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Bitcoin: Risky
business or Not? Containing a potential threat by mitigating the risks related to Money
Laundering and /or Terrorism Financing through Bitcoin.
A Guide to understanding Bitcoin / Cryptocurrency and the possible risks involved
Natasha G. Blomont, LL.B, CAMS- FCI
Bitcoin: Risky business or Not?
March 15, 2018
Page 1 of 57 Natasha G. Blomont, LL.B, CAMS- FCI
Acknowledgments
I would like to thank:
Mr. William K. Santiago, who provided insight, guidance and expertise on the subject matter
that assisted in the research and writing of this paper, although he may not agree with all of the
interpretations/conclusions of this paper.
Mrs. Sonaira Kemp-Diaz, who provided insights to the editing of and proofread this paper.
Cover page image reference: BitNewsBot. (2017, November 8) Bitcoin-news-roundup-september-3-2017.png. Retrieved December 10, 2018, from https://bitnewsbot.com/bitcoin-money-laundering-lands-six-in-court/
Bitcoin: Risky business or Not?
March 15, 2018
Page 1 of 57 Natasha G. Blomont, LL.B, CAMS- FCI
Table of Contents
Acknowledgments ......................................................................................................................................... 1
Executive summary ............................................................................................................................... 3
Introduction to Cryptocurrency and Bitcoin ......................................................................................... 3
A. What is currency and what are virtual currencies, digital currencies and cryptocurrencies?.......... 3
1. What is cryptography? .................................................................................................................. 5
2. Centralized vs. decentralized virtual currency .............................................................................. 5
3. Convertible vs non-convertible ..................................................................................................... 6
B. What is Bitcoin? ................................................................................................................................ 6
C. How does bitcoin operate? ............................................................................................................... 7
D. The pseudo -anonymity of Bitcoin .................................................................................................... 9
E. Obtaining a Bitcoin address and acquiring actual bitcoins ............................................................. 11
F. Participants in Bitcoin transactions. ............................................................................................... 12
G. Possible uses of Bitcoin ................................................................................................................... 15
1. Advantages of the use of Bitcoin ................................................................................................ 16
(Possible) regulations / guidelines applicable to Bitcoin ................................................................ 16
Risk Assessment of Bitcoin in general. ............................................................................................ 18
A. Risks involved with Bitcoin .............................................................................................................. 18
B. Risk ML ............................................................................................................................................ 19
C. Method or sources of ML through Bitcoin ...................................................................................... 20
1. Through Bitcoin Automated Teller Machines ............................................................................. 20
2. Initial coin offering (ICO) / Crowdfunding ................................................................................... 21
3. P2P Bitcoin lending platforms ..................................................................................................... 22
4. Bitcoin debit cards ...................................................................................................................... 22
5. Dark web use of Bitcoin .............................................................................................................. 23
D. Risk of TF ......................................................................................................................................... 24
E. Method or sources of TF ................................................................................................................. 25
1. Through Bitcoin Automated Teller Machines ............................................................................. 25
2. Initial coin offering (ICO) / Crowdfunding ................................................................................... 26
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Page 2 of 57 Natasha G. Blomont, LL.B, CAMS- FCI
3. P2P Bitcoin lending platforms ..................................................................................................... 26
4. Bitcoin debit cards ...................................................................................................................... 26
5. Dark web use of Bitcoin .............................................................................................................. 27
F. Case studies ML: ............................................................................................................................. 27
G. Red Flags for ML and TF .................................................................................................................. 30
H. Possible Investigative techniques to trace Bitcoin transactions to the individual behind the
transaction. ............................................................................................................................................ 31
Mitigate risks for bad use.................................................................................................................... 32
A. Attempt to regulate ........................................................................................................................ 32
B. Transaction monitoring ................................................................................................................... 33
C. Recommendations: ......................................................................................................................... 34
Conclusion ....................................................................................................................................... 36
References * .................................................................................................................................... 38
Visuals ............................................................................................................................................. 50
Glossary ........................................................................................................................................... 53
Acronyms ............................................................................................................................................ 53
Appendix ......................................................................................................................................... 56
A. About the author ............................................................................................................................ 56
Table of Figures
FIGURE 1 P2P (DECENTRALIZED) SHOWN ON LEFT VS. CENTRALIZED SHOWN ON RIGHT .................................................................... 7
FIGURE 2 GRAPH REFLECTING SIMPLIFIED BITCOIN TRANSACTION ................................................................................................ 8
FIGURE 3 APPLICATION OF FINCEN’S GUIDANCE TO PARTICIPANTS IN BITCOIN TRANSACTIONS ....................................................... 14
FIGURE 4 MONEY LAUNDERING CYCLE .................................................................................................................................. 20
FIGURE 5 SCREENSHOT OF THE TOOLS AVAILABLE AT THIRD PARTY FOR MONITORING / ASSESSING BITCOIN TRANSACTIONS ................... 34
FIGURE 6 SCHEMATIC OF HOW A BITCOIN TRANSACTION WORKS ............................................................................................... 50
FIGURE 7 CENTRALIZED, DECENTRALIZED AND DISTRIBUTED ..................................................................................................... 51
FIGURE 8 BLOCKCHAIN WALLET USERS ................................................................................................................................ 52
FIGURE 9 POPULAR STATISTICS REGARDING BITCOIN ............................................................................................................... 52
FIGURE 10 USD EXCHANGE TRADE VOLUME ........................................................................................................................ 53
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Page 3 of 57 Natasha G. Blomont, LL.B, CAMS- FCI
Executive summary
Bitcoin and other cryptocurrencies are gaining more and more popularity lately. 1 Be it positive or
negative news, this emerging trend has been viewed and spoken of in hesitation and fear. This is a very
natural reaction to a new or relatively new concept and there are different ways humans react to
change and innovation. One might panic, be confused, be overjoyed, be in denial, refuse to change or
feel helpless. 2
We currently live in the digital age and our technology is evolving on a relatively rapid pace. We humans
need to keep up the pace. We need to employ an out of -the box mentality to be able to survive the
possible risks that come hand in hand with our ever expanding technological developments.
The objective of this paper is to provide a proper understanding of the concept of Bitcoin /
Cryptocurrency and to present possible strategies to the target audience, being BSA/ AML officers, Law
Enforcement Agencies, Government, Supervisory and Regulatory Entities among other.
This white paper will give a quick introduction to Bitcoin and guide you through the possible risks related
to Bitcoin / cryptocurrency in the areas of Money Laundering (ML) and / or Terrorism Financing (TF). In
addition to providing a view of possible risks (gaps) this paper will also provide possible solutions in the
form of recommendations to mitigate these risks.
Introduction to Cryptocurrency and Bitcoin
A. What is currency and what are virtual currencies, digital currencies and
cryptocurrencies?
There are various interpretations for these various terms. I refer to some of the various interpretations I
encountered. 3
Currency is “the coin and paper money of the United States or of any other country that [i] is designated
as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange
1 Hasse, J (2017, January 24). 2017: The state of Cryptocurrencies (Part 2). Accessed on November 12, 2017 from https://www.benzinga.com/fintech/17/01/8934364/2017-the-state-of-cryptocurrencies-part-2 2 Illumine (2013, June 20). The Different ways in which we react to change. Accessed on November 12, 2017 from https://www.illumine.co.uk/2013/06/the-different-ways-in-which-we-react-to-change/ 3 Quora (n.d.) What is the difference between a cryptocurrency, a digital currency, and a virtual currency? Accessed on November 18, 2017 from https://www.quora.com/What-is-the-difference-between-a-cryptocurrency-a-digital-currency-and-a-virtual-currency
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FOCUS of PAPER: There are various types of cryptocurrencies, but for the purpose of this paper I will be focusing on the cryptocurrency Bitcoin in particular.
in the country of issuance.” according to Financial Crimes Enforcement Network’s (FinCEN) regulations.4
Currency is the legal tender of a country.
Virtual currency (VC) is a collective term referring to currency, not held in physical form, in the digital or
virtual world. This type of currency cannot be used to purchase goods and services in the real world. 5
Digital Currency is currency that can be used to make purchases in our current fiat system. 6
Cryptocurrency is an electronic system to transfer money that uses cryptography to control the creation
and transfer of money (within this system).7 This type of currency can be used to purchase goods and
services in the real world. 8
According to FinCEN, Bitcoin is classified as virtual currency.
“A virtual or digital currency (VC) is a medium of exchange that
operates in the digital space. It can be converted into either a
fiat (e.g., a government-issued currency) or it can be a
substitute for real currency.
4 31 CFR 1010.100 - General definitions. (n.d.). Retrieved November 19, 2017 from https://www.law.cornell.edu/cfr/text/31/1010.100 5 Quora (n.d.) What is the difference between a cryptocurrency, a digital currency, and a virtual currency? Accessed on November 18, 2017 from https://www.quora.com/What-is-the-difference-between-a-cryptocurrency-a-digital-currency-and-a-virtual-currency According to the U.S. Internal Revenue Services virtual currency guide: virtual currency is treated as property for U.S. Federal tax purposes and general rules for property transactions apply. See IRS virtual currency guide: virtual currency is treated as property for U.S. Federal tax purposes; general rules for property transactions apply. IR-2014-36. March 25, 2014. Accessed on February 14, 2018 from https://www.irs.gov/newsroom/irs-virtual-currency-guidance and Notice 2014-21. Retrieved on February 14, 2018 from https://www.irs.gov/pub/irs-drop/n-14-21.pdf. 6 FATF Report (2014, June). Virtual Currencies. Key Definitions and Potential AML/CFT Risks. [pdf]. Retrieved on December 1, 2017 from http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf 7 Slideshare (May 8, 2014). Bitcoin Trading The Ultimate Guide. Accessed on November 19, 2017 from https://www.slideshare.net/therealforexnews/bitcoin-trading-the-ultimate-guide 8 FATF Report (2014, June). Virtual Currencies. Key Definitions and Potential AML/CFT Risks. [pdf]. Retrieved on December 1, 2017 from http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf Quora (n.d.) What is the difference between a cryptocurrency, a digital currency, and a virtual currency? Accessed on November 18, 2017 from https://www.quora.com/What-is-the-difference-between-a-cryptocurrency-a-digital-currency-and-a-virtual-currency
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1. What is cryptography?
Cryptography is encryption of data to provide security to only enable the parties destined to receive the
information to be able to read the data transferred to them. This is to avoid eavesdropping from a third
party not involved in the transaction. Modern forms of cryptography are based on complex
mathematical equations almost impossible to solve, other than by massive computing power.9
An example of this encryption is SHA256. This is currently used for security protocols and standards by
the financial / banking industry and governments around the world. This same encryption is also used by
the Bitcoin protocol.10
2. Centralized vs. decentralized virtual currency
There are two types of virtual currencies: centralized and decentralized. Centralized virtual currencies
(e.g., formerly the Liberty Reserve) have a centralized repository and a single administrator.
