Money laundering is the practice of trying to obfuscate the true source of a sum of money.
In the legacy financial system, this is often achieved by making the ill-gotten funds flow through shell companies or loosely regulated banks.
While most money laundering worldwide is carried out in fiat currencies (like USD or EUR), the emergence of Bitcoin and private cryptocurrencies has opened the doors to a wide variety of new money laundering methods.
Throughout this piece, we examine how much Bitcoin has been laundered to date, the most common Bitcoin laundering techniques, some major cases of money laundering involving Bitcoin, and common misconceptions.
Note: This research piece is purely for educational purposes and CoinDiligent does NOT support or encourage money laundering.
How much money is laundered with Bitcoin?
It is estimated that $2.5 Billion worth of Bitcoin has been laundered to date.
How does Bitcoin money laundering work?
The most common ways to launder money with Bitcoin are by using Bitcoin Mixers, Privacy coins, Bitcoin to Cash exchanges, and private investments or services.
Contrary to popular belief, Bitcoin is not actually anonymous and every single Bitcoin transaction is publicly viewable on the Bitcoin blockchain.
Hence, criminals need to make use of a variety of techniques in order to obfuscate the source of funds.
Also often referred to as “Bitcoin tumblers”, Bitcoin mixers are tools that make the origin of Bitcoins hard to trace by creating a chain of transactions that mixes Bitcoins with the Bitcoins of dozens of other people.
So, if a criminal had 1 BTC that he wanted to launder, he would first send that 1 BTC to the Bitcoin address of a Bitcoin Mixer.
The Bitcoin mixer then splits up that 1 BTC in multiple pieces (for example: 0.2 BTC, 0.3 BTC, and 0.5 BTC) and sends them through multiple different addresses that the mixer controls.
After all the transactions are completed, the BTC is automatically returned to the criminal, minus a small fee that the mixer charges for its services.
Bitcoin mixers are one of the most popular ways to launder Bitcoin, which makes them a major target of law enforcement agencies.
One recent example is the shut-down of BestMixer.io by Europol. The agency claims that the Bitcoin mixer laundered 27,000 Bitcoin (valued at over $270 Million), since its launch in May 2018.
Although Bitcoin is not anonymous, there are coins which are fully focused on privacy. Transactions or address balances on coins like Monero or Grin are impossible to trace, which makes them a viable tool for criminals to launder funds.
However, before being able to use privacy coins to hide the origin of some funds, the criminal needs to obtain the privacy coins first, without revealing his identity in the process of doing so.
The most liquid market for privacy coins like Monero and ZCash are the exchanges Binance and Bitfinex. However, both exchanges require all their users to verify their identity, which discards them as an option.
Hence, criminals have to resort to decentralized exchanges like Bisq, which do not require their users to verify their identity. On Bisq, a criminal can easily deposit the Bitcoins that are to be laundered and put up a buy order on the XMR/BTC market (Monero/Bitcoin).
Once his buy orders for XMR are filled, he can withdraw the Monero to a Monero address and then sell that Monero for BTC or USD on any major cryptocurrency exchange without the risk of getting the funds traced back.
That said, at the time of writing there are no decentralized exchanges with comparable trading volume to exchanges like Binance or Bitfinex.
Therefore, criminals cannot use them to effectively launder larger sums of Bitcoin.
One of the latest publicly known criminal cases involving privacy coins happened in 2018, when a criminal group kidnapped the wife of billionaire Tom Hagen and requested a $10 Million ransom, paid in Monero.
Anonymous Bitcoin to cash exchanges
It is no secret that physical cash is the most anonymous form of money that exists. Dollar bills leave no trace and can be easily hidden.
Hence, some criminals chose to launder their Bitcoin by attempting to exchange it directly for cash in a P2P trade.
Back in the day, these trades could be easily made on Local Bitcoins, an exchange which enables anyone to buy or sell Bitcoin with cash by meeting up with vendors or buyers in person.
However, nowadays Local Bitcoins is not a viable option anymore as the exchange recently implemented mandatory identity verification for all its users.
That said, just because Local Bitcoins closed its doors to criminals has not stopped this practice from happening.
Exchanges like Bisq or local.bitcoin.com can still be used to sell Bitcoin for cash, without any identity verification whatsoever.
One recent example of this method in action was highlighted by the charges pressed against William Green for supposedly helping his clients convert over $2 Million worth of Bitcoin into cash.
Since the individual did so without a money transmitter license, he now faces a potential $250,000 fine and a 5-year prison sentence.
Private investments and services
Finally, the last common strategy to launder money with Bitcoin is through private investments or by offering “services”.
For example, if a criminal wanted to launder a large sum in Bitcoin, he could create a company that offers “consulting services” in exchange for Bitcoin.
Now, he pretends to be a client for his company and sends payment in the dirty Bitcoin. Those Bitcoin are now “income” for the consulting firm and the criminal can cleanly withdraw them as dividends from the company.
While there are no publicly known cases of this Bitcoin laundering scheme, there are theories that this is what Block.One might have done in its 1-year-long EOS ICO, in which it raised $4 Billion in crypto from anonymous investors.
Cases of Bitcoin money laundering
Some of the largest publicly known cases of Bitcoin laundering include the Binance hack, BTC-e exchange, QuadrigaCX exchange, and BestMixer.io.
Although Bitcoin has indeed been used for money laundering in the past years, publicly known cases are much rarer than one might think.
In early 2019, cryptocurrency exchange Binance got hacked for 7,000 Bitcoin. At the time of writing, those Bitcoins are worth over $80 million.
Although no user funds were affected as the exchange paid for the loss from its own pockets, the hack sent a shockwave through the whole space.
Almost immediately after the hack, the hackers started moving the funds around between various addresses in an effort to obfuscate the origin of the funds.
