Measuring crypto-laundering isn't possible, and that's OK.

When it comes to cryptocurrency, there's basically two schools of thought.

First, there's the critics; "Crypto is for Crime", they often lament.

Next come the advocates; "Crypto is terrible for Crime", they respond.

Well the good news is that, whichever camp you're in, this article will have something for you! The corollary of course being... there'll also be stuff you might hate. But whatever doesn't kill you makes you stronger so let's dive right in anyways shall we?

Bottom Line Up Front: 2 key misconceptions mar ALL the public discourse on crypto.

In no apparent order of wrongness, the two offending sentiments are these:

1. That "we know X% of crypto transactions are illegal or illicit";
2. That cryptocurrency should be characterised by / ostracised due to / feared because of financial crime concerns.

Misconception #1 is used mainly by the advocates which is kinda weird to be honest, even if it were true. The Chainalysis reports of yesteryear are responsible in large part, which we'll get to in time, but the argument sounds so enticing. We see where everything goes, so shouldn't crypto be terrible for crime!?

Misconception #2 is used, obviously, by the detractors. The logic works if you contain it in a neat little sequence, too. "Crypto has crime risk, and crime is very bad, and I don't like risks of very bad things, and so I don't like crypto." When you take it to the real world though - because context is a thing that exists - this basically falls apart.

We'll get to both of these but let's start at the start...

Misconception #1 - We can measure the % of Crypto-Crime.

How do you measure the % of anything with so many known unknowns? It's pretty simple actually, you make allowances as much as possible and appropriately caveat your findings.

Or... you gloss over them!

To give them their due before I criticise, Blockchain Analytics firms like Chainalysis , Elliptic & TRM Labs do a wonderful job with blockchain analytics. I'm a fan of all 3 firms, they do great stuff, they work with industry and law enforcement and are highly effective at helping detect, track and prosecute crime.

And, occasionally, they also publish reports on the state of crypto, crime & compliance. This unfortunately is where the trouble begins.

Although technically caveated (for instance in light blue text on a dark blue background, on page 138 of a 140 page report), these studies are CONTINUOUSLY misquoted and largely serve to propagate the myth that all crypto transactions are either pure or impure and that telling the difference between these extreme opposites is an easy and scientifically proven feat.

Let's take a close look at the Chainalysis Crypto Crime Report 2022 (and team, if you're reading, I do actually love your work). Here's their disclaimer though:

That's a fairly strong disclaimer, and I don't blame them, even for hiding it at the back of the report. After all, not many would read something with "THIS IS ALL JUST OUR BEST GUESS" on the cover! The thing is, although they make a lot of quotable statements throughout that lend the impression they hold the great crystal ball into the crypto-verse, they're pretty honest in the VERY FIRST (non-titular, non-table of contents) words of the report, which also happen to quite possibly be the most important qualifying words in the whole report... "cryptocurrency-based crime".

Alas, journalists, non-specialists, and perhaps the wilfully blind all generalise this to the extreme and assume that this means "all criminal transactions involving crypto". And they are wrong.

Let's be really clear here: you can measure cryptocurrency-BASED crime very, very, VERY well, and all the aforementioned firms offer tools to do just that. Imperfect tools - as all are wont to be - but pretty damn great still at measuring what they CAN measure - crypto-BASED crime.

"What's a crypto-BASED crime and why does he keep capitalising that word!?"

Simple. Crypto-based crimes are what I prefer to call 'crypto-native'. Going back to "money laundering 101", we're talking about washing funds to make them look legitimate which stem from something bad you did. That's what laundering is, and for Crypto-native crimes this means that the 'something bad' that generated your ill-gotten gains happened IN the crypto realm.

This is so fundamental, and yet so misunderstood. The blockchain has limitations (like mixers, privacy coins, other exchanges, and both good and bad online marketplaces), but even before those come into play it just can't see what it can't see.

Let's run an example:

If you hack my wallet and steal my Bitcoin, we can see where that Bitcoin goes. The crime happened via crypto, it's crypto-native, we can see where it went (with caveats).

Take a different example though: you sell someone drugs and in return, they send you a Bitcoin. The crime wasn't crypto-native, we can see where it went (with caveats)... but we have no idea that is a transaction with illicit origin.

As far as any observer is concerned, your Bitcoin is clean.

Note that detection IS possible at various stages - it's just not inevitable or even remotely probable. The compliant exchanges (and there are many that aren't) serve a crucial role in monitoring customer transactions, as do banks in monitoring the transactions of their clients before or after an exchange is involved, as do police in following it all up, over, under and through... But the fact is that even if all of this happens, it's the cops that end up telling the Blockchain analytics firms "hey that 2nd transaction up there - wallet to wallet - totally drug dealing!"

