Cryptocurrency & Crime

Cryptocurrencies have become increasingly popular over the past decade. In order to comprehend what cryptocurrency is, we first have to understand the technicality behind virtual and “real” currencies.

There are two types of currencies in the world: Fiat Currency, is what has been declared as legal tender by a government (i.e., paper or coin money), Virtual Currency, is generally defined as a digital representation of value that can be digitally traded. Virtual Currency is also divided into two categories. Centralized virtual currency can be described as a virtual currency that is backed by a commodity or is issued by a single party that keeps a ledger of the value and balances (i.e., hotel points, airline miles). Decentralized virtual currency, means that no person or entity keeps the ledger. The ledger is held on the blockchain and continuously updated by thousands of voluntary computer nodes around the world.

Today, there are more than 6.000 different cryptocurrencies in the virtual world. Bitcoin is the original and most dominant cryptocurrency, which was first utilized to buy a pizza in 2010. They are notorious for lucrative profits and strong increases but also sharp falls. The unregulated market comes with a significant amount of volatility, which makes it unstable. An example of this volatility is the sudden rise in cryptocurrency market cap in 2017, reaching almost $1 trillion. Prior to this increase, the private sector ignored the cryptocurrency market. The sudden rise caused the private sector to invest in cryptocurrency and the public interest to peak.

What is the connection between Cryptocurrency and Crime?

For criminals, cryptocurrency was not new. These virtual currencies had long been used by criminals to facilitate illicit activities and criminal behavior. Anonymity is what criminals seek while trading illicit goods or services throughout the internet. Cryptocurrencies provide this by encrypting the sending and receiving parties and sending online payments from one party to another without going through a financial institution or a government.  Cryptocurrency crimes include money laundering, child pornography, child exploitation, terrorism, funnel accounts, exit schemes, tax evasion, theft, human trafficking, drug trafficking, etc.

Laundering dirty money via cryptocurrency is notorious among criminal groups. There are a couple of ways to do this. If someone is selling drugs and receiving payments in Bitcoin, they will have to turn it into cash at some point in order to spend that money. Bitcoin ATMs provide cash in exchange for Bitcoin. However, they require a government-issued ID and limit the daily cash a person can withdraw.  They can buy real estate, a vehicle, a yacht, etc. from someone that accepts Bitcoin. They can then sell these assets for cash or keep them for personal use. Peer-to-peer (P2P) exchange websites are also being utilized for money laundering schemes. A person can list their Bitcoin for sale on these websites and receive cash or wire. Sending Bitcoins to a gambling website and cashing out the proceeds is another method of money laundering.

Criminal Use of Virtual Currencies on the Darknet

Darknet is the encrypted network built on top of the existing internet. In order to access it, special software and tools like TOR (The Onion Router) must be used to prevent tracking. Silk Road, one of the first and largest dark web marketplaces utilizing Bitcoin, was created by Ross Ulbricht in 2011. It was later seized by US federal law enforcement for providing illicit services. There is concrete evidence of child pornography and child exploitation materials being distributed on the Darknet in exchange for cryptocurrencies. These dark activities include child labor, child slavery, the sale or illegal adoption of children for economic gain, using children for distributing illegal materials or drugs, the recruitment of child soldiers, etc.

Funnel accounts are utilized consistently in human trafficking as well. Different smugglers send money to a person that has a legitimate account in a financial institution. Then, the money gets removed quickly from that account and smuggled out of the country or laundered using different methods.

Cryptocurrency and Terrorism

The financing of terrorist attacks with cryptocurrencies and virtual payment services has been discovered in a variety of incidents. The 2016 Jakarta attacks were allegedly financed by cryptocurrencies, militants and terrorist activities were paid by Bitcoins via virtual payment services. In 2017, a US citizen was charged with multiple counts of money laundering and bank fraud attempting to transfer bitcoins and other cryptocurrencies abroad in order to support the Islamic State terrorist group. The Charlie Hebdo attack in 2015 was funded by Al Qaeda in the Arabian Peninsula through Bitcoin.

Cryptocurrency Fraud and Theft

Ponzi scheme is one of the most common fraud activities we encounter nowadays. Exit schemes are similar to Ponzi schemes, where money is collected from investors and a high percentage return is promised in a short time. After a pool is formed, the initial investors get their money back, but as new investors come, the system becomes unable to return itself and the company goes bankrupt. This system collapses when there are no new investors and/or there are no funds to pay the returns of previous investors. Initial Coin Offering (ICO) is a popular method for an Exit Scheme. The company offering the ICO receives investment from all over the world, and they guarantee an x amount of return. Then the company fails to make these returns and collapses.    

Last but not least, cryptocurrency theft is one of the easiest methods for criminals to make illicit gains. There are a couple of ways for people to steal other people’s cryptocurrencies. Keyloggers are malicious software that records all the keystrokes that the user makes. Then, this data is used to exploit the wallet of the user. Phishing attempts are traditional ways to gain access to someone’s wallet. A fake log-in screen where the user types in their username and password can result in the loss of their cryptocurrency. Wallets can also be hacked by perpetrators who exploit the weaknesses in the coding mechanism of the wallet and use it to their advantage to steal cryptocurrency.

Awareness is crucial to ensure personal security in Cryptocurrencies

The popularity of cryptocurrency among people and the evolution of cryptocurrency crimes are in a positive correlation. Especially nowadays, coins have become a part of our daily conversations. In order to be on the safe side and not become a victim of a cryptocurrency crime, we are obliged to take precautionary measures. A good start might be investing through popular global exchange platforms rather than recently created ones. Thodex and Vebitcoin cases in Turkey have caused a loss of public trust in local cryptocurrency exchanges. Therefore, it is imperative to maintain personal virtual security by using appropriate firewalls and anti-virus programs, keeping the passwords and sensitive information in a secure place, and making logical decisions on where to invest.

Erkut Çakmak | Senior Specialist / Corporate Security