However, every single transaction was monitored by blockchain analytics firm CoinFirm.
The firm kept track of the stolen coins and even identified that some of the addresses used in this process belonged to ChipMixer, a major Bitcoin transaction mixer.
After multiple weeks of mixing the stolen Bitcoins, the hackers sent several small amounts to cryptocurrency exchanges.
These transactions included a 5.98 BTC transfer to Kraken, a 0.12 BTC transfer to Huobi, and a 0.29 BTC transfer to Luno.
This was likely an attempt by the hackers to see if the coins would be recognized, before transferring a larger amount.
Needless to say, the exchanges were informed of the origin of the coins and immediately confiscated them.
Founded in 2011, BTC-e was a major cryptocurrency exchange until the US Government seized the website in July 2017.
Throughout its 6 years of operations, users of the exchange moved over $290 Million worth of Bitcoin in 21,000+ transactions.
While it is still uncertain what percentage of those transactions were fraudulent, the investigators of the case stated that:
“A significant portion of BTC-e’s business was derived from suspected criminal activity.”
Among many other crimes, BTC-e is suspected to have laundered a portion of the Bitcoin stolen in the Mt. Gox hack back in 2013.
BTC-e founder, Alexander Vinnik, was arrested in mid-2017 by US authorities while vacationing in Greece and now potentially faces 55 years in prison.
QuadrigaCX was a major Canadian Bitcoin exchange serving clients worldwide. On January 2019, the exchange’s CEO Gerry Cotten suddenly died on a trip to India from Crohn’s disease.
Supposedly, Mr. Cotten was the only individual with access to the company’s $137 million worth of cryptocurrency that it held in “cold storage”, meaning that the exchange’s users lost access to most of their funds.
However, some skeptics question the validity of this story due to the relative ease with which a death certificate can be faked in India.
Further, new information also suggests that the founders of QuadrigaCX were operating an intermediary for Liberty Reserve, a cryptocurrency system that seems to have been used by criminals to hide ill-gotten funds.
Investigations are still in progress, but based on current findings, it is not unlikely that the exchange operator attempted to launder a big portion of the company’s funds, before faking his death and disappearing.
Founded in June 2018, BestMixer.io was a popular “Bitcoin Tumbler”, which is a tool that mixes Bitcoins in a complex string of transactions in an effort to obfuscate the origin of the coins.
Barely one year after launching, the tool was shut-down by Europol.
The agency claims that the service processed 27,000 Bitcoins (valued at over $270 million), and that it suspects a big portion of the transactions to be tied to criminal activity.
That said, although the website and servers of the service have been confiscated, the founder has still not been identified.
Who launders money using Bitcoin?
Contrary to popular belief, most money laundering in Bitcoin occurs with money obtained in Bitcoins directly.
The most common crimes that launder money using Bitcoin are:
- Cryptocurrency exchange hackers
- ICO scams
- Cryptocurrency exchange exit scams
- Phishing scams
- Funds from extortion/threats
- Darknet merchants
There are no publicly known cases of criminals converting fiat currency (like USD) into Bitcoin in order to launder the funds.
Comparing money laundering in US Dollar and Bitcoin
Mainstream media often frames Bitcoin as a currency which is largely used for money laundering, while ignoring that every year about $1 Trillion are laundered in fiat currencies, a figure that dwarfs the total money laundered in Bitcoin to date, by 400-fold.
In April 2019, a scandal came to light where “Danske Bank” was found to have made over $224 Billion in suspicious transactions of Russian money between 2007 and 2015, a sum almost 100 times larger than what has been laundered with Bitcoin since its inception.
Further, every single one of the 10 largest banks in the EU and 18 of the top 20 banks have been fined with money laundering.
In fact, money laundering among banks is so common, that major banks calculate money laundering fines into their yearly operational budget since in many cases the fines are substantially lower than the revenue generated from laundering funds.
Common misconceptions about money laundering with Bitcoin
Many journalists have written stories outlining how Bitcoin facilitates unprecedented money laundering.
Further, in mid-2019, Treasury Secretary Steven Mnuchin went as far as saying that the US Dollar is not used for money laundering and that he will ensure that Bitcoin does not become the equivalent of Swiss-numbered bank accounts.
However, when looking at the statistics, it becomes apparent that many of the narratives related to Bitcoin money laundering are in fact false.
“A lot of money is being laundered with Bitcoin”
Only about $2.5 Billion have been laundered with Bitcoin since its inception back in 2009.
This is significantly smaller of what single banks have been discovered to have laundered, in a single year.
“Bitcoin enables unprecedented money laundering”
Every single Bitcoin transaction is permanently recorded in the Bitcoin blockchain and publicly viewable.
Contrary to popular belief, Bitcoin transactions are not actually anonymous.
This makes characteristic makes it significantly harder to launder Bitcoin, than a fully anonymous form of money like physical US Dollars, which do not leave any record of transactions.
“Bitcoin is mainly used for money laundering”
In 2018, the Bitcoin network settled over $400 Billion in value.
That is 160 times larger than the total amount of Bitcoin laundered to date and shows that money laundering constitutes a negligible fraction of the Bitcoin economy.
“Bitcoin laundering cannot be prevented”
Cryptocurrency exchanges can prevent money laundering by implementing a basic KYC/AML procedure where users need to verify their identity and submit proof for the source of the funds.
In fact, most major cryptocurrency exchanges like Binance, Coinbase, and Bitfinex, are already adhering to that procedure, making Bitcoin money laundering increasingly hard.
Alexander has worked in community growth for multiple cryptocurrency companies. He is now the Sales and Operations Manager for CoinDiligent. In his free time, he writes articles sharing his industry insights. You can get in touch with Alexander on LinkedIn.