Estimates are that more than 95% of money laundering goes through our financial system unfettered, which means no cops telling the exchanges or analytics firms, which means that the incredibly, overwhelmingly vast majority of non-crypto-native crime isn't detected - both when it's in the traditional financial system or in blockchain.

At the end of the day, I'm a massive fan of the work all these blockchain analysis firms do, and Chainalysis have done a MUCH better job in their 2023 report. Quoting them, in the introduction no less (and with the text a contrasting colour!):

we have to keep in mind that this figure doesn’t capture proceeds from non-crypto native crime (e.g. conventional drug trafficking involving cryptocurrency as a mode of payment).?

Wonderful!

So why am I being mean to Chainalysis, you ask? Well, hopefully I'm not - they are amazing in a lot of ways, foremost being identifying crypto-native crimes, and have some incredible people working there and technologies deployed. And if they tell me "X address is bad for Y reason," I'm extraordinarily inclined to agree with them...

But even with their improved 'transparency' in calling out the caveats, there's still crypto dude-bro blockchain evangelist emerging-AI-experts saying "check it out, less than 1% crime, sOoOoOoO much better than traditional finance!!1" with the 2023 report.

That is pure, absolute, unadulterated nonsense. Simply put by a friend of mine: we don't see what we don't see.

Which brings me to the other end of the spectrum...

Misconception #2 - Crime is a reason to eschew Crypto.

Yeah, yeah, I know I've just spent a while talking about how all of the "only X amount" measurements are missing appropriate nuance, and detailed a scenario in which Crypto can easily play a part in disguising and rapidly moving illicit funds. In fact, for the avoidance of doubt, for many fraud and scams and especially ransomware, crypto has actively increased the crime rates & made perpetrators lives easier.

Let's play devil's advocate though. What else can we say was involved in those transactions?

Let's start with non-crypto-native crimes: they all, by definition, start in the realm of traditional finance, and so in some way or another involve financial institutions. Or alternatively, they head back into those same waters.

Cash from a drug deal, precious stones pried from the priceless chandelier in Tiffanys, art, gold - whatever your illicit gain, it has to travel by other means into the blockchain. Let's be fair: every failing of the blockchain to detect this is no more egregious than the failure of every means by which it got there.

What about crypto native crimes? "There's really no getting around that," I hear the haters cry.

Sure, okay, let's ban crypto.

And cash.

And, bear with me here, prepaid Visa and MasterCards.

These are all equally terribly for allowing crime through them and becoming tools in the astute launderer's toolkit.

Don't worry - this isn't purely 'whataboutism' - because I'm making no attempt to say "don't worry about X while Y is happening". Crime through all these things are bad. But the difference is that when people call for a ban on cash, it's resoundingly shouted down as the last bastion of freedom against inevitable tyranny as if we're in the Shire and electronic transactions are Sauron.

And as for gift cards, absolutely the way that the most small scale laundering occurs in the entire world, the conversation is even more lacking... because it doesn't exist in the first place.

The fact is that we make concessions that things can't be perfect - all the time in fact. And while crypto is very far from perfect indeed, it offers benefits, including some unique advantages that go along with it's drawbacks when it comes to combatting crime... and some of the critiques are frankly bizarre.

Context matters, and comparing crypto to other financial services to find it wanting as 'too high risk for crime' immediately is strange, unfair and unreasonable (unless we do it for those pesky prepaid / stored value cards too, I guess)...

To go over just a few points...

• Traceability. This has so many caveats that I'm not going to go into (haha, what a hypocrite!) but the fact is there's definitely more traceability with crypto than with virtually any other transaction type. A card issuer loses track of the funds that go to a merchant, a bank loses track once cash is withdrawn or funds are sent elsewhere, and a remitter really only sees one small part of someone lobbing funds around the Earth. Crypto goes further and, in the many cases where it actually can't, at least identifies what the blocker is, which can usually help tell if it's dodgy or not.

• FinTechs guard the borders. The 'borders' here are the on and off ramps from Crypto to fiat money, and the 'FinTechs' are just Crypto exchanges. I've worked at big banks and FinTechs, and the unsexy truth is that neither are so different to the other as they suppose. Both are (or can be) damn good at finding and managing risk and addressing crime. FinTechs can do amazing things with data and with technology, including mitigating risk really well, and the blockchain is nothing if not technology.

