Navigating the wild west of crypto trading platforms

By Hazel Davis

How fraudsters use trading platforms for money-laundering


Earlier this month, the Australian Minister of Home Affairs, Peter Dutton, warned that terrorists are using cryptocurrencies to “fund their deadly missions”. Addressing a counter-terrorist conference in Melbourne, he talked about how the anonymity offered by digital and online currencies has enabled criminals to operate outside of surveillance.

This wasn’t much of a surprise to anyone who knows anything about cryptocurrencies or criminals. Back in May European government agency Europol announced it had shut down two of the world’s major dark web marketplaces – Wall Street Market and Silkkitie (which also went by the name of Valhalla).

Europol says it seized more than €550,000 in cash, along with cryptocurrencies Bitcoin and Monero in “six-digit amounts,” data storage, firearms and vehicles. Silkkitie, one of the oldest and best-known dark web marketplaces, up and running since 2013, operated on the anonymous open-source system Tor, which sends internet traffic through a wide range of free, worldwide, volunteer overlay networks (networks running on top of each other) to hide users’ location and usage from surveillance.

In 2017, the US Department of Justice brought a $100m lawsuit against Alexander Vinnik, founder of the BTC-e crypto exchange. Vinnik is currently imprisoned in Greece. During its time trading BTC-e served around 700,000 traders with $296 million and more than 21,000 bitcoin transactions. The platform did a great job of mixing legit business with a "significant portion" of criminal activity.

These marketplaces aren’t unusual, says Ray Walsh, digital privacy expert at digital freedom platform “Some crypto experts feel that around 90 per ent of Initial Coin Offerings (ICOs) were basically just pyramid schemes – hit and runs – designed to fool speculators into investing so that the coin's developers could get rich. For this reason, investing in anything but the core cryptocurrencies is risky.”

However, Walsh adds: “The crypto space is still extremely young and it can be very difficult to ascertain exactly which coins, exchanges, and crypto-services are legitimate.”

Some coins, such as Monero and Dash, are even designed to provide added privacy during transactions using encryption. This makes those coins harder to trace when they are transacted making them even better for criminal purposes.

Walsh compares the current crypto market as “something of a Wild West”, but believes this will change with incoming regulation: “Until new services are proven to be legit and have been given licences by the countries they trade in there is a high risk of being goxed [a reference to MT Gox, the Japanese trading platform that went into liquidation in 2014, blaming hackers for stealing around $473 million of its’ customers money].”

Currently, it’s possible to start accounts on some exchanges without providing identification. “Most exchanges require an ID if you intend to deposit fiat currency and exchange it for crypto-assets,” says Walsh, “However, if all you require is a wallet to transfer crypto funds into, then it is possible to sign up for the account through Tor or a VPN [virtual private network] to conceal your real IP address.”

However, Walsh warns that over-regulation could negatively affect the decentralised nature of cryptocurrencies: “If this were the case, this could damage the sector and drive investors away.”

“On the face of it, crypto offers savvy criminals the opportunity to launder funds across the globe with complete impunity,” says Jill Lorimer, partner in Kingsley Napley’s criminal litigation practice. “By its very nature, the offending is cross-border and the perpetrators are frequently unidentified and out of the reach of UK law enforcement.”

According to a BBC report, there are around 9,000 money exchanges in London alone, handling tens of billions of pounds each year between them. The National Crime Agency estimates that around £100bn is laundered through the UK every year, but it is not known much of this goes through money service businesses.

Lorimer says, the reality is that using crypto as a money laundering haven is becoming increasingly challenging. The Financial Conduct Authority (FCA) is cracking down on crypto exchanges and early next year exchanges will be forced to comply with UK anti-money-laundering (AML) regulations. In anticipation of this, says Lorimer, the top exchanges have already put in place these controls: “The days of being able to freely transfer money in and out of crypto under a shield of anonymity are numbered.”

Moreover, Lorimer says: “Technical advances mean that it is becoming increasingly possible for specialist investigators to trace and ultimately recover stolen funds.”

Other legal tools are being used to access crypto which would once have been out of the reach of victims or law enforcement. This year saw the first UK criminal case in which Bitcoin was made the subject of a confiscation order, after a hacker was ordered to pay compensation of more than £900,000. Lorimer says: “Crypto is no longer the safe haven that it was a few years ago.”

After a crackdown earlier in 2019 by the FCA, HMRC and the Metropolitan Police, 13 people were arrested and £1.5m in cash was retrieved. London-based money service business, Touma Foreign Exchange, was found to have breached AML regulations and handed a record fine of £7.8m. It was found that the exchange had failed to follow risk assessment rules and associated record keeping, policies, controls and procedures and due diligence as well as failing to provide sufficient staff training.

Crypto, it seems, is no longer out of the reach of the law.

FURTHER READING: Australian minister claims crypto currencies fuelling terrorist operations

FURTHER READING: How to choose the best and most secure crypto exchange

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