Former SEC Director of Internet Law Enforcement: Cryptocurrencies Cause Exponential Growth in Crime

Blockchain's Most Prominent Use - Cryptocurrencies and DeFi - Cryptocurrencies, DeFi and the rest of Web3 form the basis of criminal tools beyond imagination.

For criminals, the regulatory vacuum of cryptocurrencies allows them to make dangerous mistakes never before possible.

Please don't retort with the usual "so what doctrine" of what about fiat money, is fiat crime worse? This is a flawed argument and a weak form of argument.

Yes, plenty of criminals use fiat currency to commit crimes (I should know, I've spent nearly 20 years investigating and prosecuting financial crime). ** But cryptocurrencies have grown into a killer app for criminals, unleashing an unprecedented wave of cryptocurrency crime. The scale of crime in the cryptocurrency space is orders of magnitude larger than that in traditional finance. **

In fact, the carnage of investors is not the only consequence of the global social spread of cryptocurrencies. The dire externalities of cryptocurrencies are even more damaging on a global scale. Cryptocurrency has grown into a killer app for criminals, which is dangerous for everyone around the world.

Cryptocurrency and Ransomware

Take the crypto crime of ransomware, for example. Perpetrators of ransomware attacks require encryption to unlock corporate IT systems and data that the attackers secretly encrypted.

By collecting cryptocurrency (usually Bitcoin) in ransom transactions, ransomware attackers can not only hide their tracks and identities, but also carry out their plans from anywhere in the world. But ransomware would not exist without Bitcoin.

Cryptocurrency and other crimes

Traditional crimes have also grown exponentially due to cryptocurrency, including:

• Drug dealing;

• terrorism financing;

• human sex trafficking;

• money laundering;

• Countries such as Russia, North Korea and Iran use cryptocurrencies to move funds outside the financial system, thereby evading sanctions;

• Assassins and other killers seeking payment for their murder services;

• a range of other financial crimes

North Korea is a particularly egregious playground for cryptocurrency crimes. North Korea's cryptocurrency hack is paving the way for a nuclear apocalypse. North Korea has quietly become a cryptocurrency superpower. It stole billions of dollars in bitcoin and ethereum and diverted the profits to its nuclear weapons program.

Blockchain transparency doesn't make catching criminals any easier

Meanwhile, U.S. law enforcement is often incapable of investigating, let alone prosecuting, cryptocurrency-related crimes.

Accordingly, the U.S. Department of Justice recently reported that criminals are using encryption technology to innovate internationally, claiming that encryption technology has decentralization and anonymity functions.

As such, the cross-border nature of digital asset technology requires cooperation with foreign law enforcement in the law enforcement process, creating extremely complex and sometimes impossible challenges in identifying, apprehending, extraditing, and prosecuting cryptocurrency criminals.

Cryptocurrencies remain a terrible plague, unleashing a wave of high-tech crime on an unprecedented scale and posing enormous challenges for law enforcement to track.

The harsh reality, at least for now, is that most criminals who use cryptocurrencies to commit crimes will likely never be caught, and their ill-gotten gains may never be recovered.

Those who spread the “myth that crypto transactions are easy to trace” are still wrong.

**First, if cryptocurrencies were so easy to track, tens of thousands of ransomware attackers would be caught. ** But the reality is that very few people have ever been identified, let alone arrested, charged, extradited and brought to justice. Too many cryptocurrency-related tools exist to mask and disguise crypto transactions.

For example, FinCEN announced in November 2022 that U.S. financial institutions spent nearly $120 million on ransomware payments in 2021, more than double the amount spent in 2020, and that of the 1,251 ransomware-related payments, four Three-thirds were apparently paid to Russian criminal gangs. If cryptocurrencies were so easily traced, the identities, whereabouts and details of ransomware payment collectors would be known, and prosecutions would follow. But that rarely (if ever) actually happens.

