Seven years ago, agents from the US Federal Bureau of Investigation broke into a public library in San Francisco to arrest Ross Ulbricht, the brain of the Silk Road. Launched in 2011, Silk Road was the first modern darknet marketplace where anonymous users could use Bitcoin (BTC) to buy illegal drugs, weapons, and other illegal products.
Although the Silk Road was closed in 2013 after Ulbricht’s arrest, many people still use Bitcoin and other cryptocurrencies to buy illegal drugs in darknet markets. For example, a recent Naval Criminal Investigation Service (NCIS) press release said Drug-related investigations involving marine personnel have increased over the past year. Many of these people were specifically caught buying LSD with cryptocurrencies in the darknet markets. The release notes:
“Recent police reports have shown that more and more people are buying illegal substances through the Darknet due to the perceived anonymity of tools like The Onion Router (TOR). They also use cryptocurrencies like Bitcoin. Pay for purchases.”
Although the darknet markets are shelters for tools like TOR that offer anonymity by hiding IP addresses, Law enforcement officials have used new techniques to identify buyers and sellers in these markets. While some cryptocurrency transactions can be anonymous, many are understandable. Michael Meyer, the chief information officer for ArbiSmart’s automated cryptocurrency trading platform, told Cointelegraph that Bitcoin transactions are not as private, although using cryptocurrencies to buy illegal drugs appears safe:
“Despite the transparency associated with cryptocurrencies, Bitcoin is not as private as people think. Companies like Chainanalysis and CipherTrace can provide a lot of details about every transaction, which can ultimately reveal the identity of the wallet owners and the people involved.” .
NCIS has warned Navy personnel of the risks of illegal purchases in darknet markets. NCIS also found that international, federal, state and local law enforcement agencies worked together to infiltrate these markets and to identify and prosecute those involved.
Law enforcement agencies are getting smarter
John Jefferies, chief financial analyst at blockchain analytics company CipherTrace, told Cointelegraph that virtually all darknet market transactions are done with cryptocurrencies. Although this may be the case, Jefferies noted that law enforcement is improving their behavior and said:
“Criminals misunderstand that cryptocurrencies are anonymous or think they can wash them. However, the basics of real-world money laundering now apply to the cryptocurrency world.”
In June 2019, the International Financial Action Task Force (FATF) set a number of traditional banking regulations that will apply in the cryptocurrency sector. These new guidelines, also known as the “travel rule”, offer measures to combat money laundering and “Know Your Customer” in relation to cryptocurrencies. Ultimately, these rules are designed to prevent cryptocurrencies from being used for money laundering. The FATF determined that the travel rule must be a requirement for digital asset service providers to be enforced by June 2020. It seems that it may take longer than expected for the entire cryptocurrency sector to adopt these rules.
However, according to Jefferies, some progress has been made. According to the CipherTrace report on cryptocurrency crimes and anti-money laundering in the spring of 2020, the global average of direct exchange money received on exchanges decreased by 47% in 2019. This shows a minimum of three years for the global exchange of cryptocurrencies, since only 0.17% of the money that will go to the exchanges in 2019 comes from criminal sources. In addition to the travel rule, Jefferies found that CipherTrace created a training program called “League of Defenders” in which students are trained by professionals to investigate cryptocurrency criminal activity:
“It took a while for the program to start, but we already have about 30 students in the training program at a university in Monterey, California that specializes in financial crime management. We also just created a bot to address this To evaluate cases. If law enforcement is better prepared to fight these crimes, this program will help. “
It is also noteworthy that former U.S. Secretary of State for Terrorism and Financial Information, Sigal Mandelker, recently joined an advisory board at Chainalysis, a cryptocurrency forensic company that provides cryptocurrency transaction data to the FBI. and the Internal Revenue Service (IRS). Rumor has it that Mandelker Chainalysis should help to understand how crimes related to cryptocurrency can be properly investigated and to partner with federal officials.
The Silk Road was just the beginning
With the introduction of new methods to combat cryptocurrency crime, new challenges have arisen, many of which are due to the short success of the Silk Road. According to Jefferies, there are still many versions of Silk Road available today. He noted that drug dealers often settle in four or five markets on the Darknet and create their own websites as an alternative to generate additional income.::
“We have seen an increase in the number of new darknet markets. We are tracking hundreds of sellers selling medication online. Our fourth quarter report shows that Russia’s largest market Hydra claims to make 100,000 transactions a day with three million users. “
Jefferies also mentioned that street crime is increasingly related to cryptocurrencies. “”Drug dealers, who often only accepted cash, are now accepting cryptocurrencies, which actually creates some law enforcement benefits.“He said. Jefferies further noted that drug dealers and other criminals may be resorting to cryptocurrencies due to the increase in cryptocurrency ATMs or BTMs that have made cryptocurrency access easier. According to Statista, as of July 8, 2020 there will be U.S. 6,366 Bitcoin ATMs that continue to cause money laundering problems.
Todd Maher, chief compliance officer of consulting firm BitSource AML Solutions, told Cointelegraph that the use of BTM has increased, but has not been shown to fuel criminal activity: “It has not been possible to determine whether these BTMs are used for the purchase of medicinal products because tools are available that can reduce the risk of illegal use“he added:”Due to the audits and clients I oversee, the correlation of Bitcoin purchases with the darknet markets and criminal addresses was minimal“”
Maher also noted that every BTM operator must have a program to combat money laundering and terrorist financing. As a registered financial services company of the Financial Crimes Enforcement Network These providers also need a dedicated compliance officer, an annual anti-money laundering program review, and regular training to ensure that their operations have an acceptable compliance culture. He explained:
“A BTM operation with strict internal controls can reduce a high inherent risk and leave a low residual risk. An assessment of the risk that is carried out in your company with a money laundering policy that addresses these problems is the first step in risk the fight against financial crime. “