Decentralized VCs (e.g., Bitcoin) have no repositories or administrators but work as peer-to-peer media
of exchange without any need for an intermediary. 11
The distinction between centralized and decentralized virtual currency is how trust is created and
maintained in the currency and its value. A centralized VC is emitted by an administrator who maintains
a central payment ledger. The power to withdraw this currency lies with the administrator. The
administrator acts as the repository and he guarantees trust. Decentralized virtual currency on the other
hand does not have a central administrator and the trust is achieved through consensus validation. The
decentralized VC often rely on cryptography for their operations and use distributed ledger technologies
(DLT) to record transactions.” 12
9 Wikipedia (n.d.). Cryptography. Accessed on December 13, 2017 from https://en.wikipedia.org/wiki/Cryptography 10 Santiago, W. K. (2018, February 15 and 26). Bitcoin, Blockchain and Cryptocurrency [Personal interview]. Mr. William K. Santiago, CBP is employed with the Central Bank of Curaçao and Saint Maarten as IT Trusted Advisor. SHA was designed by the National Security Agency (NSA). Wikipedia (n.d.). Secure Hash Algorithm. Accessed on February 15, 2018 from https://en.wikipedia.org/wiki/Secure_Hash_Algorithms 11 Study Guide CAMS Certification Exam sixth Edition. ISBN 978-0-9777495-2-2 12 Goldman, Z. K., Maruyama, E., Rosenberg, E., Saravalle, E., & Solomon- Strauss, J. (2017, May). Terrorist use of virtual currencies: containing the potential threat. Retrieved on November 28, 2017 from https://www.cnas.org/publications/reports/terrorist-use-of-virtual-currencies The DLT can be distinguished in public and permissioned platforms. A different term for permissioned is federated or private. Public means being available to anyone and permissioned being available to a select group. see Bauerie, N. (n.d.). What’s the difference between public and permissioned blockchains. Accessed February 28, 2018 from https://www.coindesk.com/information/what-is-the-difference-between-open-and-permissioned-blockchains/ and FinancialIT. (2017, September 12). Inside The Federated Ledger: The Blockchain Technology Driving Instant Payments. Accessed February 28, 2018, from https://financialit.net/blog/blockchain/inside-federated-ledger-blockchain-technology-driving-instant-payments-0 and Thompson, C. (2016, October 26). The difference between a Private, Public & Consortium Blockchain. Accessed February 28, 2018, from https://www.blockchaindailynews.com/The-difference-between-a-Private-Public-Consortium-Blockchain_a24681.html
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3. Convertible vs non-convertible
According to The Financial Action Task Force (FATF) 2014 report, Virtual Currencies, Key Definitions and
Potential AML/CFT Risks, VCs can also be distinguished between convertible VCs (i.e., Bitcoin and
WebMoney) that have an equivalent value and can be exchanged in real currency, and non-convertible
VCs (i.e., Q Coins and World of Warcraft Gold) that are intended to be specific to a particular domain.”13
B. What is Bitcoin?
Bitcoin was first introduced to the world on October 31, 2008 through a very technical white paper
written by a person or group of persons under the pseudonym of Satoshi Nakamoto.14 The idea of
Satoshi Nakamoto was to base an electronic cash system (payment system) running on a peer-to-peer
system. Peer-to-peer can be interpreted as one computer sharing its available resources to other
network participants without the need of central servers. 15This entails that payments can be executed,
directly between parties without interference of a (trusted) third party (like a financial Institution). In
this aspect Bitcoin can be seen as Alternative Remittance Systems (ARSs) or Informal Value Transfer
Systems (IVTSs). “ARSs commonly involve the international transfer of value outside the legitimate
banking system and are based on trust.”16
13 Study Guide CAMS Certification Exam sixth Edition. ISBN 978-0-9777495-2-2 14 Nakamoto, S. (n.d.). Bitcoin: A Peer-to-Peer Electronic Cash System. Retrieved on November 11, 2017 from https://bitcoin.org/bitcoin.pdf Wikipedia (n.d.). Satoshi Nakamoto. accessed on November 18, 2017 from https://en.wikipedia.org/wiki/Satoshi_Nakamoto 15 Wikipedia (n.d.). Peer-to-peer. accessed on November 14, 2017 from https://en.wikipedia.org/wiki/Peer-to-peer 16 Study Guide CAMS Certification Exam sixth Edition. ISBN 978-0-9777495-2-2
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Figure 1 P2P (decentralized) shown on left vs. Centralized shown on right17
C. How does bitcoin operate?
Bitcoin is a cryptocurrency that operates through a platform called Blockchain.18 This innovative system
can be compared to a public ledger held online for all the transactions. This ledger is verified and sealed/
confirmed by miners, thus the transactions cannot be changed. The miners validate the transactions.
The blocks are chained / linked (secured) together, and this is where the term Blockchain emerged.
17 Wikipedia (n.d.). Peer-to-peer. accessed on November 14, 2017 from https://en.wikipedia.org/wiki/Peer-to-peer 18 Wikipedia (n.d.). Blockchain. accessed on November 18, 2017 from https://en.wikipedia.org/wiki/Blockchain
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Figure 2 Graph reflecting simplified Bitcoin Transaction 19
Miners are individuals who have computers to solve the complex equations to verify the Bitcoin
transactions and protect the system against double spending. These miners receive, block
compensation, compensation in Bitcoin for the solved equations and/ or transaction fees to process and
confirm the transactions. This is one method of obtaining Bitcoins, but it is not a get rich quick scheme.
The costs of the mining process can be very high and depends on various factors. Two of the factors
involved are (computer) CPU (Central Processing Unit) capacity and power consumption of the hardware
required to solve the equations. On the other hand, miners also emit/ create new bitcoins in the mining
process.20 There are currently approximately 16 million bitcoins in circulation and it is said that a
19 Goldman, Z. K., Maruyama, E., Rosenberg, E., Saravalle, E., & Solomon- Strauss, J. (2017, May). Terrorist use of virtual currencies: containing the potential threat. Retrieved on November 28, 2017 from https://www.cnas.org/publications/reports/terrorist-use-of-virtual-currencies 20 Aatcomment (2013, October 30). Bitcoin: what is it and how does it work? Accessed on November 11, 2017 from http://www.aatcomment.org.uk/bitcoin-what-is-it-how-it-works/ LKpedia (September 9, 2017). Things you should know about bitcoin Accessed on November 11, 2017 from https://lkpedia.com/bitcoin-explained/ Bitcoin (n.d.).How does Bitcoin work? Accessed on November 12, 2017 from https://bitcoin.org/en/how-it-works Buybitcoinworldwide (n.d.). Bitcoin explained for dummies, accessed on November 12, 2017 from https://www.buybitcoinworldwide.com/beginners-guide/ Bagley, J. (n.d.). Bitcoin explained in under five minutes. Accessed on November 12, 2017 from . https://blockgeeks.com/bitcoin-explained-in-under-five-minutes/ Nakamoto, S. (n.d.). Bitcoin: A Peer-to-Peer Electronic Cash System. Retrieved on November 11, 2017 from https://bitcoin.org/bitcoin.pdf
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maximum of 21 million bitcoins can be mined (created). This amount is estimated to be reached in
2140.21
Double spending is the use of the same bitcoin available for two or more transactions. The miners verify
and safeguard that there is no double spending of the available bitcoins.
The design of Bitcoin is that it is decentralized and meant to mimic cash or store of value between two
individuals without a third party.22
D. The pseudo -anonymity of Bitcoin
Bitcoin is being branded as a system to perform
transactions anonymously. This is partially correct.
Components of Bitcoin are public, and as a result
not anonymous. The transactions are transparent
and thus the term Pseudo anonymity of Bitcoin.
The following aspects of the Bitcoin wallets are
public. The public key, the balances of the Bitcoin
addresses linked to the wallet and the transactions
performed to / from the various Bitcoin addresses
through the wallet. The only information that is not public, but
private is the private key to unlock the Bitcoin addresses stored
within the wallet.23 If an individual manages to access the private
key, they are able to unlock the Bitcoin addresses and gains
access to the available balances. 24 The Bitcoin wallet should be
safeguarded by implementing a strong password or encryption
multi factor schemes and/or basic smart contracts.25
21 Beigel, O. (2017, December). What will happen when all Bitcoins are mined? Accessed on February 6, 2018 from https://99bitcoins.com/what-will-happen-when-all-bitcoins-are-mined/ 22 Santiago, W. K. (2018, February 15 and 26). Bitcoin, Blockchain and Cryptocurrency [Personal interview]. Mr. William K. Santiago, CBP is employed with the Central Bank of Curaçao and Saint Maarten as IT Trusted Advisor. 23 Investopedia (n.d.). Bitcoin Wallet. Accessed on November 19, 2017 from https://www.investopedia.com/terms/b/bitcoin-wallet.asp 24 Investopedia (n.d.). Private Key. Accessed on November 19, 2017 from https://www.investopedia.com/terms/p/private-key.asp 25 “The smart contract is a protocol to digitally facilitate, verify and enforce the negotiation or performance of a contract. The aim of the smart contract is provide security superior to regular contract law and reduce transaction costs related to contracting.” See Wikipedia (n.d.). Smart Contract. Accessed on February 27, 2018 from https://en.wikipedia.org/wiki/Smart_contract .
Source: https://www.slideshare.net/therealforexnews/bitcoin-trading-the-ultimate-guide (Retrieved November 28, 2017)
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A Bitcoin wallet is software that primarily stores the private key securely.26 It also simplifies the
processing of the transactions and reflects the balances of the various Bitcoin addresses stored within
the wallet. When a transaction is performed the wallet publishes the transaction to the bitcoin network
to be verified and confirmed (sealed). The Bitcoin wallet is provided by a wallet- provider, which
facilitates participation in the bitcoin transaction system by facilitating the transactions. In this scenario
the online wallet provider also has custody of the private keys.
The public key is the Bitcoin addresses linked to the wallet. The Bitcoin address can be compared to a
bank account number used to transfer funds to and from. The Bitcoin address is not a fixed number like
a bank account number. The address should not be confused with an actual bank account number. The
reference to a bank account number is only to clarify what the function of the address is. The Bitcoin
address is used to receive bitcoins and is not intended to be re-used.27The public key is created from the
private key through a series of complex calculations.
The private Key is the secret code or password to access the public key. 28 The private key cannot be
reverse- calculated from the public key.
This private key can be stored using the following methods:
Online wallet or web wallet, also known as Hot storage, which stores the private key on a server
(custody falls on the web wallet operator)
Offline wallet or Desktop or Mobile (hardware) wallet, where the private key is stored on a hard
drive of a personal computer or mobile device. The mobile wallet uses an app which makes
executing payments as easy as a simple click of a button and/ or scanning a Quick Response (QR)
code. 29 (custody falls on the wallet owner)
Paper wallet or cold storage, where the private key is written on a piece of paper and stored
somewhere safe. (custody falls on the wallet owner)
Brain wallet, where an individual memorizes the private key. (custody falls on the wallet owner)
The security of the private key is a very important measure to keep one’s bitcoins safe. The main
concern is who has custody of the private key. The individual or company who has custody of the private
This system employs encryption multifactor scheme. The ledger shared through the Bitcoin protocol enables the contract to execute without need for a third-party financial intermediary (a bank). See TechTarget (n.d). Smart contract. Accessed February 27, 2018 from http://searchcompliance.techtarget.com/definition/smart-contract . The blockchain acts as a shared database to provide a secure, single source of truth, and smart contracts automate approvals, calculations, and other transacting activities that are prone to lag and error. See Ream, J., Chu, Y., Schatsky, D. (2016, June 8). Upgrading Blockchains. Smart Contract use cases in Industry. Accessed February 27, 2018 from https://www2.deloitte.com/insights/us/en/focus/signals-for-strategists/using-blockchain-for-smart-contracts.html. 26 Investopedia (n.d.). Bitcoin Wallet. Accessed on November 19, 2017 from https://www.investopedia.com/terms/b/bitcoin-wallet.asp 27 BitcoinWiki (n.d.). Address. Accessed on November 19, 2017 from https://en.bitcoin.it/wiki/Address 28 Investopedia (n.d.). Private Key. Accessed on November 19, 2017 from https://www.investopedia.com/terms/p/private-key.asp 29 A QR code is a machine readable code used for storing/ retrieving information by reading the code with the camera of a smartphone/ smart device.