**Second, while crypto payments (if not masked or properly laundered) may in some cases provide a chain of information about where the crypto is going, the chain cannot identify to whom the crypto is going. **

**Finally, even in the best-case scenarios of cryptocurrency tracking (which are rare, require significant effort, and only work under certain circumstances), the identity of the actual holder is usually obtained by subpoena, Found through search warrants, arrests, etc. ** This is not an easy task when individuals and entities residing in countries other than the United States not only confront U.S. law enforcement efforts, but even deny service. (For example, in the SEC/Terraform case, Terraform and its founders continued to fight the SEC's subpoena despite a detailed ruling forcing them to do so.)

Accordingly, the U.S. Department of the Treasury pessimistically pointed out in a report titled "Assessment of Illegal Financial Risks in Decentralized Finance" on April 6, 2023:

“There are some limitations to relying on public blockchain information tracking to reduce illicit financial risks in the DeFi space. First, as mentioned above, data on public blockchains is anonymous. Although regulators, law enforcement and public blockchain companies In some cases transaction participants can be identified, but in other cases they may only have the participant's wallet address without additional identifying information. Also, users can obfuscate public blockchains by using mixers, cross-chain bridges Second, blockchain tracking and analysis usually requires the initial identification of illegal transactions or addresses as a starting point, although new tools can identify potentially suspicious activities based on the blockchain; third, key activities in DeFi services may occur Off-chain, there are challenges in locating and obtaining this data.”

Mixer and Tumbler

Unfortunately, cryptocurrency laundering tools other than mixers and tumblers continue to have new, more effective iterations, continue to be popular, and continue to exponentially increase the suite of crypto-stealth tools, including:

**- Nested and unregulated cryptocurrency exchange. ** The United States lacks regulation on digital asset trading platforms. These so-called Web3 trading services pose a huge threat to investors and extend to money laundering. Criminals can maintain accounts on various popular cryptocurrency trading platforms, allowing customers to use these accounts to trade. Nested exchanges offer instant access to all features without even KYC requirements, marketing directly to criminals. For example, according to a recent CNBC report, the main way criminals in the crypto world launder money is by sending digital assets over the blockchain, bypassing centralized services that can track and freeze transactions. They use so-called cross-chain bridges to achieve this, and the dollar amounts involved are getting larger and larger. A special cross-chain bridge called RenBridge has been used to launder money involving at least $540 million in cryptocurrencies since 2020, according to new research from blockchain analytics firm Elliptic.

**- Privacy coins such as Monero (XMR), Zcash (ZEC) and Dash (DASH)). ** For example, Monero encrypts recipient addresses on the blockchain and generates fake addresses to mask the real sender. It also masks transaction amounts. Privacy coins could undermine existing anti-money laundering laws and be used to finance terrorism, according to an Oct. 8 report by the U.S. Attorney General’s Cyber Digital Task Force titled “Cryptocurrencies: An Enforcement Framework.”

**- Jump chain. ** The U.S. Department of Justice warns that chain hopping is "often used to launder the proceeds of cryptocurrency theft" and involves swapping one person's crypto assets with those of others running on different blockchains such as Bitcoin and Ethereum Make an exchange. In fact, recent research by blockchain analytics and crypto compliance firm Elliptic reveals that cross-chain bridges and decentralized exchanges (DEXs) largely remove barriers for cybercriminals. In an Oct. 4 report titled “The State of Cross-Chain Crime,” Elliptic researchers Eray Arda Akartuna and Thibaud Madelin delved into what they called “the new frontier of cryptocurrency money laundering.” The report concluded that due to the emergence of new technologies such as cross-chain bridges and DEXs, the free flow of capital between crypto assets is more unimpeded. Since the beginning of 2020, cybercriminals have been using cross-chain bridges, DEXs, and token swaps to obfuscate at least $4 billion worth of illicit crypto proceeds, Elliptic reported.

**- Peer-to-peer (P2P) encrypted network. ** P2P decentralized networks allow users to trade cryptocurrencies without an exchange, criminals use unwitting users (money mules) to send funds to other addresses and finally to transactions in countries with few anti-money laundering standards Place. For example, earn-to-play (P2E) crypto games are becoming a popular blockchain application, which poses a high risk of fraud and money laundering. P2E crypto games offer tokens that can be easily sold outside of the gaming environment. Gamers can then sell the crypto money earned in obscure P2E crypto games on centralized or decentralized exchanges for more liquid ERC-20 tokens running on Ethereum, especially stablecoins. Gamers can then convert the more popular tokens into their fiat currency of choice.

