BTC Mythbusting: Bitcoin is used by criminals

Myth: Bitcoin is anonymous making it the preferred currency of criminals.

Truth: Every transaction is immutably recorded on the blockchain and publicly available for anyone to view. Using on-chain forensics, it is possible for authorities to track the funding of illegal activity on a blockchain and use that information to capture and prosecute criminals. The use of bitcoin for illicit activity is less than cash on both a total value and percent basis.

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A common argument used by bitcoin detractors is that BTC is often used for illegal activities such as purchasing illicit drugs, financing terrorist activity, extortion, and money laundering. However, the evidence and data show that this argument is not only false, but that its far more difficult to get away with a crime using bitcoin than it is using cash. Before we dispel this long-standing myth, we need to first understand the origins of this misconception. 

There are two root causes for the propagation of the idea that bitcoin is a perfect financial tool for criminals.  The first is a misunderstanding of how the technology works and the second dates back to bitcoin’s early days. Let’s start with the technology.

There is a misconception that bitcoin is anonymous and because it’s thought to be anonymous, criminals can pay for illegal goods or services without their identities ever being discovered.  This is simply not true.  The Bitcoin blockchain is a permanent record of its entire transaction history with all transaction data publicly available.  This info includes the wallet addresses of both the sender and recipient, timestamp, transaction value and other data associated with the transaction.  Wallet addresses do not contain any personal information per se, however, there are still several ways to match a wallet with its owner.  Think of the wallet address as nothing more than a pseudonym similar to an author publishing under an alias or an online profile with a clever username. Should anyone link the public key of your wallet with your real identity, they can prove you made every transaction ever made using that wallet. For example, if you use a regulated exchange that does KYC, all your personal info can be tied to any wallet that has interacted with that exchange and thus its possible connect your real world identity to any transaction involving that wallet. Therefore, bitcoin is not anonymous but rather pseudonymous and there are a number of ways using on-chain forensics to link a user to his bitcoin wallet address.

On to the second cause: a juicy story from the early days of bitcoin.

Before the technology was well understood, there was a period in which bitcoin became a popular currency to purchase illegal goods and services over the internet.  The largest of these underground black marketplaces was called Silk Road. At its peak, Silk Road was processing over $40 million in transactional volume per month which critics still point to as evidence of bitcoin’s role in illegal activities.  The only problem with this argument is that by 2014, the FBI had used on-chain forensics to find, capture and prosecute those involved with Silk Road.  The treasure trove of evidence taken from the Bitcoin blockchain led to 17 convictions including the founder Ross Ulbricht, who was sentenced to life imprisonment without parole.  The whole Silk Road saga is one of the most fascinating stories in bitcoin’s history and if you would like to learn more, there is an excellent book called American Kingpin by Nick Bilton that reads more like a Hollywood blockbuster than a true story. 

Silk Road proved that because every transaction is permanently recorded for anyone to view at any time, it would be foolish for criminals to use bitcoin to commit a crime.  And since those early days, the capabilities of on-chain forensic analysts have only improved.  Companies such as Chainalysis, Elliptic and CipherTrace, which are now valued in the billions of dollars, can use on-chain forensics to track the money flow and connect individuals to private addresses.

Here is the diagram of the actual money trail the FBI used to track the bitcoin transactions associated with Silk Road.  Notice there aren’t any bank accounts, only bitcoin wallet addresses but they can track the coins with extreme precision.

In fact, ask any law enforcement officer and they will tell you that they prefer criminals to use bitcoin rather than cash precisely because it’s much easier to track the flow of money.  Here are a few illustrative examples:

• When the FBI took down Silk Road, it was aided by an international law enforcement operation called Operation Onymous which was formed as a joint venture between the FBI and Europol. The organization’s objective is to target illegal activity on darknet markets and while much of what they do remains secret, a Europol representative did say regarding tracking illegal activity on Bitcoin’s blockchain “The way we do this, we can’t share with the whole world, because we want to do it again and again and again.”