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key, technically controls/ owns the bitcoins too and this might put one’s bitcoins at risk.30 This is risky
because the only way to claim one’s bitcoins is with the private key. 31The simple act of holding custody
of private keys means possession of someone else’s assets. The security measures from private key
custody holders might seem secure enough, but there are other weak links in the chain of security that
one might not be aware of: mobile operators, browsers, app stores and ad platforms.32 All of these may
become the target of hackers to steal your funds.33
Another factor that contributes to the pseudo-anonymity of Bitcoin is the fact that various Bitcoin
addresses can be created easily.
Summarizing the above, if the Bitcoin address is linked to the real identity of the individual holding the
address, the pseudo- anonymity of Bitcoin is lost and the individual is known to be the holder of the
Bitcoin address. As long as the Individual and the address are not linked together the individual enjoys
some degree of anonymity.
E. Obtaining a Bitcoin address and acquiring actual bitcoins
To obtain a Bitcoin address one simply registers through a Bitcoin wallet provider (online or through an
app). And one can generate as many Bitcoin addresses as one wants. The only requirement to be able to
register is entering your first name and last name and entering a valid email address and a password.
After email verification the wallet is set up and ready to use by generating Bitcoin address to receive or
send payment.34 The more renowned exchanges have more extensive KYC requirements.35
30 Belousov, O. (2017, April 14). Your bitcoins might be at risk. Accessed on February 15, 2018 from https://keepingstock.net/your-bitcoins-might-be-at-risk-162ed1f1b725 31 Küster, F. (2017, November 23). Top 5 best bitcoin wallets to store your bitcoins. Accessed on February 27, 2018 from https://captainaltcoin.com/best-bitcoin-wallets/ 32 Ohayon, O. (2018, February 1). The sad state of crypto custody. Accessed on February 15, 2018 from https://techcrunch.com/2018/02/01/the-sad-state-of-crypto-custody/ 33 Ohayon, O. (2018, February 1). The sad state of crypto custody. Accessed on February 15, 2018 from https://techcrunch.com/2018/02/01/the-sad-state-of-crypto-custody/ 34 Humayun Kabir (2015, September 30).How to get my own bitcoin address. Accessed on November 19, 2017 from https://www.youtube.com/watch?v=CE4XrHHjR_Q Coinbase (2017, November 13). How do I get a bitcoin address? Accessed on November 19, 2017 from https://support.coinbase.com/customer/portal/articles/1816349-how-do-i-get-a-bitcoin-address- Buy bitcoin worldwide (n.d.). How to set Up a Bitcoin Wallet. Accessed on November 11, 2017 from https://www.buybitcoinworldwide.com/wallets/set-up/ 35 Santiago, W. K. (2018, February 15 and 26). Bitcoin, Blockchain and Cryptocurrency [Personal interview]. Mr. William K. Santiago, CBP is employed with the Central Bank of Curaçao and Saint Maarten as IT Trusted Advisor.
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Source: https://bitcoinist.com/viola-ai-uses-blockchain-tackle-billion-dollar-love-scams-industry/ (Retrieved on February 15, 2018)
Bitcoins can be acquired through the following methods: 36
Mining
Accepting bitcoins as payment for goods or services
Buying bitcoins (with other Virtual currency or fiat money)
from a known reliable individual or a Bitcoin exchange
Receive bitcoins as gift or reward37
F. Participants in Bitcoin transactions.
The Financial Crimes Enforcement Network (FinCEN) issued guidance on who classifies as persons
creating, obtaining, distributing, accepting, or transmitting virtual currencies. These persons are referred
to as “users”, “administrators” and “exchangers”. 38
Users are not qualified as a money service business (MSB) under FinCEN regulations and are not subject
to MSB registration, reporting and recordkeeping.
An administrator and exchanger on the other hand are qualified as MSB under FinCEN regulations
requirements. They are subject to MSB registration, reporting and recordkeeping as prescribed by the
BSA. 39
36 Weusecoins (n.d.). 5 easy steps to get Bitcoins and how to use them. Accessed on November 19, 2017 from https://www.weusecoins.com/en/getting-started/ Saxena, S. (2016, September 19). Bitcoin explained in Layman’s terms. Accessed November 11, 2017 from https://www.linkedin.com/pulse/bitcoin-explained-laymans-terms-siddharth-saxena 37 FATF (2015, June). Guidance for a risk based approach virtual currencies. [pdf]. Retrieved on December 1, 2017 from http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-Virtual-Currencies.pdf 38 FinCEN (2013, march 18). FIN-2013-G001. Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies. Retrieved on November 12, 2017 from https://www.fincen.gov/resources/statutes-regulations/guidance/application-fincens-regulations-persons-administering 39 FinCEN (2013, march 18). FIN-2013-G001. Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies. Retrieved on November 12, 2017 from https://www.fincen.gov/resources/statutes-regulations/guidance/application-fincens-regulations-persons-administering
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DEFINITION MSB: “A money services business (MSB), or money or value transfer service (MVTS) as defined by FATF, transmits or converts currencies. Such businesses usually provide currency exchange, money transmission, check-cashing, and money order services.” Source: Study Guide CAMS Certification Exam sixth Edition. ISBN 978-0-9777495-2-2
According to the same FinCEN guidance, virtual currencies
are not considered currency under the Bank Secrecy Act
(BSA), because it is not legal tender. 40[This is also the
reason why an individual who accepts real currency in
exchange for virtual currency or virtual currency for real
currency is not considered a dealer in foreign exchange
under FinCEN regulations. 41
40 FinCEN (2013, march 18). FIN-2013-G001. Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies. Retrieved on November 12, 2017 from https://www.fincen.gov/resources/statutes-regulations/guidance/application-fincens-regulations-persons-administering 41 FinCEN (2013, march 18). FIN-2013-G001. Application of FinCEN's Regulations to Persons Administering,
Exchanging, or Using Virtual Currencies. Retrieved on November 12, 2017 from https://www.fincen.gov/resources/statutes-regulations/guidance/application-fincens-regulations-persons-administering
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The following table indicates how FinCEN’s guidance applies to the participants in Bitcoin transactions.
Figure 3 Application of FinCEN’s Guidance to participants in Bitcoin Transactions 42
Further to the above mentioned participants, we also need to consider other parties that might be
involved in bitcoin transactions, which may also pose potential AML/ CFT risks. Examples of these other
parties are web administrative providers, third party payment senders facilitating merchant acceptance,
software developers and application providers.
42 King, D. (2015, October). Banking Bitcoin-Related Businesses: A Primer for Managing BSA/AML Risks. [pdf]. Retrieved on November 19, 2017 from https://www.frbatlanta.org/-/media/documents/rprf/rprf_pubs/2016/banking-bitcoin-related-businesses.pdf
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When an individual participates in a Bitcoin transaction without intermediaries the steps and parties
involved are as follows:
Obtain the public keys (addresses), private keys, and wallets (through a free Bitcoin software)
needed to participate in the Bitcoin network
Obtain bitcoins from another address or transfer bitcoins to another address
Confirmation of the transaction by the miners 43
When an individual participates in a Bitcoin transaction with intermediaries the parties involved are:
Obtain the public keys (addresses) and private keys, through a wallet provider
Obtain / transfer Bitcoins through a virtual currency payment processor or Bitcoin ATM.
The virtual currency payment processor is a merchant payment processor that allows the
merchant to accept the VC on his website or physical location and transmit the VC to the
merchant’s wallet/ or convert the VC into fiat money to transfer to the Merchant’s bank
account.44
G. Possible uses of Bitcoin
The possibilities for the uses of Bitcoin are endless and can reach as far as one’s imagination can think
of. There are both positive and negative aspects to Bitcoin and the technology behind it. Bitcoin can be
used as a simple tool for facilitating a funds transfer to a loved one, to purchase goods online or in a
store, as an investment tool to Ransomware schemes and elaborate ML/ TF schemes. The price of
Bitcoin started off at approximately USD 0.0054 in 2009 and hit an all-time high of nearly USD 20,000 in
2017.45 One can only cry thinking about the money one could have made if one had invested in bitcoin
from the start. There are currently even bitcoin (hedge) funds that offer the services of spreading one’s
risk over various cryptocurrencies.46 An example of a hedge fund on local scale is the company Curaçao
43 FATF (2015, June). Guidance for a risk based approach virtual currencies. [pdf]. Retrieved on December 1, 2017 from http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-Virtual-Currencies.pdf 44 FATF (2015, June). Guidance for a risk based approach virtual currencies. [pdf]. Retrieved on December 1, 2017 from http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-Virtual-Currencies.pdf 45 Morris, D.Z. (2017, November 26). Bitcoin Breaks $9,000 in another all-time high. Accessed on November 27, 2017 from http://fortune.com/2017/11/26/bitcoin-breaks-9000-in-another-all-time-high/ Higgins, S. (2017, December 29). From $ 900 to $ 20,000 : Bitcoin’s historic 2017 Price run revisited. accessed on January 2, 2018 from https://www.coindesk.com/900-20000-bitcoins-historic-2017-price-run-revisited/ 46 Popper, N. (2017, November 6). Hedge Funds Push the price of Bitcoin to new heights. Accessed on November 27, 2017 from https://www.nytimes.com/2017/11/06/technology/bitcoin-hedge-funds.html
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Digital Assets Holding which will be listing crypto funds on the Dutch Caribbean Securities Exchange
(DCSX) in the near future. 47
1. Advantages of the use of Bitcoin
Further to the already mentioned pseudo- anonymity of Bitcoin there are other advantages for Bitcoin
usage. The use of Bitcoin has some advantages over traditional methods of transferring funds through
the financial system. Bitcoin transactions process quicker than a regular bank to bank international
transaction and the fee involved for the transfer is much lower than traditional bank fees. These
reduced transaction costs and speedy funds transfer reduce settlement and credit risks while waiting for
the completion of the funds transfer. This provides more effective use of one’s capital.48 Bitcoin could
also be used in (third- world) countries where people have limited banking resources. It can offer people
who are limited to cash-only transactions to fulfill their banking needs through Bitcoin, without the need
for an actual bank account. 49
(Possible) regulations / guidelines applicable to Bitcoin
To ensure the effectiveness of regulations and guidelines we need:
A thorough understanding of how virtual currencies operate
The formulation of a uniform term that accurately reflects the different forms of virtual
currency.50
The most effective strategy to mitigate the risks is to focus legal and regulatory changes to gateway
financial institutions, or on/off ramps to and from fiat to crypto assets exchanges, that process virtual
currency transactions. These may be banks, money service businesses or virtual currency exchanges.
