Bitcoin: a criminal currency? - icoinic
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Bitcoin: a criminal currency?

It is commonly known that cryptocurrencies are the most liberal and progressive currencies there are, as anybody can participate in the Bitcoin network. No identification or other preventive measures regarding the Anti-Money Laundering Directive legislation (AMLD5) are required. This is one of the main areas of criticism of Bitcoin, but what’s the reasoning behind this and where does the criticism come from? In this blog article the experts of Icoinic will elaborate on the possible criminal aspect of Bitcoin.

The Liberty Currency

Bitcoin is one of the few currencies that is hard to trace, or so the critics say, which would make it an alternative to cash transactions for criminals. From what we know now, it seems like the perfect tool for money laundering or for even terrorist to anonymously purchase the necessary equipment for their heinous deeds on illegal marketplaces such as SilkRoad. On this marketplace all kinds of (illegal) goods and services were sold for bitcoin. Police were able to track these payments and knew the exact amount of volume transacted but couldn’t connect the addresses to real people. This has led to some governments deciding to ban Bitcoin and other cryptocurrencies.

Let’s dive into the reasoning behind this decision. We can distinguish between two types of blockchains, private and public. The main difference between these is that anyone can participate on an open blockchain, while access is restricted on a private blockchain. This means that on a private blockchain, there is more control over who participates in the network, which would make it harder for a criminal to infiltrate and send malicious transactions. There are numerous reasons why its difficult to use a public blockchain for criminal activity.

The first reason is that should one decide to cash out his bitcoin at an exchange, he’ll be identified and the destination of the money becomes known, thus leaving a trace. Another option for a criminal to cash out his bitcoin would be through a Bitcoin ATM, however transporting large amounts of money would not be easy. Spending this would also create suspicion, thus making it unattractive for any criminal.

The second possibility which would make the usage of Bitcoins attractive for criminals is by paying with bitcoin directly. At the moment buying objects of a considerable value with bitcoin is not a realistic option, leaving the criminals with currency they can’t expand. It is likely this will change in the future, but that won’t change the fact that sellers of big ticket items would require identification of the buyer. This leaves a criminal with bitcoin only one option to spend them: small items that can anonymously be purchased online. Unless a criminal is interested in spending his dirty money on Amazon or Alibaba, Bitcoin is in no way a viable option for a criminal, if he wishes to remain undiscovered.

Does private guarantee privacy?

Instead of using public blockchains, criminals could opt for a private blockchain. All information regarding transactions is only known to the validators of the blockchain, thus making it seemingly attractive for those with malicious intentions. At most private blockchains the validators require the identity of those behind the addresses, as well that all information regarding transactions will be known to the validators. These points are major reasons why a criminal wouldn’t use a private blockchain for criminal activities.

The possibility still exists that a private blockchain could be created in which the identity is not required. However, this still leaves the validators with one powerful option at their hands:  they could block certain addresses or even create invalid transactions, allowing them to steal money from certain addresses. If there’s one thing criminals will never let happen, is someone being able to steal their money at any time. This means that in the end private blockchains are based entirely on a vast amount of trust, something which is very rare in the underworld.

Bitcoin: an untraceable currency?

All addresses and payments are fully traceable, although they can’t be linked to a real person because the identity of the address owners are not recorded on the blockchain and must be discovered by the observers. Once a criminal is caught, the address(es) that the criminal used will be known to the authorities involved. This will also enable the authorities to find out which other digital addresses the criminal has been in contact with and they can be ‘blacklisted’. Once blacklisted, the authorities can force the parties involved with transferring bitcoin into cash, such as exchanges, to block all payments from the blacklisted accounts. This can easily be done, as the history of the Bitcoin network is public, thus making it possible to block certain addresses.

Then there is the matter of linkability. Once a transaction is made, the information regarding this transaction becomes public. If the identity of the one(s) behind two addresses is known, if there has been a criminal transaction, then it can be established that the (owners of these) addresses have been in contact. This data will also never disappear, all data on the Bitcoin network is immutable and will never disappear.

A currency of the law

To sum up, Bitcoin is simply not a viable option for those with malicious intentions. There is a considerable risk that the identity of those behind the criminal addresses will be discovered, either scaring away most criminals or allowing law enforcement to catch those who do use Bitcoin by monitoring and analyzing publicly available information. Therefore, how privacy on Bitcoin will be handled is up to regulations per jurisdictions. The number of opportunities is numerous since the underlying data for any policy is available on the blockchain. Future will decide whether governments opt for more control or they let the world decide how to use cryptocurrencies.

Luc Correia Cabrito