Europol’s European Cybercrime Center hosted a conference in June 2018 discussing virtual currencies and how to foster the legitimate use of this monetary system that is frequently abused by hackers, international drug dealers, and organized crime movers. Since then, there has been a big push to monitor cryptocurrencies. But what is the realm of possible? While there are currently no cryptocurrencies that are fully untraceable, the technology is advancing rapidly. As such, it is crucial for intelligence agencies to stay ahead of innovation in order to keep their edge over rogue actors using cryptocurrencies.
Governments have an obvious interest in regulating this monetary system, primarily because the use of cryptocurrencies for legal transactions could ultimately lead to loss of economic power and a shift toward the decentralization of economies on a global scale. The second reason is that some characteristics of cryptocurrencies – most notably (the varying degrees of) anonymity – make it prone to abuse by rouge actors. While cryptocurrencies are widely used for illicit purposes in cybercrime and on the Dark Web, there have also been several instances of terrorism financing involving cryptocurrencies.
Nevertheless, it is worth noting that heavy regulation may deter the legitimate use of cryptocurrencies. Regulation varies across different countries, and may be more focused on either deterring the use of cryptocurrencies for illicit purposes, or on encouraging their legitimate usage. For instance, while Australia’s regulation is focused on preventing financial crimes, Malta is trying to position itself as the “natural destination” for businesses operating in the blockchain sector. Considering these opposing positions, it is important that regulation be balanced, fostering cryptocurrencies’ benefits and preventing money laundering.
Ineffective regulations against anonymous users has been the main advantage enjoyed by rogue actors using cryptocurrencies over agencies. However, are cryptocurrencies truly anonymous? There are varying degrees of anonymity among different variants. The history of Bitcoin transactions is visible to all users – if combined with a monitoring tool. This actually makes it easier to follow a user’s activity compared to money service bureaus. There is also a range of cryptocurrencies known as “altcoins,” striving for greater anonymity by removing identifying information (such as sender, recipient, etc.) from a blockchain’s ledger. While Monero and Dash are the two cryptocurrencies that have come closest to providing this level of anonymity, neither has achieved it yet. However, the technology is believed to be advancing rapidly, and there will likely soon be cryptocurrencies that are fully untraceable.
Ultimately, all cryptocurrencies need to be exchanged for fiat currencies. This is currently the best opportunity for overcoming anonymity. Agencies have the best chance of tracing rogue actors involved in illicit activities, such as money laundering and terrorism financing involving cryptocurrencies, by focusing on deanonymization and anomaly detection. However, as agencies get better at identifying criminal behavior, criminals and rouge actors come up with new evasion techniques, which is why traditional approaches to law enforcement are no longer sufficient.
Instead, agencies need to stay ahead of innovation so as to keep their advantage over rogue actors using cryptocurrencies. One way in which agencies can do this is by using blockchain technology to monitor transactions. However, there are currently limitations on this approach, as it would require the participation of a large number of banking institutions. It is also important to continue developing an expert community of law enforcement and private sector professionals, which the Europol meeting set the grounds for. In addition to law enforcement agencies and public prosecutors’ offices, the community should also include representatives from cryptocurrency services providers, who have an interest in fostering the legitimate use of this monetary system.