47 Southurst, J. (2018, February 8). Curaçao Digital Assets holding wins approval to list Crypto fund on DCSX. Accessed on February 15, 2018 from https://bitsonline.com/curacao-digital-assets-fund-dcsx/ 48 Goldman, Z. K., Maruyama, E., Rosenberg, E., Saravalle, E., & Solomon- Strauss, J. (2017, May). Terrorist use of virtual currencies: containing the potential threat. Retrieved on November 28, 2017 from https://www.cnas.org/publications/reports/terrorist-use-of-virtual-currencies 49 Neagle, C. (2013, June 07). Bitcoin ATM is horrible for money laundering, co- creator says. Accessed on November 12, 2017 from https://www.networkworld.com/article/2167059/malware-cybercrime/bitcoin-atm-is--horrible-for-money-laundering---co-creator-says.html According to Mr. William Santiago, CBP this includes the use of smart contracts that could augment systems like S.W.I.F.T. in the banking industry. This is an example of a private blockchain. It will be cheaper, more secure, more efficient (faster) than traditional banking methods. Santiago, W. K. (2018, February 15 and 26). Bitcoin, Blockchain and Cryptocurrency [Personal interview]. Mr. William K. Santiago, CBP is employed with the Central Bank of Curaçao and Saint Maarten as IT Trusted Advisor. 50 FATF Report (2014, June). Virtual Currencies. Key Definitions and Potential AML/CFT Risks. [pdf]. Retrieved on December 1, 2017 from http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf
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These points in the transaction process can be effective in spotting suspicious activities or suspicious
customers in the Bitcoin financial system. 51
The fiat on and off ramp issue is that we still require a centralized exchange for the purpose of
converting fiat money into crypto assets (ETH, BTC etc.) and visa versa. On ramp refers to converting fiat
to bitcoin and off-ramp refers to converting bitcoin to fiat. The off ramp can pose a risk for abuse like
money laundering or other illicit activities and needs to be tackled by regulators. 52
Furthermore the Bank Secrecy Act is applicable for the Exchangers and administrators operating a
bitcoin business, which are currently being classified as MSBs. In other words these are organizations
that hold custody of private keys.
Instead of classifying these bitcoin businesses as money services businesses, why not create a unique
license for these business as done by the New York State Department of Financial Services, which
adopted the Bitlicense for virtual currency businesses. This license sets specific rules and regulations for
these businesses.53 Or, use the Uniform Law Commission’s (ULC) model act for digital currency business
as a basis. 54 This model act regulates virtual currency business activity and not personal use of
technology. The activity is narrowed down to exchange, storage and transfer. The challenge here is to
create more pragmatic licenses for specific functions vs strong licensing which stagnates innovation.55
These businesses themselves should have a way to ensure proper (Know Your Customer) KYC and
(Customer Identification Program) CIP are in place within their structure to avoid pseudo anonymity of
51 Goldman, Z. K., Maruyama, E., Rosenberg, E., Saravalle, E., & Solomon- Strauss, J. (2017, May). Terrorist use of virtual currencies: containing the potential threat. Retrieved on November 28, 2017 from https://www.cnas.org/publications/reports/terrorist-use-of-virtual-currencies 52 Haymond, P. (2017, November 6). Solving the fiat on and off ramp issue for decentralized exchange protocols. Accessed on February 14, 2015 from https://medium.com/@peterhaymond/draft-2-solving-the-fiat-on-and-off-ramp-issue-for-decentralized-exchange-protocols-81dc377c0734 Lunn, B. (July 2, 2014). The Bitcoin off-ramp regulatory problem. Accessed on February 14, 2018 from https://dailyfintech.com/2014/07/02/the-bitcoin-off-ramp-regulatory-problem/ Diar (2018, January 22). Illicit Bitcoins funneled through European fiat off-ramps increasing. Accessed on February 27, 2018 from https://diarweekly.com/illicit-bitcoins-funneled-through-european-fiat-off-ramps-increasing/ 53 King, D. (2015, October). Banking Bitcoin-Related Businesses: A Primer for Managing BSA/AML Risks. [pdf]. Retrieved on November 19, 2017 from https://www.frbatlanta.org/-/media/documents/rprf/rprf_pubs/2016/banking-bitcoin-related-businesses.pdf 54 van Valkenburg, P.(2017, July 19). The ULC’s model act for digital currency businesses has passed. Here’s why it is good for Bitcoin. Accessed on February 15, 2018 from https://coincenter.org/entry/the-ulc-s-model-act-for-digital-currency-businesses-has-passed-here-s-why-it-s-good-for-bitcoin 55 Santiago, W. K. (2018, February 15 and 26). Bitcoin, Blockchain and Cryptocurrency [Personal interview]. Mr. William K. Santiago, CBP is employed with the Central Bank of Curaçao and Saint Maarten as IT Trusted Advisor.
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Bitcoin as much as possible. The more difficult part will be incorporating and implementing an
(automated monitoring program for) monitoring of customer transactions. Since only a public key and
no other personal identifiable information (PII) is needed to perform a bitcoin Transaction, which makes
tracing of the sending and receiving parties very difficult. This further poses a major challenge for The
Office of Foreign Assets Control (OFAC) monitoring related to bitcoin transactions.
The Bitcoin protocol up until now is not designed to collect these types of information or to provide
these types of information and in the future most probably will never incorporate these types of
information.
One possible way to try to ensure OFAC compliance can be by tracking IP addresses of clients and
identification. Although this also might be futile, because of virtual private networks (VPNs) and other
methods of concealing the actual IP addresses.56
Risk Assessment of Bitcoin in general.
Bitcoin transactions can bring significant risk. The Pseudo anonymity is a major factor for this risk,
because it poses significant challenges to adhere to the Bank Secrecy Act (BSA).57
A. Risks involved with Bitcoin
First of all there is the risk related to anonymity of bitcoin transactions compared to traditional payment
methods. The fact that these transactions are done on/ or through the internet are generally
characterized by non- face to face transactions. If anonymous transactions are permitted through the
virtual exchangers without properly identifying the source of the funds and if sender and receiver are
not adequately identified this also contributes to the anonymity risk factor.58
56 People will find ways to circumvent this by e.g. using satellite internet connectivity. This will make the location (point of origin) of the transaction harder to be traced, thus making it harder to track the location of the User. See Lambert, F. (2018, February 13). SpaceX is about to launch its first prototype internet satellites and Tesla is getting a ground station. Accessed February 26, 2018, from https://electrek.co/2018/02/13/spacex-launch-prototype-internet-satellite-tesla-ground-station/ and Whiting, G. (n.d.). Can you track the IP Address on satellite internet. Accessed February 26, 2018 from https://itstillworks.com/can-track-ip-address-satellite-internet-38913.html. 57 According to William K. Santiago, CBP Bitcoin blockchain technology compared to current legacy systems (Current banking system).has superior security and asset tracking than any system seen before in human history. Once the transaction/ information is publicized to the Bitcoin blockchain, it stays there and it remains unchanged and cannot be removed (see What's the Difference Between Centralization and Decentralization? (n.d.). Accessed February 2, 2018 from https://blockchain.wtf/what-the-faq/centralization-vs-decentralization/). Santiago, W. K. (2018, February 15 and 26). Bitcoin, Blockchain and Cryptocurrency [Personal interview]. Mr. William K. Santiago, CBP is employed with the Central Bank of Curaçao and Saint Maarten as IT Trusted Advisor. 58 FATF Report (2014, June). Virtual Currencies. Key Definitions and Potential AML/CFT Risks. [pdf]. Retrieved on December 1, 2017 from http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf
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DEFINITION ML: “Money laundering involves taking criminal proceeds and disguising their illegal sources in order to use the funds to perform legal or illegal activities. Simply put, money laundering is the process of making dirty money look clean.” Source: Study Guide CAMS Certification Exam sixth Edition ISBN 978-0-9777495-2-2
The way Bitcoin is set up to operate also contributes to the anonymity risk factor. There are No KYC
requirements to register for a Bitcoin address. The Bitcoin addresses do not have real world
identification of the customer attached to it. The Bitcoin protocol does not have requirements to
identify and verify the identity of the participants or to create historical records that can be linked to
identities in the real world.59
There is not a central oversight for the Bitcoin system (and there will most probably never be one in the
near future).60 There are no KYC requirements to acquire bitcoins, from another person and also no KYC
requirements to process a bitcoin transaction, except for transactions that will be processed through an
exchange.
From the above information, it can be concluded that Bitcoin can be assessed as an extremely high risk
product or service from the standpoint that almost no KYC requirement is needed for a user as defined
under FinCEN regulations to transact in bitcoins.
On the other hand an Administrator or Exchanger is regarded as an MSB and regulations are applicable.
B. Risk ML
The interpretation of the term money is very important to be
able to define if Bitcoin can be considered as a vehicle for
money laundering.
Technically Bitcoin can be used in all three stages of money
laundering, which are:
Placement – through buying bitcoins with illicit funds
Layering – transferring bitcoins to / through various
Bitcoin addresses
Integration – purchasing goods / services with bitcoins
or cashing out bitcoins to purchase goods / services.
59 31 CFR 1010.100 - General definitions. (n.d.). Retrieved November 19, 2017 from https://www.law.cornell.edu/cfr/text/31/1010.100 60 This is due to the way the Bitcoin protocol is set up to operate.
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See below chart reflecting the classic money laundering cycle
Figure 4 money laundering cycle 61
C. Method or sources of ML through Bitcoin
1. Through Bitcoin Automated Teller Machines
There are various types of Bitcoin ATM’s out in the market. Depending on the type of machine used and
if the machine is set up or capable to support compliance procedures, the machine can be used for
possible money laundering. A Bitcoin ATM can have compliance process features (hardware / software)
built into the unit, but it depends on the operator if he will activate / use these features. One can
encounter the same type of ATM with different verifications and limits set up, depending again on the
operator preferences.
61 United Nations Office on Drugs and Crime (n.d). The Money Laundering Cycle. Retrieved on January 28, 2018 from http://www.unodc.org/unodc/en/money-laundering/laundrycycle.html
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The general process for purchasing bitcoins using a Bitcoin ATM is:
Verification step (optional / depending on type of machine)62
Provide Bitcoin address for deposit
Insert cash into ATM
Confirm transaction
Seeing the fact that compliance features on a Bitcoin ATM can be employed or not by the operator,
these machines can be used by a money launderer to place illicitly obtained cash into the system. The
placement phase can be completed easily depending on the transaction limits employed by the operator
of the Bitcoin ATM. The illicitly obtained funds can now be layered by routing the funds through various
other Bitcoin addresses to ultimately complete the cycle of money laundering by purchasing goods or
services with the bitcoins or cashing out the bitcoins through a Bitcoin ATM.63
The modern ATMs have the highest compliance AML/KYC including biometrics, scanners, pictures and
camera etc. As strict as currently being used by US Customs Border Patrol (CBP) 64
2. Initial coin offering (ICO) / Crowdfunding
Crowdfunding is raising funds for a project or venture by raising money from various people.65
Initial coin offering is a method of crowdfunding through cryptocurrency. The ease with which someone
can log in to social media to request funds by just providing a Bitcoin address is here. Someone with an
internet connection can raise funds online through an elaborate money laundering scheme and does not
necessarily need to have a bank account to be able to do this. Very often ICOs are linked to fraud. 66
This is currently being addressed by global jurisdictions including the Securities and Exchange
Commission (SEC) and Commodity Futures Trading Commission (CFTC) and will hopefully be tackled
soon. 67
62CoinATM Radar Blog (n.d.). How to Buy Bitcoins with Bitcoin ATM. Accessed on January 28, 2018 from https://coinatmradar.com/blog/how-to-buy-bitcoins-with-bitcoin-atm/ CoinATM Radar Blog (n.d.). How to sell Bitcoins using Bitcoin ATM, accessed on January 28, 2018 https://coinatmradar.com/blog/how-to-sell-bitcoins-using-bitcoin-atm/ 63 Krebsonsecurity (September 19). Money mule gangs turn to Bitcoin ATMs, accessed on November 12, 2017 from https://krebsonsecurity.com/2016/09/money-mule-gangs-turn-to-bitcoin-atms/ 64 Santiago, W. K. (2018, February 15 and 26). Bitcoin, Blockchain and Cryptocurrency [Personal interview]. Mr. William K. Santiago, CBP is employed with the Central Bank of Curaçao and Saint Maarten as IT Trusted Advisor. 65 Wikipedia (n.d.). Crowdfunding. accessed on November 12, 2017 from https://en.wikipedia.org/wiki/Crowdfunding 66 Wikipedia (n.d.). Initial Coin Offering. accessed on November 12, 2017 from https://en.wikipedia.org/wiki/Initial_coin_offering La Placa, D. J. (2017, August 7). Watch this new emerging trend. accessed on November 12, 2017, from http://blog.intellect.us/2017/08/07/watch-this-new-emerging-trend/ 67 Hatmaker, T. (2018, February 6). Senate Cryptocurrency hearing strikes cautiously optimistic tone. Accessed on February 14, 2018 from https://techcrunch.com/2018/02/06/virtual-currencies-oversight-hearing-sec-cftc-bitcoin/
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They assume that the ICOs are securities and they can apply the howey test which dictates what is
classified as a security or not. The idea behind this is to protect consumers. 68
3. P2P Bitcoin lending platforms
Peer-to-peer Bitcoin lending platforms offer an opportunity for people that need to overcome their
financial need, by turning to one of these platforms to get the money they need. Compared to regular
financial Institutions the costs are lower and the processing time is quicker. These centralized platforms
connect borrowers and lenders, where the borrower post their requests and the lenders evaluate who
to invest in.
