bitcoin crime

At the FinTech Canada conference this August, leading cryptocurrency trial attorney Brian Klein gave an excellent overview of how cryptocurrencies have been used for illegal purposes and what law enforcement officials are doing to crack down on it.

Known for representing high-profile clients like Bitcoin early-adopter Erik Voorhees, Brian Klein is the founder and chair of the non-profit Digital Currency and Ledger Defense Coalition (DCLDC) and the chair of the American Bar Association’s blockchain technology, digital currency, and ICO national institute.

In his talk, Klein points to the law enforcement efforts and litigation around the Silk Road as an early example of crime with a cryptocurrency element. At the time, the closure of the online black market and related arrests made headlines worldwide.

But how have things moved on in 2018?

Cash (not Crypto) is Still King in Criminal Activity

In criminal law, cash is still king.

While cases like the Silk Road made sensational headlines, cryptocurrency rarely plays a truly innovative role when it comes to more traditional criminal activity. 

Cryptocurrency may offer advantages for long-distance transactions and online shoppers, but most criminal acts today are still paid for in cash. 

The crypto element may add a modern flair and conjure images of shadowy figures in Guy Fawkes’ masks but, for the most part, digital currencies remain a payment method rather than a new frontier in criminal acts.

bitcoin silk road
The now-defunct black market Silk Road website used to buy drugs with bitcoin

Cryptocurrencies Are the New Swiss Bank Account: Money Laundering and Tax Evasion

You might still see movies where bank robbers demand that funds be wired to a Swiss bank account, but when it comes to money laundering and hiding assets, cryptocurrency has increasingly replaced the wiring of funds to jurisdictions that favor banking secrecy. 

A key advantage of cryptocurrency is that it’s not tied to a single jurisdiction or set of laws – unlike Switzerland, which tightened its banking regulations after a large tax evasion investigation in 2008.

With cryptocurrency, there’s also no need to rely on intermediaries to handle transfers. And while a bank can be forced to turn over someone’s account information, there is no central authority for the Bitcoin system.

However, as noted in Klein’s talk, most current digital currencies operate on a public, permanent ledger. Bitcoin, for example, isn’t fully anonymous as many believe. Each transaction can be tracked, analyzed and de-anonymized — if the authorities can link a wallet address to a particular criminal – now or in the future.

The Emergence of Privacy Coins

Privacy coins circumvent some of the potential risks of making cryptocurrency transactions available on a public ledger. 

Indeed, Bloomberg noted that criminals are increasingly ditching bitcoin for privacy coins like monero and zcash. 

Monero logo

While there are different types of privacy coins, they typically obscure their ledger through a variety of methods including single-use wallets and transaction keys, as well as “coin mixing”, which involves pooling different transactions together to obscure the amount and parties involved in any given transaction. 

In his talk, Klein notes that privacy coins are a key source of concern for law enforcement and regulatory agencies.

Fraud and Initial Coin Offerings (ICOs)

Reports suggest that as many as 80% of ICOs offered in 2017 were fraudulent. 

Perhaps the largest was Pincoin, an ICO that raised $660 million during the ICO fever of 2017. Shortly after raising the money, Pincoin vanished, taking investor money with it. This is what’s known as an “exit scam.”

As a result of these scams, investors have asked securities regulators to intervene.  The problem? In the US, there’s no set answer on whether ICOs are “securities.” 

What’s a security? A security is a financial instrument, like a stock, bond or investment contract, that you are able to trade or transfer to someone else. If something is a security, it is often subject to regulation and must be registered with the regulators.

Until ICOs are classified as a security, we don’t know if they are something the Securities Exchange Commission (SEC) can regulate.

So long as they remain unregulated, ICOs fall outside the oversight and authority of securities regulators, potentially leaving investors more exposed to fraudulent activity

Although the SEC’s Chairman has previously claimed that ICOs are securities, the issue is still relatively untested in the courts. This leaves many ICOs operating in a grey area. 

How Are Law Enforcement Officers Cracking Down on Illegal Crypto Activity?

