Throughout the past decade, a common narrative against Bitcoin from both regulators and many financial institutions has been the supposed utilization of the dominant cryptocurrency by crime syndicates to launder money.
However, with tightening Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations on both crypto exchanges and ATMs, it has become increasingly difficult to settle criminal proceeds using Bitcoin.
Why Bitcoin is a “Money Laundering Machine” Narrative is False
A report from Bloomberg in late 2018 disclosed that relative to legal activity, the involvement of Bitcoin in criminal operations or money laundering has declined substantially.
Lilita Infante, a U.S. Drug Enforcement Administration official, stated that in 2013 when the global interest in Bitcoin was still low, criminal activity accounted for almost 90 percent of all transactions on the Bitcoin blockchain network.
Since then, the utilization of Bitcoin in criminal operations dropped from 90 percent to 10 percent, and speculation on the price trend of the asset dominated most of its use cases.
Fewer criminals are using Bitcoin because of its transparent and peer-to-peer structure. Contrary to popular belief, Bitcoin, by nature, is not anonymous, unlike cash, and the public blockchain network enables anyone to track wallets and transactions.
With major cryptocurrency exchanges like Binance and Coinbase strengthening their internal management systems equipped with KYC and AML, it is virtually impossible to convert Bitcoin to cash without leaving a trace, at least in established markets.
Infante suggested that she actually prefers criminals using Bitcoin because it is easier to track than other forms of money due to the presence of the blockchain.
“The blockchain actually gives us a lot of tools to be able to identify people. I actually want them to keep using them.’’
The Case of Binance and Cryptopia
Recently, a New Zealand-based cryptocurrency exchange Cryptopia was hacked, losing millions of dollars worth of customer funds to an unknown group of hackers.
— Cryptopia Exchange (@Cryptopia_NZ) January 15, 2019
Immediately after the security breach, Cryptopia hackers began to move the stolen funds. Binance was one of the first exchanges the hackers attempted to use to launder the funds.
However, the Binance team, which tagged the addresses involved in the hacking attack, swiftly flagged the transactions, and as soon as the transaction arrived on the exchange, the funds were frozen.
Exchanges like Binance are able to prevent criminal proceeds from being transferred to their platforms because of the emergence of blockchain analytics companies that actively trace wallets containing suspicious transactions.
Binance, for instance, works with Chainalysis, a company established in 2014 that prevents and detects money laundering and fraud in cryptocurrency.
Bitcoin ATMs, which are often considered alternatives to exchanges for criminals, are also not practical in laundering money due to small daily limits ranging from $100 to $1,000.