These sites require Identity verification and also require other measures to be taken in an attempt to
avoid fraud and theft. These measures may include confirming valid phone number, video verification,
linking social accounts and history from other trading / lending sites. All these measures will not
guarantee that the lender will not be scammed out of his/ her bitcoins. There is also no guarantee that
the lender is not laundering illicitly obtained (money converted into) bitcoins. These platforms also pose
a great risk for money laundering. 69
4. Bitcoin debit cards
These cards are prepaid Visa (debit) cards that can be reloaded (credited) with bitcoins. The funds
transferred to the card can be spent anywhere VISA is accepted or one can withdraw the funds from any
VISA compatible ATM. According to Bitpay, the card can be ordered online and they verify the identity of
the person purchasing the card. 70
There cards are considered New Payment methods (NPM) which also brings vulnerabilities for ML and
TF. These NPM can easily be used cross border and are very attractive to criminals, because they are:
Portable
Valuable
Easily exchangeable
Anonymous 71
They assume that the ICOs are securities. To confirm this, the howey test should be applied. This test indictates what is classified as a security or not. See FindLaw. (n.d.). What Is the Howey Test? Accessed February 2, 2018, from http://consumer.findlaw.com/securities-law/what-is-the-howey-test.html 69 Bitcoin P2P loans (n.d.). Bitcoin P2P loans- What is it and how does it work? Accessed on January 29, 2018 from http://www.bitcoinp2ploans.com/ Khatwani, S.(2017, July 27). The Best Person-to-Person Bitcoin Loan Networks (Bitcoin P2P Loans). Accessed January 29, 2018 from https://coinsutra.com/bitcoin-loan-networks/ 70 Bitpay(n.d.). BitPay Card – Visa® Prepaid Debit. How it works. Accessed on January 19, 2018 from https://bitpay.com/card/#howitworks 71 Study Guide CAMS Certification Exam sixth Edition. ISBN 978-0-9777495-2-2
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These cards are also attractive because they employ low transaction and or exchange costs compared to
what credit card companies, financial institutions, Paypal, etc., offer. 72
FATF issued “Guidance For A Risk-Based Approach Prepaid Cards, Mobile Payments And
Internet-Based Payment Services,” in 2013. The risks identified with new payment methods (NPMs)
were:
Non face-to-face relationships and anonymity:
Geographical reach
Methods of funding
Access to cash
Segmentation of services
Customer due diligence (CDD)
Loading, value and geographical limits
Source of funding
Recordkeeping, transaction monitoring and reporting 73
5. Dark web use of Bitcoin
The usage of anonymizing tools, such as darknet and mixers, facilitate anonymity. The object of these
tools is to obscure where the Bitcoin transaction originates from. Examples of these tools on the darknet
are TOR browser74, dark wallet and Bitcoin laundry.
TOR stands for The Onion Router. This peer-to-peer system encrypts communication and conceals the
computer’s true IP address, thus making the person surfing the dark web anonymous.75
Dark wallet is a browser- based extension wallet that ensures anonymity through implementing various
tools like mixer, decentralized trading, decentralized crowdfunding platforms and information black
markets, and decentralized marketplaces similar to “Silk Road”. “Browser based extension is a plug-in
that extends the functionality of a web browser”.76
Mixers also known as laundry or tumbler, are also a type of anonymizing tool. The object of these tools
is to obscure the chain of transactions in the blockchain. The transactions are linked in a way to appear
as they were sent from another address than the address which they are sent from. The transactions are
72 Eha, B. P. (2012, August 22). Get ready for a Bitcoin debit card. CNN Money. Accessed on January 19, 2018 from
http://money.cnn.com/2012/08/22/technology/startups/bitcoin-debit-card/index.html 73 Study Guide CAMS Certification Exam sixth Edition 74 TOR was developed by the U.S. Federal Government through the ofice of Naval Research and Defense Advanced Research Projects Agency (DARPA) and currently used by the NSA. See Wikipedia (n.d.). TOR (Anonymity Network). Accessed on February 26,2018 from https://en.wikipedia.org/wiki/Tor_(anonymity_network) 75 FATF Report (2014, June). Virtual Currencies. Key Definitions and Potential AML/CFT Risks. [pdf]. Retrieved on December 1, 2017 from http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf 76 Wikipedia (n.d.). Browser Extension. Accessed on January 23,2017 from https://en.wikipedia.org/wiki/Browser_extension
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DIFFERENCE between ML AND TF: The origin of the funds is the clue. “Terrorist financing uses funds for an illegal political purpose, but the money is not necessarily derived from illicit proceeds. On the other hand, money laundering always involves the proceeds of illegal activity. The purpose of laundering is to enable the money to be used legally.” Source: Study Guide CAMS Certification Exam sixth Edition
very difficult to trace. The tools arrange it in such a way that the addresses and the transaction cannot
be linked together, because the tool uses various complex dummy transactions in a semi- random series.
The transactions are being commingled with other user transactions to obscure which address the
transaction is intended for. Examples of these tools are Bitmixer.io; SharedCoin; Bitcoin Laundry. 77
D. Risk of TF
The rate at which transactions can be processed and the
pseudo anonymity that Bitcoin offers can be used to facilitate
TF. Up to now terrorists have not really approached the
Bitcoin alleyway to fund terrorism activities. But this does not
mean that it will not happen in the near future. The terrorists
have used informal cash based money transfer mechanisms
(IVTS) like the hawala systems to receive cash to do their illicit
businesses, but terrorist groups adapt to changing
environments. 78 At the moment the lack of infrastructure in
countries with active terrorist groups is also a major issue for
the disposal of Bitcoin as a method for terrorism financing.
The moment the terrorist groups have access to a better
infrastructure to acquire bitcoins and exchanging them in their
local currency, the risk of terrorist group using Bitcoin for terrorism financing will skyrocket. The modus
operandi of the Terrorist financing networks is to move funds from other locations to the locations
where they plan or launch their attacks. Terrorist financing networks have also not yet turned to Bitcoin
because their current methods of transferring funds is still effective enough to circumvent detection by
global/ regional/ local anti- money laundering/ counter terrorist financing rules / regulations/ reporting
requirements. As long as these relatively simple methods are effective there will be no need to
implement a new complicated method to transfer funds.79
77 FATF Report (2014, June). Virtual Currencies. Key Definitions and Potential AML/CFT Risks. [pdf]. Retrieved on December 1, 2017 from http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf 78 Goldman, Z. K., Maruyama, E., Rosenberg, E., Saravalle, E., & Solomon- Strauss, J. (2017, May). Terrorist use of virtual currencies: containing the potential threat. Retrieved on November 28, 2017 from https://www.cnas.org/publications/reports/terrorist-use-of-virtual-currencies Maxey, L. (2017, June 11). Terror Finance in the age of Bitcoin. Accessed on November 28, 2017 from https://www.thecipherbrief.com/article/tech/terror-finance-age-bitcoin Lormel, D.M. (2013, August 24). The Challenges of Terrorism Financing in 2013 and beyond. [pdf]. Retrieved February 3, 2018 from http://www.dmlassociatesllc.com/files/dml_challenges_beyond2013.pdf 79 Goldman, Z. K., Maruyama, E., Rosenberg, E., Saravalle, E., & Solomon- Strauss, J. (2017, May). Terrorist use of virtual currencies: containing the potential threat. Retrieved on November 28, 2017 from https://www.cnas.org/publications/reports/terrorist-use-of-virtual-currencies
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We better be prepared for the moment terrorist financiers start turning to Bitcoin to finance terrorist
activities, if they are not doing so already.80
“The key to good counterterrorism work is staying ahead of the terrorist curve,” says Fanusie Yaya
Fanusie, the director of analysis for the Foundation for Defense of Democracies’ Center on Sanctions
and Illicit Finance and former CIA counterterrorism analyst. 81
There are basically three steps in the Terrorist Financing Process:
Source of funds
Methods to launder money
Availability of funds82
Bitcoin can be used to fulfill these three basic needs for terrorism financing.
The major threat of a mass scale terrorism funding through Bitcoin is still seen as highly improbable due
to the great amount of money needed for the terrorism activities. On the other hand the ”lone wolf”
attacker might use bitcoin to fund his activities. 83
E. Method or sources of TF
Most of the sources of ML already mentioned above are also applicable for TF. In the below section I will
elaborate on the part applicable to TF.
1. Through Bitcoin Automated Teller Machines
As already mentioned in §IV.C.1. Through Bitcoin Automated Teller Machines the fact that
compliance features on a Bitcoin ATM can be employed or not by the operator, these machines can
also be used for terrorism financing. Funds can be placed through these ATMs in any location
around the world and withdrawn through another (Bitcoin) ATM somewhere else around the world.