This is still relatively new territory for law enforcement agencies and governments. However, they are increasingly capable of de-anonymizing transactions and tracking criminal activity. Below are just a few of the ongoing themes of law enforcement activity in the crypto space:

  • Governments and law enforcement are collaborating on an international scale. This includes sharing information, joint investigations, and global agreements around extradition.
  • Law enforcement is increasingly capable of tracking cryptocurrency transactions, especially where the ledger is public. AI and machine learning are also making it easier to analyze the blockchain and pierce anonymity.
  • On the blockchain, transaction history is not just public – it’s permanent. This can create a permanent chain of evidence for law enforcement to review and rely on, especially over time, as new data is gathered and different wallets and accounts are identified.


Bitcoin has been linked to illegal activity ever since the infamous Silk Road black market emerged. The cryptocurrency ecosystem has also played host to its fair share of scams, hacks, and frauds. 

However, we should also remember that every bitcoin transaction, by design, is recorded in a permanent, transparent log. If bitcoin is used for nefarious purposes, that transaction is preserved forever.

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A Philippine lawmaker is pressuring her colleagues to expedite a vote on legislation that would increase the severity of penalties for crimes that involve cryptocurrencies.

Leila M. de Lima, a senator from the Phillippines’ opposition party, on Monday urged her colleagues to make Senate Bill 1694 a top priority during the present legislative session.

SB 1694, first introduced by Lima in March, aims to up the penalty by a full degree for crimes that are perpetrated using cryptocurrencies, which she says increase the difficulty of investigating crimes and bringing maleficent individuals to justice.

In her remarks, she cited a recent Bitcoin fraud case which saw two scam artists swindle more than 900 million pesos (~$50 million) from more than 50 Philippine investors.

“I hope that this occurrence will push my esteemed colleagues in the Senate to take my proposed bill seriously and help pass it into law soon. Knowing that virtual currency resembles money, and that the possibilities in using it are endless, higher penalty for its use on illegal activities is necessary,” she said in a statement. “No matter how small or big a group, same punishment must be given. It should never be easy to escape after stealing the hard earned money of other people,” she said.

Lima also encouraged her colleagues to vote on SB 959, which would reduce the minimum number of people needed to be involved in a swindling operation before defendants could face life imprisonment or the death penalty. At present, a crime can only be classified as a “syndicated estafa” if at least five people are involved; SB 959 would reduce that number to two.

Meanwhile, the country’s Securities and Exchange Commission (SEC) has also been ramping up its cryptocurrency enforcement efforts. Earlier this week, the agency issued a formal warning to 14 cryptocurrency investment schemes — which the agency claims are unregistered securities offerings — advising them that they could face penalties including fines or imprisonment if they continue to operate in the country.

Featured Image from Pixabay

Theresa May on crypto crime

Jan. 25, 2018, U.K. Prime Minister Theresa May discusses the need to “seriously” look at Bitcoin and other virtual currencies due to their potential for use in crime during an interview with Bloomberg’s Editor-in-Chief John Micklethwait. During their conversation in Davos, Switzerland, May talks about the importance of continuing the fight against online crime and her concerns regarding the use of cryptocurrencies and other technologies for elicit and illegal purposes.

May on Crypto, Crime and Tech

After May expresses her desire to see more progress in terms of social responsibility in the tech world, specifically mentioning online child pornography and terrorist activities, Micklethwait asks her if she sees digital currency as an area where she “ought to try to clamp down, too?” May replies that she sees the realm of cryptocurrencies as “increasingly developing” and says, “Cryptocurrencies like Bitcoin, we should be looking at these very seriously, precisely because of the way they can be used, particularly by criminals.”

She also says that she feels progress has been made overall in the realms of online social responsibility but calls for more to be accomplished, so that “people can look at the internet and know that it is a force for good.” She says she is positive about tech companies’ abilities to change lives for the better and feels that the UK is already a leader in realms such as AI, electric vehicles and battery technology. “We are already an attractive place for businesses to come and set up,” she adds.

Recent UK Crypto Regulations

In December 2017, the UK and other EU governments committed to increase the regulation of virtual currencies as a means of deterring their use to launder money or fund international crime and terrorism. Established counterterrorism and anti-money laundering finance rules will now be applied to cryptocurrencies and are expected to be made into law by participating countries within 18 months.