industry feature”.
As we will show, smearing Bitcoin as criminal money in 2023 is a mischaracterisation at odds with the evidence. So why are such views so widespread?
Some British history
It is, in part, historical: criminals looking to stay one step ahead of the authorities have always been early adopters of disruptive new technologies. Unfortunately, this routinely leads to such innovations being demonised.
Throughout its rise, many Britons have seen the internet as little more than a vehicle for crime. Periodic hysterias over illicit content have recurred from the mid 1990s into the following decades, as have media assertions that internet criminals are spreading evil. This vilification of the internet was presaged in the 1980s by the now-comical media-confected moral panic around “video nasties”, which accompanied mass home VCR adoption.
As for home video and the internet, so for Bitcoin. In early 2010s Britain, you’d be forgiven for thinking Bitcoin was about nothing but drug dealing. Its media coverage was dominated by the US Silk Road “dark web” marketplace, described as unstoppable because of its association with Bitcoin. Despite Silk Road’s patent lack of invincibility (it was shut down by the FBI), short lifespan (2011-13) and small scale (its founder allegedly ran the entire operation on a single laptop), the still-infant Bitcoin became firmly fused with crime in the British public’s imagination.
In Britain, prejudice against Bitcoin persits
Despite being thoroughly outdated, this association between crime and crypto (including Bitcoin) is still regularly reinforced in the media today. This is also parroted in official UK pronouncements, where crypto is said to be “used by criminals” despite a huge weight of evidence to the contrary.
It is disappointing, then, that the FT’s recent article begins by trotting out the same familiar association: "… during a panel on crypto.. I argued that it shouldn’t be thought of as money. The only reason to use it other than for speculation, I said, was to buy drugs on the internet."
There are two things to note here. First is the intimation that the technology has no legitimate use. Similar demonstrably false claims are also made in official UK reports: for example, the House of Commons Treasury Committee recently stated that it serves “no useful social purpose” (directly contradicting its own earlier admission in the very same report that it can “improve the efficiency and reduce the cost of making payments”). This is reminiscent of similarly dismissive attitudes towards the internet, which in 2000 was still being described in the media as a near-useless “passing fad”.
Secondly, although Silk Road was shut down a decade ago, Bitcoin is still ‘drug money’ in the British media. This anachronistic portrayal has no basis in fact: for example, according to a 2021 report by a subsidiary of Mastercard: “Cash—anonymous and liquid—has long served as a tool for criminals. Cryptocurrency, with its similar characteristics, may likewise struggle to ever completely shake its bad reputation, despite illicit transactions making up less than 0.5% of Bitcoin’s yearly volume in 2020.”
In the 2020s, the evidence is clear
But rather than providing such context, the FT article instead uses large-looking but decontextualized numbers to cast crypto as money for criminals: "Last year was... a record year for crypto-based crime: illicit crypto transactions topped $20bn in 2022, according to data analytics firm Chainalysis, up from $18bn the previous year".
But the very same Chainalysis report does put those numbers in context: not only is $20bn is a mere 0.24% of crypto transactions by volume, but also "crime as a share of all crypto activity is still trending downwards".
It is worth noting that neither Mastercard (whose profits rely on the maximisation of traditional card payments) nor Chainalysis (whose business depends on the existence of ‘crypto’ criminality) have any incentive to play down the level of blockchain-bourne crime.
If we zoom out and look at conventional payments, Bitcoin and ‘crypto’ look ever cleaner. According to the International Compliance Association, financial crime overall accounts "for a shocking 3.6% of global GDP", or around $3.6 trillion. Other estimates are even higher: the United Nations has estimated that the scale of money laundering alone could be as high as 5% of global GDP - $5 trillion in today’s terms.
So compared with the traditional financial system, the criminal proportion of Bitcoin and ‘crypto’ transactions looks very low indeed. And in absolute terms it is miniscule, with only a fraction of one percent of all criminal transactions ever going anywhere near a blockchain.
