OSINT Blog / Post

June 19, 2024

Cryptocurrencies: The Evolution of Criminal Funds

In the absence of effective regulation, the criminal use of cryptocurrency is accelerating. Whilst the scale of the criminal use of cryptocurrencies is difficult to determine, it was estimated to be roughly $14 billion worth of transactions in 2021. $14 billion represents only a small share of the overall cryptocurrency market, however, this figure demonstrates a significant utilization of digital currency to support criminality.

Once linked almost exclusively to cybercrime, criminals now rely on cryptocurrencies to obfuscate money flows when laundering funds, as a means of payment for illegal goods and services, and to facilitate fraud. 

Criminals utilize cryptocurrencies to launder profits from virtually every existing crime type. Law Enforcement Agencies have identified criminals using cryptocurrencies to launder existing digital funds and funds held in fiat currencies. Criminals are also increasingly utilizing cryptocurrencies for human and drug trafficking. Large-scale money laundering networks also offer their services to less technically able criminal actors.

Similarly, cryptocurrencies facilitate investment fraud. Fraudsters create websites to scam customers into making fictitious cryptocurrency investments. Some fraudsters also operate call centers to offer investment opportunities to potential victims. Many consumers have a limited understanding of the concepts involved in cryptocurrencies and blockchain technology and can be convinced to invest to ‘get rich quick’, leaving them vulnerable to scams.

Additionally, criminals also utilize cryptocurrencies to send and receive payments. When buying and selling illicit goods and services, cryptocurrencies can enable criminals to conduct their transactions away from the eyes of law enforcement. Goods and services may include ransomware payments demands or drugs and child sexual abuse materials (CSAM) offered on dark web marketplaces. The Department of Homeland Security’s Immigration and Customs Enforcement unit has estimated that between 80 and 90 percent of Dark Web sales they observe are related to illegal drugs.

Criminals utilize cryptocurrencies because unlike fiat currencies and online banking, digital coins offer decentralization, pseudo-anonymity, and transparency. Cryptocurrencies are decentralized because their administration takes place via a peer-to-peer network rather than through any single institution. Cryptocurrencies enable coin holders to remain pseudo-anonymous because they utilize hashes of public keys to identify users rather than usernames or account numbers, separating coins from the real-world identities of their owners. Cryptocurrencies also offer transparency because all transactions are recorded on the publicly available blockchain, meaning criminals can conduct due diligence.

The law enforcement response to the criminal use of cryptocurrencies has improved as increased regulation demands service providers and platforms capture more information on users and transactions. However, money laundering networks specializing in large-scale money laundering as-a-service have adopted cryptocurrencies and provide their services to other criminals to avoid these increased regulations.

Cryptocurrencies are only pseudo-anonymous because each transaction is logged in the blockchain, a transactional database that records and shares data across multiple data stores. The majority of cryptocurrencies exist on permissionless blockchains. Permissionless blockchains are accessible by everyone without any approval, making transactions traceable. However, privacy-focused coins like Monero are utilized by criminals as they enable anonymous transactions by hiding both the sending and receiving addresses of the involved parties. Other cryptocurrencies exploit existing regulatory gaps between jurisdictions to circumvent oversight and government authorities. The cryptocurrency industry remains a decentralized network with no central administrator and therefore despite regulation efforts, anonymized activity can continue.

Holding proceeds in digital coins is not a long-term solution for criminals who must, at some point, convert their gains to traditional currencies. Cryptocurrency exchanges are financial service platforms that enable individuals to purchase and convert cryptocurrencies. In many jurisdictions, regulations have been introduced into cryptocurrency exchanges. Due diligence requirements require cryptocurrency service providers to capture the personal information of cryptocurrency holders. 

To avoid these regulation techniques, criminals have devised new multi-step methods to conduct cryptocurrency transactions. These multi-step methods enable criminals to conduct transactions without detection by ensuring cryptocurrencies do not flow straight from wallet to wallet.

Law Enforcement Agencies have also identified several obfuscation methods and countermeasures that criminals use. To guarantee the continued use of cryptocurrencies, criminals use several techniques and criminal-run services to remain anonymous and prevent disruption by law enforcement agencies. 

Peer-to-Peer (P2P) trading enables criminals to trade cryptocurrencies without an intermediary. By trading without an exchange, the risk of identification is reduced. When P2P trading, transactions are not protected like through an exchange, meaning one party may not trade as agreed. Independent professionals and groups have emerged as unofficial currency exchanges, facilitating contact between parties for a percentage of the transaction value.

Crypto-swapping services enable criminals to convert coins into other digital currencies. Transactions made through crypto-swapping services often convert well-known coins into less well-known ones or privacy coins, making them difficult to trace to their owners.

Decentralized Finance, also known as ‘DeFi’ converts cryptocurrencies into other digital coins rather than the fiat currencies other exchanges offer.

Cryptocurrency mixers conceal transactions by mixing different funds belonging to many individuals. The mixers move the funds through multiple wallets and transfer the currency back to owners through mixed coins, making the funds difficult to trace.

Non-fungible tokens (NFTs) enable criminals to purchase intangible items that hold high value. Criminals can self-launder their money by purchasing an NFT and reselling it to themselves through different digital accounts to create a record of sales on the blockchain. When the criminals later sell the NFT to a genuine buyer, their funds appear 'clean'.

Gambling platforms that accept cryptocurrencies also enable criminals to conceal the profits of crime. Criminals buy credit or virtual chips on these gambling platforms using cryptocurrencies, which they then cash out again after making small bets. 

The criminal use of cryptocurrencies will likely continue to grow, with increasing levels of cybercrime and criminals relying increasingly on money laundering processes in the blockchain. To disrupt this activity, investigators will be required to focus their efforts on understanding and targeting the use of cryptocurrencies by criminals.

Skopenow is an analytical search engine that uses social media, open web, deep web, and dark web data to generate actionable intelligence. Investigators utilize Skopenow to investigate cryptocurrency-linked crimes, including organized money laundering, fraud, and dark web transactions. Utilizing computer vision and behavioral analytics, Skopenow identifies high-risk behaviors and hidden connections through addresses, vehicles, social media, court records, and image recognition. Sign up for a 7-day free trial of Skopenow at: https://www.skopenow.com/try.