Cryptocurrency and money laundering: why understanding fraud is critical


Cryptocurrencies can make it easier for fraudsters to obscure the source of criminal proceeds and are increasingly becoming the preferred currency of cybercriminals, from purchasing illicit goods using Bitcoin as a payment method to ransomware attacks where payments by Bitcoin are demanded. This trend is more prevalent because cryptocurrency offers a combination of anonymity, ease of use and the ability to circumvent international borders and regulations, in essence, to launder the ill-gotten proceeds.

The advanced fraudster or money launderer using Bitcoin may use both Bitcoin mixing services and Bitcoin exchanges. Bitcoin mixers typically provide customers with a newly generated bitcoin address to make a deposit. The Bitcoin mixing service pays out other Bitcoins from its reserve to Bitcoin addresses supplied by the customer after deducting a mixing fee. Some randomness is applied to the frequency and amount of payments/fees to create a guise of legitimacy. Bitcoin mixing services allow fraudsters to conceal the origin of their ill-gotten proceeds, disassociating them from the criminal activities to cash out safely using a Bitcoin exchange, which is designed to convert Bitcoins to spendable money anonymously.


Many crypto assets are volatile and, more likely than not, present a risk for financial institutions as exposures increase. Bitcoin, Ethereum, Litecoin, Dash and other coins can be some of the riskiest assets a bank could hold. So, it is not surprising that regulators are trying to unpack and get a handle on this “virtual currency.” One regulatory body describes crypto assets — which it calls virtual currency — as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value,” other than a representation of the U.S. dollar or a foreign currency. Cryptocurrency is a digital asset that uses cryptography to secure transactions digitally recorded on a distributed ledger, such as a blockchain, in units typically referred to as coins or tokens.

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