• Kathryn Haun, who spent a decade as a federal prosecutor with the U.S. Department of Justice focused on fraud, cyber, and corporate crime and prosecuted the Silk Road case, said that bitcoin’s permanent ledger provides “digital bread crumbs. There’s a trail law enforcement can follow rather nicely.”

• Former CIA Director Michael Morell, one of the most respected individuals in the intelligence community, authored a report on cryptocurrencies for the Crypto Council for Innovation with two major takeaways.  The first was that the generalizations about the use of Bitcoin in illicit finance are significantly overstated.  The second was Blockchain analysis is a highly effective crime fighting and intelligence gathering tool.  This report also quoted an official at the CFTC who stated that it “is easier for law enforcement to trace illicit activity using Bitcoin than it is to trace cross-border illegal activity using traditional banking transactions, and far easier than cash transactions.”

• After researching Bitcoin in 2018, the Quebec government concluded that Bitcoin transactions are not anonymous and can often be tracked by law enforcement agencies. “Bitcoin is not above the law, nor is it a magnet for illicit transactions; it forms only a tiny part of the criminal money circulating around the planet. The reason, it is less attractive for anyone who wants to make transactions without leaving a trace.”

• According to the US Department of Justice, the blockchain is a powerful forensic tool. “Cryptocurrency…provides law enforcement with an exceptional tracing tool, the blockchain. While the blockchain’s historical ledger will not list the names of parties to transactions, 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.”

• In a testimony before the House Subcommittee on National Security in February 2021, former Assistant Secretary of the Treasury for Terrorist Financing and Financial Crimes Daniel Glaser stated that “cryptocurrencies provide enhanced opportunities in certain ways for law enforcement agencies to be able to trace transactions.”

Those are some consistent denouncements of this myth that bitcoin is the perfect currency for criminals, but what does the data tell us? 

• According to a report put out by Chainalysis earlier this year, the percent use of all cryptocurrencies for illicit activity fell to just 0.34% in 2020. The same report found that the vast majority of illicit activity is related to general scams rather than terrorist financing, kidnapping, or money laundering.  

• According to a report put out by CipherTrace earlier this year, less than 0.5% of crypto transactions were related to illicit activity.

• According to a report authored by Elliptic in December 2020, illicit activity accounts for less than 1% of transactions.

And remember that report issued by former CIA director Michael Morell that was previously referenced, it showed that since Silk Road, the use of bitcoin for illegal activities had fallen dramatically.

More recently, Bank of America released a 141-page research report on the digital asset ecosystem in which they came to similar conclusions as Morell’s report.

Not only is the use of bitcoin for illicit purposes a tiny fraction of all transactions and declining, BTC is used far less on both a percent basis and a total value basis than cash.  A 2020 report by the Society for Worldwide Interbank Financial Telecommunication stated that “identified cases of laundering through cryptocurrencies remain relatively small compared to the volumes of cash laundered through traditional methods.” Estimates of illicit activity conducted through traditional financial intermediaries and with traditional fiat currencies are on the order of 2% – 4% percent of global GDP. By the way, that’s the percent of illegal transactions that we know of.  Very few cash transactions are immutably recorded on a public database for everyone to examine so it’s very likely that the real percentage is much larger.  In fact, the American Institute for Economic Research estimates that up to 1/3 of all US currency in circulation is unaccounted for and likely used by criminals and tax cheats.

Does this mean no one will ever use bitcoin for illegal activity ever again? Of course not.  The point is that it’s a lot harder to get away with a crime using bitcoin than using the legacy financial infrastructure.  So, the next time you read an article or hear a politician claim that bitcoin is used by criminals, remember that all Bitcoin transactions are public, traceable, and permanently stored on the blockchain and that the data shows that bitcoin is used far less often than cash for illegal activities.

More Info on Bitcoin Use in Illicit Activities

• An Analysis of Bitcoin’s Use in Illicit Finance by Michael Morell
• CipherTrace Cryptocurrency Crime and Anti-Money Laundering Report
• Chainalysis 2021 Crypto Crime Report
• Elliptic Financial Crime Typologies in Cryptoassets
• Kathryn Haun’s TED Talk on her experience taking down the criminals involved with The Silk Road

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