The myth of the crypto criminal: why crime doesn’t like crypto

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Learn Crypto Aug 25 · 9 min read

The myth of the crypto criminal: why crime doesn’t like crypto

In a scene from the 2018 Malaysian film KL Special Force, a police officer questions a man who’s been the target of a crime syndicate. The man then opens a suitcase to reveal what the syndicate’s been after. Instead of piles of cash, as one might expect, however, it contains only a small metallic device.

The man goes on to explain that he sold all his stocks, used the money to buy Bitcoin, and stored it in a hard disk. Cue exclamations of surprise and confusion about what Bitcoin was.

The film was just one of many to feature crypto and Bitcoin, a trend that started soon after Bitcoin gained prominence in a widely-covered bull run in 2013. Like the majority of other screen fiction, Bitcoin seemed to be the choice currency of criminals and illicit activity.

In Dope (2015), kids in a high-crime neighbourhood of California find a way to sell drugs and keep proceeds with Bitcoin. In the series Startup (2016), crime gangs create a new cryptocurrency to launder money and run an underground economy involving drugs and weapons in Miami.

So crypto is full of crime, right?

Perhaps it’s important to point out that these examples of crypto in popular fiction all bear similarities in their portrayal of crypto. They were used to commit or facilitate crime and they made it easier for the criminals involved to commit crime and move their ill-gotten wealth.

But they were also highly inaccurate and misinformed – reminiscent of earlier films that falsely portrayed how easy it was for criminals to hack computers or steal money at will.

Some of these errors are only obvious to people who understand crypto. For example, the “hard disk” in KL Special Force actually appears to be a hardware wallet. And in Startup, the supposedly decentralised cryptocurrency used by the crime gangs is operated from a single computer belonging to one of the leads – not at all how a decentralised crypto works.

Nevertheless, just as films continue to depict tech criminals inaccurately, we can expect popular fiction to continue using inaccurate tropes associated with crypto. In particular, that crypto has a strong association with criminal activity.

The myth of rampant criminality in crypto

The myth of crypto’s close association with crime persists, even among academics. In 2022, David Rosenthal, known for his work at Standford University on digital preservation, delivered a presentation on crypto, branding it as “a waste of energy” and “full of crime”.

Rosenthal insists that crypto has been used for “massive” crime waves that include fraud, theft, tax evasion, and funding of rogue states, what these observations fail to understand is that the scale of crypto crime actually compares poorly to the same criminal activities using other forms of money or currency.

In 2022, for example, ransomware payments (money paid by companies to hackers to return stolen data or access) made with crypto amounted to a mere $16 million, according to blockchain analytics firm Crystal Blockchain. Globally, ransomware payments in the same year were valued at over $400 million. Crypto accounted for less than 1% of that.

In fact, ever since blockchain intelligence firms like Chainalysis started recording data, the percentage of known cryptocurrency transactions associated with illicit activities like money laundering and terrorism financing have been dropping annually.

Chainalysis finds that by the end of 2021, only 0.15% of crypto transactions, representing $18 billion (this was updated only recently; initial findings were $14 billion), were involved in criminal activity. Studies continue to find that the vast majority of crypto use is legitimate. Even if Rosenthal was correct to say that the dominant use of crypto continues to be speculation – something we also refer to in our introductory course on crypto in Learn Crypto Academy – there is no criminal association in trading crypto.

On the other hand, it is worth noting that crime’s downward trend in crypto did stop in recent months, at least, according to Chainalysis in its latest findings, detailed in the Crypto Crime Report 2023.

Much of the 2022 figures do include a huge chunk of value held by three major crypto companies: FTX, Celsius, and Three Arrows Capital. These were among the largest business entities in crypto and imploded spectacularly within months of each other in 2022, amid allegations of fraud. They continue to be the subject of investigation today.

It is important to point out, however, that cryptocurrency itself wasn’t the enabler of fraud in all three companies. Rather, it was bad business practices, mismanagement of investment and assets, and fraudulent leadership that were the enablers of fraud in all three companies. 

FTX’s CEO, Sam Bankman-Fried, for example, was gambling with investor funds in the speculation markets, putting huge bets without the oversight of the board. It also appears that many investors placed huge sums of money into FTX ventures without conducting the necessary due diligence one might expect, trusting instead that Bankman-Fried was a money-making genius.

Money laundering and terrorist financing

Another key factor in the increase in crypto crime numbers was the fact that OFAC launched a massive crypto sanctions programme in 2022, snaring some large targets, including Russia-based crypto exchange Garantex. Garantex on its own accounts for 43% of 2022’s illicit transactions volume.

This meant that, from the view of sanctions, Garantex is believed to act as one of the top money launderers for Russian-based hacker groups and by the same links, is alleged to have helped finance terrorism activities.

One has to note though that the sum of $100 million attributed to Garantex’s money laundering looks relatively small compared to the hundreds of billions of dollars proven to have already been laundered by… traditional banks!

