We all feel pretty certain that it’s happening. Some people must be using cryptocurrencies for illicit activities, right?
It might even be a smart thing to do. After all, a briefcase only holds about $200,000 worth of $20 bills and would weigh more than 20 pounds.
Now we have proof that criminals are using cryptocurrencies. A paper titled Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed Through Cryptocurrencies? was recently published by a team of Australian researchers.
They found “that approximately one-quarter of Bitcoin users and one-half of Bitcoin transactions are associated with illegal activity. Around $72 billion of illegal activity per year involves Bitcoin, which is close to the scale of the U.S. and European markets for illegal drugs.”
Research started by downloading the entire Bitcoin blockchain. This gave the team a ledger of all Bitcoin activity.
Some Bitcoins were known to have criminal ties. These would be coins seized by the FBI or authorities in Europe and Australia.
“What the FBI did was grab all the Bitcoin that was in the escrow accounts and auctioned it off to the public. We can observe the auction of all those Bitcoins and work backwards through the blockchain to find the actual escrow accounts and see all the users who had money sitting at Silk Road,” one of the authors told news.com.au.
The ledger was combined with other data to create a database of about 6 million Bitcoin users. The data was analyzed for patterns to find how big the average transactions of users were, how frequently users completed transaction and who they traded with.
“[We used] an econometric model that looks for users that are similar in characteristics to those that are known to be illegal, accounting for the fact that our sample is non random,” Talis Putnins of the University of Technology Sydney explained.
High volatility and rapidly rising values have made cryptocurrencies attractive to traders. But, these aren’t characteristics of money consumers will use in day-to-day transactions.
In December, Australia Reserve Bank governor Philip Lowe noted the problems with using crypto for everyday transactions didn’t apply to criminal activities.
“When thought of purely as a payment instrument, it seems more likely to be attractive to those who want to make transactions in the black or illegal economy, rather than everyday transactions,” Lowe said at a conference in Australia.
Now the central bankers of the world have data to support this theory. And law enforcement has a technique that could allow them to catch money launderers, drug dealers and other users of the dark web.