Crime isn’t supposed to pay, but sometimes the wages of sin are paid in bitcoin. Last week, Japanese police reported that 2018 saw a tenfold increase[1] of cryptocurrency money laundering. In 2017, Japan’s National Police Agency discovered fewer than 700 instances of crypto money laundering. Last year, they found more than 7,000 cases. What is it about this new asset class, which is enabled by blockchain distributed ledger technology, that makes it so appealing to criminals? And what can be done to keep cryptocurrency clean?
Cryptocurrencies present the world with a radically new way of thinking about value. As a rule, there’s no central issuer like a mint, no printed bills or stamped coins, and no government affiliation. Given these radical differences from traditional money and cryptocurrency advocates’ concerns about institutions and centralization, some uncontroversial and long-established aspects of traditional finance have proven unpopular in the crypto world. One of the most important disputes, and the most central to stopping crime, is over anti-money laundering (AML) and know-your-customer (KYC) regulations.
In addition to stymying money laundering, KYC/AML rules help combat illegal drug trade, halt terrorist financing, and prevent trafficking. Outside observers are sometimes surprised that such measures inspire resistance from the cryptocurrency world, but many of the technology’s earliest adopters believed in full anonymity as a principle. Though absolute anonymity may have a theoretical appeal for some, it may cause more problems than it solves. When cryptocurrency exchanges are hacked, anonymity protects the perpetrators. When the Mt. Gox exchange was hacked in 2014, the hundreds of millions of dollars of “lost” money could be traced to accounts, but those accounts could not be linked to individuals. Similarly, while anonymity can permit bad actors to execute money laundering, it makes price manipulation via pump-and-dump schemes far simpler. By