One only has to look at recent statistics of how complicit the banking industry is in money laundering alone (as a type of financial crime). In 2022, there was a 50% increase in anti-money laundering (AML) penalties globally. All in all, some 3,500 AML events were reported, resulting in fines of almost $5 billion, according to Finexus.

The anti-money laundering (AML) penalties at the global scale recorded an increase of 50% in 2022 totaling nearly $5 billion as a result of 3,495 AML events reported.

Of course, all of this isn’t an excuse for crypto – while blockchains are transparent by design, the nature of the industry is centralised and firmly entrenched in the norms of traditional finance, while seemingly enjoying the flexibility of yet-established regulations. The crypto industry certainly has a lot of ground to cover to improve its safety, reliability, and compliance for investors.

While the 2022 numbers do appear to be bad news for crypto’s improving reputation, the one strength of such findings is that illicit activity in crypto can be more accurately estimated when compared to traditional finance. This is because of blockchain’s transparency, as opposed to the opaque and blocked-off systems used by banking and finance across the world.

This transparency is unrivalled by any other type of monetary system and exposes another error Rosenthal makes in his assessment of crime in crypto, which is his belief that a main enabler for crypto is the prospect of anonymity. We now tackle this misconception in the following section.

The myth of crypto as an anonymous form of money

If we view cryptocurrency simply as a digital currency that uses cryptography for security and operates without a central authority, or even beyond the purview of any form of recognised authority, then it certainly seems like a good idea to use it for activities you wouldn’t want the authorities to see.

Certainly, early digital criminals thought so, as Bitcoin was the digital currency of choice for traders dealing drugs, weapons, and other illicit goods using dark web marketplace Silk Road.

Private crypto transactions aren’t anonymous transactions

What was poorly understood then, which translates to the misinformation about Bitcoin that persists today, was that Bitcoin only preserves certain privacies for the user. Unlike any other kind of digital money, anyone could use Bitcoin without registering a single piece of personal information – no name, no identification document, no phone number, no email, not so much as even a username.

In this sense, one could remain anonymous by not revealing their names or persons using Bitcoin.

On the other hand, Bitcoin records every transaction detail permanently and transparently on a very public blockchain that anyone can look up at any time.

Every transaction’s sender, receiver, and amount is written to the blockchain – carrying an unchangeable record that tracks every single unit of bitcoin transferred, in an unbroken chain.

It is this crucial difference in Bitcoin’s architecture (and most of crypto following in its mould) that means that crypto doesn’t actually make you anonymous. Rather, it allows for pseudonymous use of money, protecting much of personal identification privacy, but requiring complete transparency of transaction activity.

Bitcoin transactions saving the day

In fact, Silk Road’s eventual demise in 2013 was only possible because of its use of Bitcoin. In short, investigators were able to recover information on the alleged owner, revealing their Bitcoin wallets. Using simple transaction information available on public Bitcoin blockchain explorers, enforcement agencies were able to track down the guilty parties simply by linking wallets connected by the transactions, and matching location data like IP addresses linked to those transactions.

This method of capture would almost certainly not have been possible with other types of digital currency, where records could be deleted, falsified, or even further obscured.

What’s interesting as well about the entire incident was that the US government’s seizure of Silk Road assets – including Bitcoin – would make it one of the wealthiest governments in terms of crypto ownership.

The myth of new technology as an enabler of crypto crime

As a relatively new technology, cryptocurrency also suffers from the increasingly popular view that technology is the harbinger of dehumanisation. Sci-fi works produced decades ago seem to take on physical forms in our increasingly technological world today, where advancements seem to take away what makes us human.

But this phenomenon of mistrusting technological advancement isn’t really unique to the digital age.

In the late 19th century, the telephone threatened to make delivery boys and horse messengers obsolete, prompting business people and scientists to denounce the technology as a fad.

At the turn of this century, even the Internet was seen by some as a cause of all kinds of social ills: marriage breakdowns, computer addiction, and even pornography. Unsurprisingly, this opinion was often shared by print media (understandably, staring down the barrel of digitalisation) as noted by this 2001 article by The Register.

Just as many claimed that the Internet was full of criminals in the 1990s, many today claim that crypto harbours hackers and scammers at every blockchain corner.

Crime will learn not to like crypto

The truth is, criminals are, in fact, early adopters of technology. Crime syndicates were quick to use the telegraph, telephones, and the Internet as means of communication, long before police caught on. Silk Road was using Bitcoin for years before enforcement even understood how it worked.

As criminals themselves understand that crypto like Bitcoin is wholly unsuited to crime, owing to its transparency, immutability, and widespread monitoring, it is possible that they will move on, or will adopt privacy crypto to stay ahead of enforcement.

That should never be an excuse to prevent the advancement of technology.

Cryptocurrency is a relatively new technology and like any other technology, and like any other tool, can be used for purposes both good and bad.

It is up to crypto users and organisations to use crypto responsibly, and up to enforcement and governments to understand it so they can mitigate its misuse. Most importantly, it is the individual’s responsibility to educate themselves as best they can so they are fully informed and can navigate crypto use safely.

Hopefully, Learn Crypto makes that responsibility a little easier.