New Study Finds Patterns in Money Laundering through Bitcoin

Washington, D.C., January 12, 2018 – Bitcoin gambling sites, “mixers” and European Bitcoin exchange may be the destinations of choice for criminals looking to launder bitcoins, according to a study issued today by the Foundation for Defense of Democracies’ (FDD) Center on Sanctions and Illicit Finance (CSIF) and cryptocurrency analytics firm Elliptic.

Through extensive analysis of a data sample of Bitcoin transactions between 2013 and 2016, CSIF director of analysis Yaya Fanusie and Elliptic’s Dr. Tom Robinson identify trends in the flow of bitcoins from illicit actors to various digital currency exchanges and services. The process is similar to money laundering, but without as many steps.

The report, “Bitcoin Laundering: An Analysis of Illicit Flows into Digital Currency Services,” is the first such study of its kind.

“We discovered several patterns during our research, including how Bitcoin exchanges received the greatest amount of identified illicit bitcoins out of all digital currency conversion services,” said Fanusie, a former CIA economic and counterterrorism analyst. “But they also processed the majority of Bitcoin transactions overall.” He added that the services with the highest proportion of Bitcoin laundering within their platforms were mixers – online software tools that obscure Bitcoin transaction history – and online gambling sites.

The study found that digital currency conversion services based in Europe received the greatest share of illicit bitcoins out of all the identifiable regions — more than five times as much as North American services. However, many services that process illicit bitcoins conceal their locations.

“This study shows that particular services are prone to being exploited to launder proceeds of ransomware, darknet marketplace trade and other illicit activity,” said Tom Robinson, Chief Data Officer at Elliptic. “It also demonstrates the transparency of the Bitcoin blockchain, and the analytical techniques that can be used by law enforcement to trace and apprehend cyber criminals, and by financial institutions to prevent the reintroduction of this dirty money into the mainstream financial system.”

The authors suggest that law enforcement can combat cyber crime by targeting and exposing darknet marketplaces. They further suggest that compliance professionals assessing financial crime risk should take into account flows of funds originating from cryptocurrencies, both directly and indirectly. The risk is particularly acute for those financial institutions that are providing banking services to cryptocurrency businesses such as exchanges.

The report calls on Congress to create a Commission for National Digital Currency Preparedness to address both the risks and strategies of new financial technologies.

Download the full memo here. 

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