Bitcoin vs traditional payments
This makes sense when you consider how Bitcoin (which dwarfs other ‘cryptos’ in size) works. Functionally, it is a transparent single ledger with all transactions available in perpetuity for anyone to inspect and analyse. At any time and without anyone’s permission, money can be traced backwards through any number of transactions to its origin. According to the US Department of Justice, it “provides law enforcement with an exceptional tracing tool: the blockchain…it provides investigators with ample information about how, when, and how much cryptocurrency is being transferred. Moreover, this information is publicly available; no subpoenas or warrants are required to obtain it.”
Contrast this with the international banking system, a complex web of hidden private ledgers, which – even if you could see them all – would likely not reconcile with each other anyway. In only a few transactions, money can cross myriad jurisdictions (including murky offshore regimes), each with its own separate labyrinth of laws, conventions and regulations. Throughout, all data is concealed, the default position being absolute secrecy. Tracing even a simple fraud often requires the cross-border co-operation of multiple legal bodies, law enforcement agencies, regulators and private financial institutions.
Given all this, it is unsurprising that the proportion of illicit Bitcoin transactions is so low: criminals wishing to obfuscate their activities clearly prefer the opaque complexity of the traditional financial system to the transparent simplicity of the unalterable Bitcoin record.
Bitcoin presents even more inconveniences for big-time criminals. Its comparative lack of size and liquidity versus traditional financial markets means that large transactions stick out like a sore thumb for all to see. Furthermore, contrary to popular misconception, Bitcoin is not anonymous – it is pseudonymous. While names and geographical addresses are not held on its blockchain, Bitcoin addresses are. Techniques such as transactional pattern recognition and on-chain forensics can often link criminals’ wallets to exchanges, which are generally subject to ‘know-your-customer’ requirements just like other financial institutions (moving large sums into or out of Bitcoin usually involves exchanges because that’s where the only real liquidity is).
Criminals shun Bitcoin the world over
Law enforcement’s success using on-chain analytics to trace criminals is not theoretical – it has happened time and time again. Cybercriminals demanding ransoms are typically tripped up by their trail of immutable “digital breadcrumbs”, such as in the 2021 Colonial Pipeline attack. Many of the convictions relating to Silk Road were made possible by tracing Bitcoin transactions back to their instigators, including the site’s founder (prompting Wired Magazine to say in 2015: “If anyone still believes that bitcoin is magically anonymous internet money, the U.S. government just offered what may be the clearest demonstration yet that it’s not”). In 2022, even a criminal who defrauded Silk Road itself of thousands of bitcoins (now worth billions of dollars) was convicted “thanks to state-of-the-art cryptocurrency tracing”, according to the US Department of Justice. A decade after the crime, the perpetrator could not escape the permanent trail left on the Bitcoin ledger.
According to Michael Morrell, who twice served as Director of the CIA, “the broad generalisations about the use of Bitcoin in illicit finance are significantly overstated” and “Bitcoin’s use in illicit activity is relatively limited”. This is likely because, as Morell maintains, analysis of Bitcoin’s blockchain “is a highly effective crime fighting and intelligence gathering tool”.
In short, criminals shun Bitcoin because it’s far too likely to give them away. So while the FT goes on to describe various potential criminal uses of crypto, it has to admit that the scale is small. All it can really threaten is that this scale will increase: for example, “while the proportion of money laundering done in crypto is still relatively low, it is expected to increase rapidly.”
No rationale for this bizarre expectation is given by the FT, nor any explanation as to why it hasn’t already happened. The facts just don’t support it: a full ten years on from Silk Road, criminals – renowned for their rapid adoption of new technology – are still not making proportionally greater use of blockchains. They still (and increasingly) prefer dollars, pounds and euros and the camouflage of the traditional financial system. We see no reason for this now long-term trend to reverse.
Bitcoin in the fight against crime
Perhaps the most criminal use of Bitcoin is as a smokescreen to deflect attention away from the comparatively dirty and opaque legacy financial system and its expensive and invasive anti-crime measures, which do little to stop criminals, but do a lot to drive up cost, inconvenience and loss of privacy for all law-abiding businesses and people.
Policymakers might conclude that the fight against crime is better served by discouraging traditional payments altogether, and instead encouraging greater use of the simple, immutable and transparent Bitcoin ledger.
By Bitcoms