80 According to Mr. William K. Santiago This technology is evolving rapidly and focusing on Bitcoin is too narrow. Focus on illegal activities is on other technologies. Bitcoin seems to be the last place where illegal activity will gravitate too, due to its transparency characteristics. E.g. bitcoin might be converted to monero or other crypto currencies which offer more anonymity. Santiago, W. K. (2018, February 15 and 26). Bitcoin, Blockchain and Cryptocurrency [Personal interview]. Mr. William K. Santiago, CBP is employed with the Central Bank of Curaçao and Saint Maarten as IT Trusted Advisor. 81 Maxey, L. (2017, June 11). Terror Finance in the age of Bitcoin. Accessed on November 28, 2017 from https://www.thecipherbrief.com/article/tech/terror-finance-age-bitcoin 82 Lormel, D.M. (2007, October 15). Understanding and disrupting Terrorist Financing. [pdf]. Retrieved February 3, 2018 from http://www.dmlassociatesllc.com/files/dml_whitepaper_20071015.pdf 83 Manheim, D., Johnston, P. B., Baron, J., & Dion-Schwarz, C. (2017, April 21). Are terrorists using Cryptocurrencies? Accessed on December 13, 2017 from https://www.rand.org/blog/2017/04/are-terrorists-using-cryptocurrencies.html Fanusie, Y. (2017, November 6). Will a new generation of terrorists turn to Bitcoin? Accessed on March 14, 2018 from https://www.thecipherbrief.com/will-a-new-generation-of-terrorists-turn-to-bitcoin
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Once the funds are converted to bitcoins these can be transferred to anyone pseudonymously and
used to purchase goods to perform terrorist activities. 84
2. Initial coin offering (ICO) / Crowdfunding
Crowdfunding is raising funds for a project or venture by raising money from various people.85
Initial coin offering is a method of crowdfunding through Cryptocurrency. 86The ease with which
someone can create an ID and log in to Facebook or another social media platform to request funds by
just providing Bitcoin address /bank account details is scary. This illustrates that someone with internet
connectivity can raise funds online for any terrorist activities and also illustrates that terrorist group
networks are / can be venturing outside of regular terrorist financing activities and looking into more
modern methods of generating funds for their illicit activities. The choices for the person donating funds
are endless, one can choose from providing funds to purchase weapon to funding the whole activity.87
3. P2P Bitcoin lending platforms
As already mentioned in § IV.C.3 P2P Bitcoin lending platforms, people can be scammed out of their
money / bitcoins, by investing in front companies set up to fund Terrorism activities.
4. Bitcoin debit cards
I refer to the information set out in § IV.C.4.Bitcoin debit cards. These tools can also be used for
Terrorism financing.
84 Neagle, C. (2013, June 07). Bitcoin ATM is horrible for money laundering, co- creator says. Accessed on November 12, 2017 from https://www.networkworld.com/article/2167059/malware-cybercrime/bitcoin-atm-is--horrible-for-money-laundering---co-creator-says.html Krebsonsecurity (September 16). Money mule gangs turn to Bitcoin ATMs. Accessed on November 12, 2017 from https://krebsonsecurity.com/2016/09/money-mule-gangs-turn-to-bitcoin-atms/ 85 Wikipedia (n.d.). Crowdfunding. Accessed on November 12, 2017 from https://en.wikipedia.org/wiki/Crowdfunding Wikipedia (n.d.). Initial Coin Offering. Accessed on November 12, 2017 from https://en.wikipedia.org/wiki/Initial_coin_offering La Placa, D. J. (2017, August 7). Watch this new emerging trend. Accessed on November 12, 2017, from http://blog.intellect.us/2017/08/07/watch-this-new-emerging-trend/ 86 Wikipedia (n.d.). Initial Coin Offering. Accessed on November 12, 2017 from https://en.wikipedia.org/wiki/Initial_coin_offering La Placa, D. J. (2017, August 7). Watch this new emerging trend. Accessed on November 12, 2017, from http://blog.intellect.us/2017/08/07/watch-this-new-emerging-trend/ 87 Goldman, Z. K., Maruyama, E., Rosenberg, E., Saravalle, E., & Solomon- Strauss, J. (2017, May). Terrorist use of virtual currencies: containing the potential threat. Retrieved on November 28, 2017 from https://www.cnas.org/publications/reports/terrorist-use-of-virtual-currencies
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5. Dark web use of Bitcoin
The usage of the Dark Web as explained in §IV.C.5. Dark web use of Bitcoin is never ending and can also
be an asset for the Terrorist Financier. The various tools available to ensure anonymity for the user to
sell and purchase illicit goods online makes this a perfect tool to facilitate Terrorism Financing.
F. Case studies ML:
“Silk Road” Website:
The Silk Road website was a hidden site on the TOR network where Illegal goods and services were
offered and the preferred mode of payment was through Bitcoin. The communication between the
sellers and buyers on The Silk Road website were considered anonymous and the payments made
through Bitcoin offered greater anonymity than traditional payment methods. The founder of the Silk
Road website was later tracked through one of his many aliases that were later linked to his personal
email address. When the site was finally shut down by the FBI, it was estimated that USD 1 Billion in
transactions took place on the site and the founder was suspected to have acquired a fortune of
approximately USD 28 Million. 88
Dutch man pleads guilty for dealing drugs for bitcoins:
According to a U.S. Prosecutor, A 22 year Old Dutch man named C.J.S from Woerden, The Netherlands,
using the alias Super Trips, was dealing drugs worth millions of dollars in bitcoins through a black market
website. S was dealing drugs through the “Silk Road” Website. He was arrested in Miami and
prosecutors are seeking forfeiture of more than USD 3 million in alleged proceeds from his crime.89
Illegal Bitcoin trade generated millions of Euros:
Thirteen men have earned around 10 million euros in one and a half years by the laundering of bitcoins,
which were earned in criminal trade. The public prosecutor’s office considered six men as the main
suspects. The criminal case against these six, is held in Utrecht, The Netherlands. Three men ages 21, 25
and 29 years from Arnhem and Krimpen aan den IJssel acted as bankers according to the public
88 Reese, H (2017, May 10). How the founder of the Silk Road made millions on his illegal startup on the Dark Web. Accessed on February 2, 2017 from https://www.techrepublic.com/article/how-online-marketplace-silk-road-became-the-craigslist-for-illegal-drugs/ Norry , A. (2017, November 29). The History of Silk Road: A Tale of Drugs, Extortion & Bitcoin. Accessed on February 2, 2017 from https://blockonomi.com/history-of-silk-road/ Cryptomaster (2017, August 20). Criminal mastermind of $4bn bitcoin laundering scheme arrested. Accessed January 31, 2017 from https://whatsbitcoinprice.com/market-news/criminal-mastermind-of-4bn-bitcoin-laundering-scheme-arrested/ 89 Nederlands Compliance Instituut. (2017). Praktijkgids bestrijding Witwassen en terrorisme financiering. ISBN 987-94-91252-27-3
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prosecutor’s office. They included bitcoins offered on Darknet Markets (an underground website for
illegal transactions). Three other suspects ages 21, 39 and 44 years were important customers. The
bankers used software to erase the tracks of the bitcoins and then exchanged them legally for cash. That
money was booked on dozens of bank accounts and then taken out again. Customers paid 10 percent
commission. 90
News: prison sentence for suspects dealing in drug and bitcoins in TOR networks.
On 2 October The Financial Intelligence Unit (FIU) in the Netherlands published the case of drugs and
bitcoins in TOR networks. Two of the suspects had received a demand of 6 and respectively 4.5 years in
prison. Yesterday, the District Court of the Netherlands (Rechtbank Midden Nederland) fully accepted
the demand from the Public Prosecutors Office. So the claim became the verdict. The confiscation
session will follow in December. Then it will be determined how high the criminal earnings have been
and what the convicted will have to pay to the state. A turnover of 5 million was achieved in a year with
the exchanging of only bitcoins for hard euros. 91
From virtual money to hard euros:
The best known virtual payment method is Bitcoin. Bitcoins are very popular as a means of payment for
deals on the darkweb. Criminals who earn bitcoins with their illegal trade in this way naturally want to
exchange the virtual currency into cash money in an anonymous way. A holder of a private bank account
at a bank established in the Netherlands came into the spotlight due to a certain pattern emerging on
the account. He did large cash withdrawals from his bank account. Investigations in the police database
indicated that the man had filed a report of robbery a year earlier. He stayed in a quiet part of a public
building when he was robbed of 7,500 euros. The man was not registered in the Netherlands as a
resident and he did not mention in his statement that he had wanted to purchase bitcoins with the cash
from someone. A transaction analysis soon revealed that he had made millions of cash withdrawals. In
addition, there were also the various international bank transfers to and from the account. The man
appeared to advertise on the internet under a company name, that he offered to buy bitcoins against
cash and that he is able to come up with the cash within the hour. He calculated a commission of 8 and
6 percent respectively, depending on the amount to be exchanged. The authorities had more than
enough reason to start an investigation into facilitating money laundering. Together with the English
police, three suspects were identified and their arrests followed for suspicions of money laundering. The
90 MSN Geldzaken (n.d.). Illegale Bitcoinhandel leverde miljoenen op. accessed on January 23, 2018 from http://www.msn.com/nl-nl/geldzaken/nieuws/illegale-bitcoinhandel-leverde-miljoenen-op/ar-AAv3tpK?li=BBoPEwG&ocid=DELLDHP 91 Financial Intelligence Unit –Nederland. Nieuws (2017, November 16) Nieuws: celstraf voor verdachten drugs, bitcoins en TORnetwerken. Accessed on February 6, 2018 from https://www.fiu-nederland.nl/nl/nieuws-celstraf-voor-verdachten-drugs-bitcoins-en-tornetwerken
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companies used by them turned out non-existent. When exchanging bitcoins to euros, no questions
were asked about the origin of the funds and the identity of the customer remained unknown. 92
Earned through darkweb:
The public prosecutor demanded sharp sentences against six suspects. Three years ago, FIU-the
Netherlands started with analyzing bitcoin exchangers. Over time, this resulted in a considerable
number of files that were transferred to the police and “Fiscale Inlichtingen en Opsporings Dienst”
(FIOD). The FIOD is the Dutch Anti-Fraud Agency. They proceeded with the investigations that led to
raids, arrests and seizures of, among other things, large sums of cash.
This time it concerned, six suspects, all customers of an exchanger. The FIOD was investigating an illegal
bitcoin exchanger, which will appear in court later this year. The FIOD was able to record money
transfers from the six suspects at locations such as Starbucks and Mc Donalds. The exchanger paid them
cash out in cash for the bitcoins received. The suspects were prepared to pay a considerably higher
commission than they would have had to pay with regular exchangers. Direct hard cash, no questions
asked about origin of funds, no verification of ID. The FIOD investigation also showed that the suspects
had been active on the darkweb and had obtained bitcoins from their illicit sales and this was the reason
for the anonymous exchange for cash.
None of the suspects had a plausible explanation as to why they had not been to a regular and therefore
much cheaper exchanger. The sentences for suspected money laundering ranged from 6 months to
three years. 93
Court cases:
The case is U.S. v. Murgio et. al., U.S. District Court, Southern District of New York, No. 15-cr-00769.
In a criminal case over hacking attacks against J.P. Morgan Chase and other companies, federal judge
Alison Nathan, ruled that bitcoin qualifies as money. Judge Nathan rules: “Bitcoins are funds within the
plain meaning of that term,” “Bitcoins can be accepted as a payment for goods and services or bought
directly from an exchange with a bank account. They therefore function as pecuniary resources and are
92 Financial Intelligence Unit –Nederland. Casuïstiek (n.d.). Van virtueel geld naar harde euro's. Accessed on February 6, 2018 from https://www.fiu-nederland.nl/nl/van-virtueel-geld-naar-harde-euros 93 Financial Intelligence Unit –Nederland. Casuïstiek (n.d.). Via darkweb verdiend. Accessed on February 6, 2018 from https://www.fiu-nederland.nl/nl/via-darkweb-verdiend BitNewsBot. (2017, November 08). Bitcoin Money Laundering Lands Six in Court. Retrieved March 14, 2018, from https://bitnewsbot.com/bitcoin-money-laundering-lands-six-in-court/
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used as a medium of exchange and a means of payment.” 94Another judge, Judge Jed Rakoff ruled in an
unrelated case that virtual currency met that definition.95
In another case a Miami Judge Mary Pooler ruled that bitcoins are not real currency. She stated that
bitcoin is not backed by any government or bank and has a long way go before it’s equivalent to money.
someone can be charged with money laundering In Florida only when they participate in a financial
transaction that will stimulate illegal activity. 96
G. Red Flags for ML and TF
The following are scenario’s to keep an extra watchful eye out for:
The last five bullets are related only to TF.
