The Big Bugaboo about Crypto and Money Laundering

We keep hearing stories about cryptocurrencies being used for nefarious purposes.

In fact, some people seem to associate cryptocurrencies mostly with child pornographers, drug dealers and terrorists.

Even during a recent Senate hearing, some of the testimony raised concerns that Bitcoin and other cryptocurrencies might usher in a new area of money laundering.

This is not an allegation cryptocurrency advocates should take lightly. Nor is this rhetoric coming from typical “fake news” sources.

Most of it seems to originate from influential institutions like the IMF and U.S. Treasury Secretary. Steve Mnuchin himself said flatly that he doesn’t want “bad people to use these currencies to do bad things.”

We don’t either. But let’s take a moment to conduct …

A Reality Check

First off, where’s the evidence? Even as these claims are thrown around, little or no data is provided to back them. So, I figured I’d do some digging.

One of the most comprehensive studies I found was done in collaboration with a blockchain analytics company called Elliptic.

Their finding: Only about 1% of Bitcoin transactions are related to illegal activities, mainly drug trafficking. They admit that their methodology doesn’t pick up all of the activity and the actual number could be a lot higher. So for argument’s sake, let’s dial up the estimate all the way up to, say, 5% of transactions.

For 2017, that would be about U.S. $21.2 billion, according to

A lot of money? Not quite.

Back in 2009, the United Nations estimated that criminal activity represented about 3.7% of World GDP, and there’s no reason to believe that percentage has changed significantly since then.

So, with world GDP now at about $89.26 trillion, that would imply \an estimated $3.5 trillion is illicit activity. It also means that our $21 billion estimate for Bitcoin illicit activity is a drop in the bucket by comparison.

At most, illegal Bitcoin transactions represent, 0.6% of the total illegal transactions globally. Less than one percent.

Put another way …

For each dollar criminals and terrorists use in Bitcoin, they use at least $167 worth of greenbacks, euros, yen and other fiat currencies.

Real Offenders Go Scot-free

If money launderers use Bitcoin and other cryptocurrencies for just 0.6% of their activities, where do they go for most of the other 99.4%?

The answer: The global banking system!

You can almost hear the launderers saying, “Why bother with esoteric virtual currencies and shady exchanges, when we can just go to banks like HSBC that make the process so much smoother?”

Or how about JPMorgan?

The penalty for the banks: Typically a slap on the wrist in the form of a fine that represents just a few percentage points of the profits from these sources — the cost of doing business.

And never forget: There are plenty of banks in the world where anyone can show up with a sack of $100 bills, and the only question asked is “coffee or tea, sir?”

Then, once that money is inside the banking system, it becomes nearly impossible to trace back to its origins.

So, why aren’t regulators shutting down banks that aid money launderers?

First, because that could shut down a big chunk of the entire banking system.

Second, because it’s a lucrative business.

And third, because regulators can always hide behind the official line that they’re “beefing up security measures” to catch the bad actors next time around.

Trouble is, the dirty money keeps flowing into the banking system, and so far, at least, there’s been no slowing it down.

All of which leads us to the punchline: The real battle is not against any particular currency that the bad guys happen to be using. It’s against the bad guys themselves.

Indeed, when it comes to fiat-based money laundering, no one in the world proposes that investigators or prosecutors target the currency they’re using. So, why do they talk about targeting cryptocurrencies? Could it be because some view cryptos as a competitive threat to the fiat-based systems they control?

Money-and-State Separation

Cryptocurrency visionaries advocate for the separation of Money and State, much as visionaries of centuries past advocated for the separation of Church and State.

We all know how, during the Renaissance, they encountered stiff resistance from the status quo. So, don’t be surprised when cryptos encounter similar resistance in the current era.

Just bear two things in mind: It won’t change the trend. And if anything, such resistance can only help trigger the kind of price pullbacks that give crypto investors better bargains.



About the Editor

When econometrician and pro trader Juan M. Villaverde first applied his algorithms to Bitcoin years ago, he discovered a regular cyclical pattern. And he has since used it to build the world’s first crypto timing model based on cycles. Thanks to his analysis, the Weiss Ratings team has accurately picked the top and bottom of major crypto booms and busts.

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