• The "blind spots" aren't anything new. The way that a bank loses track of money passing to a crypto firm is the EXACT same way that a bank loses sight of funds going out in cash at a branch. Or at an ATM. Or at a FinTech. Or out to another bank as a transfer. Or onto a credit card and then out to 50 different vendors a month. Or onto a remitter's platform. Or into a share trading app. Or into a lender's repayment platform. Or a BNPL. Or a gold and bullion dealer. Or to a lawyer's Trust Account. Or to buy a piece of real estate. Or to a managed fund. It's. The. Same. Every. Time. Heck, if you really want to go back in time, it's not that dissimilar to the funds arriving or leaving via cheque - remember those things?!

• Crime's going to happen. If anyone thinks that abolishing crypto (or cash even) will "END FINANCIAL CRIME", I have a bridge in San Francisco to sell you. It's not about playing whack a mole with the products, unless those products are an outsize threat inherently (cough, Tornado Cash, Monero, cough)... and "crypto" as a whole isn't. I think the better solution for those who care about FinCrime (and I'll upset some crypto devotees again here) is to play extremely hardball with the specific features that heighten the risk and undermine the mitigants of crypto. For instance: go hard on Privacy Coins, Mixing Services, and the like. But those are a subset of features, not the whole shebang. The 'blockers' to blockchain analytics firms are neither perfect (for very large scale transactions) nor even necessarily part of 'crypto' itself.

• Specific Crypto Crimes aren't really a thing. As they say, "there's nothing new under the sun". Crypto-native crimes may have happened on-chain, but they mostly weren't invented there. Batman's parents being murdered in an alley doesn't make murders an "alley-only" thing. By the same token, scams are gonna scam no matter the method. Ransomware too. Sanctioned jurisdictions had/have other and better methods before, which will remain after. As will those buying vile illegal material online. As will terrorist financiers. As will launderers. In fact, speaking generally, it's possible that crypto is a net benefit to crime fighting efforts despite the risks, if only we...

• Don't hate - Regulate! Okay, hate if you like, but just know ... there's moderates that like or are agnostic about crypto as well (*waves hello*). And when you call for abolishing something wholesale that a lot of people want, rather than regulating it, you know how you look to us? A fair bit like the extreme advocates on the opposite side of the debate who you deride... And to them, a whole lot like a sworn enemy.

I propose, if you fall into this camp, that you consider joining us moderates! Repeat after me: "I don't personally believe in it and see risks to mitigate, so I think it should be regulated." If we're being really honest, a lot of nay-sayers don't have to learn much new here - they just need to update the last word from "banned..."

It's been a long day, so let's just grab some takeaway(s)

There's a lot to unpack in this article and I've probably been struck from a few Christmas NFT Airdrop lists for writing it. To make that sacrifice worthwhile, I'll repeat the key lessons below:

• Do not fall for the idea that anyone KNOWS how much crime happens in Crypto. We can measure the bits we know quite well, but that's not to say that these transactions are the only bad ones.
• Crypto loses sight of where funds came from or went almost as soon as fiat is involved. This is, ironically, the same concern most fiat institutions have for Crypto... Twinning!
• The caveat emptor that gets dropped so frequently is vitally important - the %'s refer to what's been FOUND, not what's necessarily HAPPENED.
• If someone says "only [whatever] % of crypto is crime according to ABC," tell them you took a survey of all the cafes in the world and concluded that the drink humans consume the most of is coffee. If they say "you don't know what people drink at bars, or at home though", tell them you've got an immutable coffee bean. As they start to back away from you, smile, knowing that it's the exact same logical fallacy but when you reframe it they realise it's crazy.
• Crypto can be attractive to a whole suite of users, including bad guys. That's known. The same can be said for everything. Like, every single thing. Ever. In all of history. Not to say "whatabout" those things, but if you're going to make the argument that crypto shouldn't be a thing, you have to go far further than just "crime risk."
• Crypto bro's cover your ears: crypto becomes "money" through regulated exchanges. Exchanges are FinTechs. FinTechs can be AWESOME at AML and Risk. This is on all of us to encourage.
• Crypto offers myriad benefits as well as vulnerabilities for crime. No it's not perfect. Yet it is still a factor to consider.

And, last but not least... whichever side of this or any debate you're on... criticism is fine, but it's far better when it's honest, fair, and contextualised.

You mightn't be able to convince the other side, but those undecided aren't necessarily swayed by extreme narratives. I've seen absolutely unhinged arguments from both sides of the aisle, and really...

Does your side want to be like them?

Published by Luke Raven, 21/02/2023. Opinions are my own.