ICO’s 97
Usage of mixers and tumblers 98
Usage of VPN
Usage of Dark web /net
Usage of Bitcoin ATMs (cash withdrawals (in areas of conflict))
IP logins/ transactions originating or beneficiary of transactions in conflict areas (where
terrorists activists are known to come from)
IP logins/ transactions identifiable with travel to/ from conflict areas and the counties used as
points of entry en route to these areas. 99
Transactions related to Charity in areas of conflict especially in Syria100
Financial activity identifiable with travel [purchase of airline tickets] to Syria through Turkey and
other points of entry to include Jordan, Lebanon and Israel101
94 Reuters (2016, September 20). Bitcoin is real Money, Judge rules in J.P. Morgan Hack -The case is U.S. v. Murgio et. al., U.S. District Court, Southern District of New York, No. 15-cr-00769. Accessed on November 27, 2017 from http://fortune.com/2016/09/20/judge-rules-bitcoin-is-money/ 95 Reuters (2016, September 20). Bitcoin is real Money, Judge rules in J.P. Morgan Hack -The case is U.S. v. Murgio et. al., U.S. District Court, Southern District of New York, No. 15-cr-00769. Accessed on November 27, 2017 from http://fortune.com/2016/09/20/judge-rules-bitcoin-is-money/ 96 MFI Miami (n.d.). Miami Judge throws out Bitcoin Money Laundering Case. Accessed on November 27, 2017 from https://mfi-miami.com/2016/07/bitcoin-money-laundering-case/ 97 Choudhury, S. R. (2017, August 5). I’ts a very good time to be a money, launderer and you can thank cryptocurrencies. Accessed on March 3, 2018 from https://www.cnbc.com/2017/08/04/icos-may-be-seen-as-securities-by-u-s-and-singapore-regulators.html 98 Mary, J., Warrack, P. & Real, L. (2016, September 20). When two worlds collide. Accesses January 31, 2018 from https://www.acamstoday.org/when-two-worlds-collide/ 99 Hutchings, H. (2015, May 26). 58 Red flags for Terrorist Financing. Accessed February 3, 2018 from https://verafin.com/2015/05/58-red-flags-for-terrorist-financing/ 100 Hutchings, H. (2015, May 26). 58 Red flags for Terrorist Financing. Accessed February 3, 2018 from https://verafin.com/2015/05/58-red-flags-for-terrorist-financing/
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Top seven ways
your real world
identity can be
linked to your
Bitcoin address
H. Possible Investigative techniques to trace Bitcoin transactions to the individual
behind the transaction. 102
The investigative techniques to trace the individual(s) behind possible illicit Bitcoin transactions are not
well defined or mature. This mostly because the criminals are ahead in the game and the investigators
are always a step behind.
Requesting information from the bitcoin exchanger is a very important tool, used by law enforcement,
to be able to trace the individual hiding behind the address.
Another useful tool is: https://www.chainalysis.com/
Bitcoin Address- reuse can lead to possible tracing of the individual receiving bitcoins/behind the
transaction. Through information exchange with a Bitcoin exchanger Law enforcement will be able to
establish the real world ID behind the Bitcoin address.
101 Hutchings, H. (2015, May 26). 58 Red flags for Terrorist Financing. Accessed February 3, 2018 from https://verafin.com/2015/05/58-red-flags-for-terrorist-financing/ 102 Meiklejohn, S.,Pomarole, M. ,Jordan, G., Levchenko, K., McCoy, D., Voelker, G.M. & Savage , S. (n.d.). A Fistfull of Bitcoins :Characterizing payments among Men with no names. retrieved on December 1, 2017 from https://cseweb.ucsd.edu/~smeiklejohn/files/imc13.pdf
1. Publishing your name and Bitcoin address online –anyone on
the World Wide Web knows your address.
2. Trading bitcoins for national currency on an exchange -The
exchange knows your address.
3. Buying goods / services with bitcoin – The merchant or
payment processor knows your address.
4. Using a thin client or hosted Wallet – The server administrators
know your address.
5. Using Bitcoin without a VPN or TOR browser - your internet
service provider (ISP) knows your address.
6. Using Blockchain.info and Pissing Off Roger Ver – anyone on
the internet knows your address.
7. Getting a visible tattoo of your Bitcoin address – Anyone who
takes your picture knows your address.1
Source:99 Bitcoins (n.d). Top seven ways your identity can be linked to your Bitcoin
address. Accessed on December 1, 2017 from https://99bitcoins.com/know-more-top-
seven-ways-your-identity-can-be-linked-to-your-bitcoin-address/
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Mitigate risks for bad use
A. Attempt to regulate
One way to mitigate risks for bad use of Bitcoin is to try to regulate it. This poses a lot of challenges, due
to the way Bitcoin is set up to operate. It is not easy attempting to regulate a payment method set up
with the intention not to be regulated, but there are countries working very hard at regulating Bitcoin.
The European Union has been trying to regulate certain aspects of Bitcoin. The European Court of
Justice has exempted Bitcoin transactions from Value Added Tax (VAT). The European Commission
proposed to add digital wallets providers and exchange platforms in the Anti-Money Laundering
Directive to prevent anonymous exchange of bitcoins in July 2016. 103
Japan can be considered a trend setter in this aspect. “Japan’s legislature has passed a law that brought
bitcoin exchanges under anti-money laundering/know-your-customer rules, while also categorizing
bitcoin as a kind of prepaid payment instrument.” This law went into effect on April 1st, 2017 and will
put capital requirements, cyber security and other operational requisites for the exchanges. They are
also required to perform employee training programs and submit annual audits. 104
South Korea has also tackled anonymity and Money Laundering in cryptocurrencies. The new measures
will allow you only to trade in cryptocurrencies from real name bank accounts, so banks can comply with
KYC and AML requirements 105
The U.S. had a hearing on cryptocurrencies scheduled on February 6, 2018 related to cryptocurrency and
token markets. 106 In this hearing before the Senate Banking Committee, Securities and Exchange
Commission (SEC) Chairman Jay Clayton and Commodity Futures Trading Commission (CFTC)
Chairman Christopher Giancarlo sketched a “useful distinction among three pillars of the virtual
currency ecosystem (for lack of a better unifying term): cryptocurrencies, “a replacement for dollars;”
ICOs, “like a stock offering;” and distributed ledger technologies, or the technical framework generally
103 Coleman, L. (2017, January 15). BBVA Economist. Legal Framework needed for Bitcoin technologies. Accessed on November 12, 2017 from https://www.cryptocoinsnews.com/bbva-economist-legal-framework-needed-for-blockchain-technology/ 104 Keirns, G. (2017, March 31). Japan’s Bitcoin Law goes into effect Tomorrow. Accessed on November 27, 2017 from https://www.coindesk.com/japan-bitcoin-law-effect-tomorrow/ 105 Ming, C (2018, January 29). New cryptocurrency rules just came into effect in South Korea. Accessed on January 30, 2017 from https://www-cnbc-com.cdn.ampproject.org/c/s/www.cnbc.com/amp/2018/01/29/south-korea-cryptocurrency-regulations-come-into-effect.html Gibson, S. (2017, January 31). South Korean Government framed new rules for cryptocurrency Trading. Accessed February 3, 2018 from http://stocknewspress.com/2018/01/31/south-korean-government-framed-new-rules-for-cryptocurrency.html 106 Brito, J (2018, January 25). How the SEC and CFTC can address cryptocurrency while preserving U.S. innovation. Accessed on February 3, 2018 from https://coincenter.org/entry/how-the-sec-and-cftc-can-address-cryptocurrency-while-preserving-us-innovation?mc_cid=43c83fe30c&mc_eid=4c77927bdf
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known as blockchain.” The focus of the hearing was on protecting consumers ICO fraud and unsafe
exchanges instead of hindering growth. 107
Curaçao, a small island in the Caribbean is also partaking in the attempt to regulate Bitcoin by instituting
a Taskforce addressing Blockchain and cryptocurrencies. This taskforce consists of most of the
disciplines that are part of the international financial sector of Curaçao, including lawyers, tax advisors,
accountants, representatives of the Dutch Caribbean Stock Exchange (DCSX) and specialists in the field
of cryptocurrencies. The main goal of the task force is to provide recommendations for specific
legislation and regulations with which Curaçao will position itself as an attractive jurisdiction in this
highly innovative sector and hopefully making Curaçao attractive for funds and companies active in this
sector to settle in Curaçao. This in turn will give an extra boost to Curaçao's knowledge economy,
building on the strengths already present, including a multilingual population, very good internet
connections with several continents and decades of experience with international financial services.108
B. Transaction monitoring
Another key aspect and also a major challenge will be monitoring transactions for potential suspicious or
unusual transactions. There are Third party solution providers offering tools to contribute in identifying
suspicious or unusual transactions on Blockchains like Bitcoin. One of those companies is Blockchain
Intelligence Group based in Vancouver. They have developed a sophisticated transaction monitoring
system. Furthermore it is of the utmost importance to stay up to date on technological advances. We as
AML professionals should keep educating ourselves. In this scenario we need to know the basics of
blockchain technology and on how cryptocurrencies are being used and not only for the bad stuff, but
also for legitimate purposes.109
107 Hatmaker, T. (2018, February 6). Senate cryptocurrency hearing strikes cautiously optimistic tone. Accessed on February 14, 2018 from https://techcrunch.com/2018/02/06/virtual-currencies-oversight-hearing-sec-cftc-bitcoin/ 108 Taskforce voor cryptocurrency. (2018, January 23). Antilliaans Dagblad. Accessed on February 14, 2018 from http://antilliaansdagblad.com/nieuws-menu/17054-taskforce-voor-cryptocurrency Knipselkrant Curaçao (January 24, 2018). AD│ Taskforce voor cryptocurrency. Accessed on February 12, 2018 from http://www.knipselkrant-curacao.com/ad-taskforce-voor-cryptocurrency/#more-215933 Taskforce blockchain en cryptovaluta opgericht. (2018, January 24). Amigoe Curaçao 109 Mary, J., Warrack, P. & Real, L. (2016, September 20). When two worlds collide. Accesses January 31, 2018 from https://www.acamstoday.org/when-two-worlds-collide/
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Figure 5 Screenshot of the tools available at Third party for monitoring / assessing bitcoin transactions 110
Further to those aforementioned possible tools that can be used, Exchangers should block users
applying VPN when conducting bitcoin transactions. This way at least the real IP of the user is known
when transacting through an Exchange, thus minimizing the chances of a user (being a person)
transacting from within a conflict area.
C. Recommendations:
The following recommendations should be considered by the audience to try to stay ahead:
Instituting a team/ organization to thoroughly research Bitcoin from legal / legislative / technical
/commercial perspective and implications and involve all government organizations like FinCEN,
IRS, FBI, etc. and if possible also in cooperation with other similar organizations worldwide and
intergovernmental organizations like FATF and the Law Enforcement, Organized Crime and Anti-
Money-Laundering Unit (LEOCMLU) of the United Nations Office on Drugs and Crime (UNODC)
and the Anti-Money Laundering Global Task Force (GTF-AML). 111
110 Blockchain Intelligence Group (n.d.). Bitcoin Blockchain Search & Big Data Analytics. Rerieved on February 3, 2018 from https://blockchaingroup.io/ 111 E.g. on local scale is the community organization like Curaçao Blockchain and cryptocurrency Taskforce (“CBCT” See the following websites for the intergovernmental organizations. http://www.fatf-gafi.org/ and https://www.unodc.org/unodc/en/money-laundering/imolin-amlid.html and http://gopacnetwork.org/programs/antimoney-laundering/ Websites accessed on March 1, 2018.
