Working with bitcoin is easy enough, given the wide array of bitcoin wallets and other payment processing tools available today.
However, determining whether incoming bitcoin are tainted by or connected to illicit activity is increasingly challenging. It’s also increasingly important for businesses or banks that want to deal in cryptocurrency while remaining compliant with anti-money laundering/combating-the-financing-of-terrorism (AML/CFT) regulations.
Here’s a look at why assessing the potential association between bitcoin transactions and illicit activity is challenging, and what is being done to solve the problem.
Ever-Evolving Crypto-Laundering Strategy
Detecting illicit activity related to incoming bitcoin would be easy if criminals always followed the same playbook — if they always used the same type of payment channel, for instance, or the same websites.
But they don’t. Criminals’ strategies for hiding illegal activity, or “laundering” bitcoin in order to make it difficult to detect illicit origins, are constantly evolving along with the crypto ecosystem itself. To cite one example, a 2018 indictment by the U.S. Department of Justice reported that Payza, a cryptocurrency exchange, had been used by criminals for six years to launder bitcoin by depositing illegally obtained funds into the exchange, then withdrawing an equal amount of “clean” currency into a different exchange. In this case, attackers took advantage of the fact that Payza operated as a noncompliant exchange, making it easy for criminals to use it as a vector for obfuscating the origins of cryptocurrency.
Similarly, peer-to-peer crypto exchanges like LocalBitcoins, which have proven popular with bitcoin users who seek an alternative to centralized exchanges, also present criminals with an opportunity for laundering bitcoin. Under this typology, as Europol has observed, criminals can use bitcoin networks to launder illegally obtained fiat currency by selling the fiat
