Tracing 66,000 Bitcoins: What We Should Learn From BTC-e Story

Compliance-as-a-service company Coinfirm discusses the BTC-e situation and the 66,000 Bitcoins moved.

According to Pawel Kuskowski, CEO & Co Founder at Coinfirm, right after the arrest of Alexander Vinnik, broadly referred to as the mastermind behind BTC-e, over 66,000 BTC were moved from 18f1yugoAJuXcHAbsuRVLQC9TezJ6iVRLp across the Bitcoin ecosystem.

Bitcoin mixers could be going extinct

Vinnik himself is facing 21 charges from a US grand jury, mainly for money laundering but also computer hacking and drug trafficking.

Lately the nefarious part of the cryptocurrency market took a big hit. It all started with a joint effort by law enforcement agencies from the U.S., Europe and Thailand to close two major dark net markets used mostly for the drug trade. Kuskowski notes that three days after the hack, BitMixer, the most popular Bitcoin mixing service announced their shut down effective immediately.

Mixing services (mixers, tumblers, anonymizers) are services that are tools for potential mixing of illegal funds and are recognized by Europol and Interpol as illegal tools - their use could be treated as intentional anonymization of funds.

In post on a bitcointalk forum, admins stated that they see the future of Bitcoin as more clean and legitimate than the dark net past. Moreover, it seems they realized that mixers became redundant in the wake of new Blockchain compliance and analytics solutions.

Ignorance is not an excuse

BTC-e.com, one of the oldest cryptocurrency exchanges, was considered a golden standard of reliability. This may seem peculiar, considering the reputation of the exchange operating from Russia. It turns out that this stability might have been rooted in illicit operations that took place on the exchange as some took advantage of the exchange’s consciously permissive policies.

Recent reports estimate that 95 percent of Bitcoin transactions resulting from ransomware attacks were cashed out through BTC-e, an exchange that was handling up to three percent of all Bitcoin traffic.

Now BTC-e faces a $110 mln fine from Financial Crimes Enforcement Network for facilitating ransomware and dark net drug sales, and US authorities have seized the site’s domain.

Note that ransomware is a criminal activity and helping with ‘anonymizing’ or ‘clearing funds’ from that source is considered money laundering and is a crime. We still can’t know if they’ll manage to get back in the game.

Kuskowski tells Cointelegraph that shortly after the first tweet announcing the site’s unplanned maintenance, authorities confirmed that one of the central figures behind BTC-e, Alexander Vinnik was arrested in northern Greece and now faces accusations of leading a money laundering operation estimated at around $4 bln, and it is also presumed that Alexander took part in the MtGox hack.

As a consequence, FinCEN assessed a civil penalty of $12 mln against Vinnik and if convicted he faces up to 55 years in prison.

An additional moral to the story is that whether knowingly or not, not preventing your company or platform from laundering money from criminal operations or sources cannot only seriously threaten your business, but also your personal freedom.

On July 27, 2017 Jamal El-Hindi, FinCEN’s Acting Director stated:

“We will hold accountable foreign-located money transmitters, including virtual currency exchangers, that do business in the United States when they willfully violate U.S. anti-money laundering laws. This action should be a strong deterrent to anyone who thinks that they can facilitate ransomware, dark net drug sales, or conduct other illicit activity using encrypted virtual currency. Treasury’s FinCEN team and our law enforcement partners will work with foreign counterparts across the globe to appropriately oversee virtual currency exchangers and administrators who attempt to subvert U.S. law and avoid complying with U.S. AML safeguards.”  

A new era for Blockchain

Kuskowski reveals that approximately two hours after the first tweet from BTC-e over 66,000 Bitcoins were moved from 18f1yugoAJuXcHAbsuRVLQC9TezJ6iVRLp Bitcoin address through a couple thousand intermediating addresses.

He notes that Coinfirm used their Blockchain AML & Analytics Platform that streamlines and automates AML and compliance for Blockchain, to trace the transaction.

This case sets a new era for Blockchain as one of the oldest exchanges was directly tied to illegal activities, and suggests that implementing AML analysis tools in exchanges and all crypto-related businesses is a necessity as the ecosystem moves forward.

Also, it highlights that regardless of where you are - AML/CFT rules need to be followed. Such events mixed with new solutions in the market is moving the whole Blockchain ecosystem further towards commercial and mass adoption, revealing the undisputed benefits it holds to a much wider scope of users and businesses.

Fixing the traditional system

Last January, Chris Skinner met with Kuskowski to discuss Blockchain and the future of Compliance. In a Laundering-as-a-service blogpost that resulted from that meeting, it reads that 98 percent of an estimated $1.6 trillion of global money laundering goes through the nets in the traditional financial system.

It turns out that the traditional finance system’s reliance on intermediaries and central authorities might be more prone to mismanagement, than fully decentralized, automated and auditable systems based on Blockchain and solutions that aren’t focused on investigation, but providing data to prevent being tied to financial crimes.

As would be the case with any functional unregulated value exchange system, Bitcoin was partially adopted by people who wanted to escape financial oversight. This made Bitcoin adoption a harder case especially for commercial entities.

Sometimes inaccurately praised for alleged anonymity, companies and financial institutions around the world became wary about adopting the world-changing innovation, and potential clients who are using it, do so mainly due to compliance and regulatory fears. Now it turns out that the tides have turned for the overall good.

With Compliance-as-a-service solutions for Blockchain-based systems, we stand on the verge of a system with the potential to nearly eradicate money laundering and provide a new era of honesty and transparency in the financial system.

Compliance is possible

This case proves that compliance for Bitcoin and cryptocurrencies is not only possible, but can become a layer for both Blockchain and traditional systems that enables the next generation of efficiency, transparency, and security for users and companies globally.

Functionalities, and the infrastructure offered by the maturing Blockchain ecosystem are unparalleled, and with the compliance hurdles deemed as the largest roadblock for cryptocurrency and Blockchain mass adoption being solved, it may give rise to a new era of compliance overall.

What used to be a large cost and labor drain for all parties involved, can now be automated and streamlined to the point where it no longer becomes a major burden, and opens up the possibility for smaller and disruptive players to enter the market and interact with companies and individuals globally.


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