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Institute a team / organization to draft legislation to regulate the use of bitcoin etc. 112
Draft legislation/regulation to address possible abuse at on/off-ramps
Draft legislation/ regulation to regulate organizations holding custody of private keys113
Create new institutions / licensing for institutions dealing in / with Bitcoin / cryptocurrency to be
regulated (if not already in the process of being created)
Redefining the current definitions as applied by FinCEN’s Interpretative Guidance on participants
in Bitcoin transactions (see below text)114
Development of a uniform term (applicable worldwide if possible) to define Bitcoin /
cryptocurrency and the parties involved in Bitcoin/ cryptocurrency transactions
Develop a central database for registration of AML / CTF emerging trends and their respective
Red Flags for Bitcoin / cryptocurrency
Add registry / database of IP addresses used for illicit Bitcoin transactions (similar to OFAC
Specially Designated Nationals and Blocked Persons List (SND) list )
Periodic research of the emerging trends to keep up to date recommendations and Red Flags.
Incentives for VC businesses themselves to prevent abuse in their commercial interests 115
Innovations by financial regulators/ legislators /policy makers to incorporate Virtual currencies
and new Payment methods.116
Explore the possibilities for regulated Blockchain (ledger) technology to be implemented in a
controlled environment (private Blockchain) 117
Development of Public – Private sector collaboration118
Raise awareness in private sector
Information campaigns for customers
Each Jurisdiction should conduct a national risk assessment to assess if their financial system
and regulatory framework supports a payment method like Bitcoin.
112 Morningside translations (February 28, 2017). Emerging trends in Bitcoin regulation. Accessed on November 12, 2017 from https://www.morningtrans.com/emerging-trends-in-bitcoin-regulation/ Buy bitcoin worldwide (n.d.). Bitcoin explained for dummies. Accessed on November 12, 2017 from https://www.buybitcoinworldwide.com/beginners-guide/ 113 organizations holding custody of private keys which mean possession of someone else’s asset 114 Sing, K. (2015). The new Wild West: Preventing Money laundering in the bitcoin network, 13 Nw. J. Tech. & Intell. Prop. 37 (). Accessed on December 10, 2017 from https://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=1229&context=njtip 115 Goldman, Z. K., Maruyama, E., Rosenberg, E., Saravalle, E., & Solomon- Strauss, J. (2017, May). Terrorist use of virtual currencies: containing the potential threat. Retrieved on November 28, 2017 from https://www.cnas.org/publications/reports/terrorist-use-of-virtual-currencies 116 Goldman, Z. K., Maruyama, E., Rosenberg, E., Saravalle, E., & Solomon- Strauss, J. (2017, May). Terrorist use of virtual currencies: containing the potential threat. Retrieved on November 28, 2017 from https://www.cnas.org/publications/reports/terrorist-use-of-virtual-currencies 117 Truthcoin (March 16, 2016). Private Blockchains demistified, Accessed on November 12, 2017 from http://www.truthcoin.info/blog/private-blockchains/ 118 Goldman, Z. K., Maruyama, E., Rosenberg, E., Saravalle, E., & Solomon- Strauss, J. (2017, May). Terrorist use of virtual currencies: containing the potential threat. Retrieved on November 28, 2017 from https://www.cnas.org/publications/reports/terrorist-use-of-virtual-currencies
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Furthermore I would also recommend looking into the current definitions of FinCEN and redefining the
parties involved in the Bitcoin transactions. As mentioned in K. Sing (2015). The new Wild West:
Preventing money laundering in the Bitcoin network. 13 Nw. J. Tech. & Intell. Prop. 37, a more proper
definition of user would be: “a possessor of a bitcoin that is neither an exchanger nor an administrator”.
“If a person is not an exchanger, then that person is not a money transmitter. This solution provides
Bitcoin users certainty as to their applicable regulatory status.”119
Also focus on organizations holding custody of private keys which mean possession of asset.
Conclusion
Bitcoin is a cryptocurrency which can be used to purchase goods and services in the real world. Bitcoin
has already been in existence for some time and as proven to withstand the test of time, but this new
payment method comes with its risks. The cryptocurrency can be used for both ML and TF, due to
among other things a lack of or insufficient KYC requirements and/ or other mechanisms, as
recommended in this paper.
The research conducted covers an assessment of how Bitcoin operates and an indication to what extend
it may be used for money laundering and terrorism activities. Bitcoin can be used for both legitimate
and illegal purposes. The mere fact that an individual or entity is transacting in bitcoins does not indicate
that this person is laundering money or financing terrorist activities.
We have to keep a watchful eye out and formulate a uniform term to define the parties involved in
Bitcoin transactions. Further to that possible red flags to indicate/ highlight these illicit transactions and
ways to monitor these must also be formulated. Once these systems are in place we can possibly
counteract these illicit transactions.
Given the fact that a Miami Judge ruled that bitcoin cannot be considered real currency and thus cannot
be used for money laundering purposes, we are still a long way from being able to fully regulate this
emerging trend. We have to start to try to understand the technology behind it and keep up with
emerging trends. All noses need to point in the same direction.
It can be concluded that whatever currency used that can be exchanged into fiat currency or is widely
accepted for the exchange of goods / services, must be considered to be a tool for money laundering /
terrorism Financing. In this particular scenario, bitcoin can be exchanged for fiat currency and thus can
be used for money laundering, as also ruled by Federal Judge Alison Nathan.
Just like cash, bitcoin can also facilitate the human economic improvement and growth. The crux is the
attempt to establish the balance between economic improvement and illicit usage by thoroughly
119 Sing, K. (2015). The new Wild West: Preventing Money laundering in the bitcoin network, 13 Nw. J. Tech. & Intell. Prop. 37 (). Accessed on December 10, 2017 from https://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=1229&context=njtip
Bitcoin: Risky business or Not?
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Page 37 of 57 Natasha G. Blomont, LL.B, CAMS- FCI
understanding this concept and properly categorize the parties involved and their respective roles in
AML/CFT.
Up until now the known cases of Bitcoin use for TF is very limited as the Terrorist groups are still trying
to comprehend this complex system of processing transactions through this relatively new technology.
Bitcoin has been in existence since 2009, almost 9 years later we still have insufficient regulatory
framework / legislation to support /cover the ML / TF risks involved with this new payment method. Up
to date Bitcoin has been the longest unhackable, unbreakable, 100% uptime, most secure system that
has ever existed in human history. We are living in the age of cryptocurrencies and it’s about time we
embrace this new and innovative payment method and collaborate together towards providing up to
date and effective legislation and regulation to safeguard ourselves for illicit use of this innovative
payment system. We can make an attempt by implementing the aforementioned recommendations,
which in turn can ultimately benefit the jurisdictions making the attempt and teach us valuable lessons
on this cryptocurrency highway.
Bitcoin: Risky business or Not?
March 15, 2018
Page 38 of 57 Natasha G. Blomont, LL.B, CAMS- FCI
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Figure 6 Schematic of how a Bitcoin transaction works 120
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Figure 7 Centralized, Decentralized and Distributed 121
121 SteemKR (n.d.). Differences between Blockchain & Distributed Ledger Technologies. Retrieved on February 28, 2018 from https://steemkr.com/blockchain/@wecrypto/differences-between-blockchain-and-distributed-ledger-technologies
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Figure 8 Blockchain Wallet Users 122
Figure 9 Popular Statistics regarding Bitcoin 123
122 Retrieved on February 2, 2018 from https://blockchain.info/charts/my-wallet-n-users 123 Retrieved on February 2, 2018 from https://blockchain.info/charts
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Figure 10 USD Exchange Trade Volume 124
Glossary
QR Code “QR codes have become common in consumer advertising. Typically, a smartphone is
used as a QR code scanner, displaying the code and converting it to some useful form
(such as a standard URL for a website, thereby obviating the need for a user to type it
into a web browser). QR code has become a focus of advertising strategy, since it
provides a way to access a brand's website more quickly than by manually entering a
URL.”125
Acronyms
AML Anti-Money Laundering
ARS Alternative Remittance System
ATM Automated Teller Machine
CBP U.S. Customs Border Patrol
CFT Combating the Financing of Terrorism
CIA U.S. Central Intelligence Agency
CIP Customer Identification Program
124 Retrieved on February 2, 2018 from https://blockchain.info/charts/trade-volume 125 Wikipedia (n.d.). QR Code. Accessed on November 19, 2017 from https://en.wikipedia.org/wiki/QR_code URL stands for Universal Resource Locator. It is another term for web address.
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BSA Bank Secrecy Act
BTC bitcoin (currency)
CBTC Curaçao Blockchain and cryptocurrency Taskforce
CDD Customer Due Diligence
CFTC U.S. Commodity Futures Trading Commission
CIP Customer Identification Program
CPU Central Processing Unit
DARPA Defense Advanced Research Projects Agency
DCSX Dutch Caribbean Stock Exchange
DLT Distributed Ledger Technology
ETH Ethereum (another cryptocurrency)
FATF Financial Action Task Force on Money Laundering
FinCEN Financial Crimes Enforcement Network, U.S. Department of Treasury
FIOD “Fiscale Inlichtingen en Opsporings Dienst” The Dutch Anti-Fraud Agency
FIU Financial Intelligence Unit
FBI Federal Bureau of Investigation
GTF-AML the Anti-Money Laundering Global Task Force
ICO Initial Coin Offering
IP Address Internet Protocol Address
IRS U.S. Internal Revenue Service
IVTS Informal Value Transfer System
KYC Know Your Customer
LEOCMLU The Law Enforcement, Organized Crime and Anti-Money-Laundering Unit of the UNODC
ML Money Laundering
MSB Money Services Business
NPM New Payment Method
NSA U.S. National Security Agency
OFAC Office of Foreign Assets Control, U.S. Department of Treasury
PII Personal Identifiable Information
SDN Specially Designated Nationals and Blocked Persons List
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SEC Securities Exchange Commission
SHA Secure Hash Algorithm
S.W.I.F.T. Society for Worldwide Interbank Financial Telecommunication code
TF Terrorism Financing
TOR The Onion Router
ULC Uniform Law Commission
UNODC United Nations Office on Drugs and Crime
URL Universal Resource Locator
US / U.S. United States
USD U.S. Dollar
VAT Value Added Tax
VC Virtual Currency
VPN Virtual Private Network
QR code Quick Response Code
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Appendix
A. About the author
Natasha G. Blomont is currently employed on her native Island of Curaçao as a Compliance Risk Analyst within the Maduro & Curiel’s Bank N.V. Group Compliance department since August 2015. She is operational in the field of transaction monitoring. She investigates and analyses client activities generated automatically or manually for potential money laundering and terrorism financing activities. She conducts in depth investigations on clients suspected of unusual transactions. She is passionate about compliance and likes to stay informed and up to date on current and emerging trends. She obtained her Bachelor’s degree in Laws from the University of the Netherlands Antilles. Professional Credentials:
Bachelor of Laws Certified Anti-Money Laundering Specialist (CAMS)
Professional Memberships:
Association of Certified Anti-Money Laundering Specialists (ACAMS)
Scan QR code to visit her LinkedIn profile.
URL: www.linkedin.com/in/natasha-blomont-curacao