**- Gambling platform. ** Crypto casinos are now booming all over the world. Criminals can use online gambling sites to send cryptocurrencies from one country to wallet addresses controlled by criminals in another. So a criminal might buy a chip with cryptocurrency on it, make some transaction, and then "cash out" it to a wallet address controlled by the same criminal, another associate, or a "nested service provider". Illegal Goods The buyers and sellers of both hold gambling accounts with the same provider, they then make player-to-player transfers between the gambling accounts, and the sellers then "cash out" the money as gambling profits, which are profits from the sale of illegal goods. Along these lines, FinCEN is looking at casinos offering sports betting and crypto payment options for potential money laundering concerns.

**- Non-fungible tokens (NFT). ** NFTs can be bought and sold using cryptocurrencies on specialized marketplaces. A recent study by the U.S. Department of the Treasury found that the booming NFT market could be a target for money laundering and terrorist financing looking to “clean up” illegally obtained funds. NFTs can be transferred instantly from one party to another without any geographic boundaries or regulatory restrictions. “For example, a criminal could generate an anonymous NFT, sell it on the blockchain, and then purchase it through an anonymous and unregulated digital wallet containing illicit funds from another jurisdiction. The NFT could end up being sold to an unwitting users who buy NFTs with clean funds.” Money laundering allegations related to NFTs are very common, and there are even malicious allegations related to the NBA NFT marketplace.

**- off-chain. ** The biggest myth in the crypto space is that all cryptocurrency transactions are recorded on the blockchain. In fact, according to anti-money laundering expert Allison Jimenez, “Only a small percentage of crypto transactions are permanently, immutably, and decentralized recorded on the blockchain. Most transactions occur in Off-chain, on-exchange, exchanges keep private ledgers. History has shown us many examples of 'sloppy' or fraudulent record-keeping by cryptocurrency companies."

DOJ and catching cryptocurrency thieves

Yes, the DOJ occasionally catches someone (e.g. finding their password in a laptop under a bathroom popcorn jar blanket), but such arrests and interceptions are rare.

According to the U.S. Department of Justice, the cross-border nature of digital asset technology requires cases to be processed in cooperation with foreign law enforcement partners to locate and collect information involving offshore digital asset issuers, trading platforms, service providers, and other online infrastructure. electronic records and digital evidence; seizing and preventing further distribution of crime-related digital assets; and identifying and prosecuting criminal actors who exploit the anonymity features of Defi and blockchain technology to evade detection.

Likewise, from paying for ransomware in cryptocurrencies to using digital assets to circumvent sanctions and other restrictions, the DOJ is sounding the alarm that cryptocurrencies are expanding into every area the agency is exploring.

Eun Young Choi, director of the DOJ’s National Cryptocurrency Enforcement Team (NCET), recently stated that the DOJ has acknowledged that crypto-related crimes have increased significantly over the past few years:

"We see that cryptocurrencies and digital assets really touch every aspect of the criminal activity we investigate...Essentially, the technology was created so that it doesn't rely on intermediaries and transactions across borders are immutable and irreversible. Law enforcement Departments can freeze traditional transactions, but digital asset transactions cannot do the same.”

** Looking to the future **

Financial pioneers have made our lives better by backing transformative technologies like the internet, mobile phones and cloud computing in large part - and they deserve a 10x profit. But blockchain and encryption are not innovations, nor are they anything else of such significance.

To me, cryptocurrencies are still the wrong solution to the exchange math bubble that doesn't solve America's problems. But it has ushered in an era of unimaginable digital chaos, wreaking havoc and turning victims into perpetrators.

There are two main beneficiaries of cryptocurrencies:

1. Scammers, who market cryptocurrencies to lure investors, especially if those investors are oppressed, inject a predatory affinity fraud element into their schemes (like a check Cash-out services are the same as payday loans);

2. Criminals have used the anonymity of cryptocurrencies to plan a series of devastating crimes around the world.

No doctrine of any kind can confront this grim reality.