Seven years ago, agents from the United States Federal Bureau of Investigation busted into a San Francisco Public Library to arrest Ross Ulbricht, the mastermind behind the Silk Road. Launched in 2011, the Silk Road was the first modern darknet market where anonymous users could purchase illicit drugs, weapons and other illegal goods using Bitcoin (BTC).
Although the Silk Road was shut down in 2013 following Ulbricht’s arrest, many individuals still use Bitcoin and other cryptocurrencies to purchase illicit drugs from darknet markets. For example, a recent press release issued by the Naval Criminal Investigative Service, or NCIS, states that over the past year, there has been an increase of drug-related investigations involving Navy personnel. Many of these individuals have specifically been caught purchasing LSD using crypto on darknet markets. The release notes:
“Recent law enforcement reporting has revealed that an increasing number of people are moving to purchasing illicit substances via the dark web because of the perceived anonymity provided by tools like The Onion Router (TOR). They also use cryptocurrencies such as bitcoin to pay for purchases.”
Although darknet markets are havens for tools like TOR, which offer anonymity by obscuring IP addresses, law enforcement officials have been using new techniques to identify purchasers and sellers across these marketplaces. Additionally, while some cryptocurrency transactions can be anonymous, many are traceable. Michael Meyer, the chief information officer of automated crypto trading platform ArbiSmart, told Cointelegraph that while using crypto to purchase illicit drugs may appear to be secure, Bitcoin transactions are not that private:
“Even with the transparency associated with crypto, Bitcoin is not as private as people tend to think. Companies like Chainanalysis and CipherTrace are able to provide a lot of details about each transaction, which eventually can reveal the identity of those wallet owners and people involved.”
The NCIS has issued a warning to navy personnel regarding the risks involved with making illegal purchases on darknet markets. The NCIS has also noted that international, federal, state and local law enforcement agencies have been working together to infiltrate these markets while identifying and prosecuting those involved.
Law enforcement is getting smarter
John Jefferies, the chief financial analyst at blockchain analytics firm CipherTrace, told Cointelegraph that virtually all darknet market transactions occur using cryptocurrency. While this may be, Jefferies pointed out that law enforcement is upping its game, saying:
“Criminals are either under the misconception that crypto is anonymous, or they think they can launder it. However, the very basics of money laundering in the real world now apply to the crypto world.”
In June 2019, the Financial Action Task Force, or FATF, established a set of traditional banking regulations to be applied within the crypto sector. Also known as the “Travel Rule,” these new guidelines provide Anti-Money Laundering and Know Your Customer measures regarding cryptocurrencies. These rules are ultimately meant to prevent cryptocurrencies from being used for money laundering. The FAFT noted that the Travel Rule would be a requirement for digital asset service providers to enforce by June 2020. However, it appears that it may take longer than expected for the entire crypto sector to adopt these regulations.
Yet according to Jefferies, some progress has already been made. According to CipherTrace’s spring 2020 cryptocurrency crime and AML report, the global average of direct criminal funds received by exchanges decreased by 47% in 2019. This demonstrates a three-year low for crypto exchanges globally, with only 0.17% of funds received by exchanges in 2019 coming from criminal sources. In addition to the travel rule, Jefferies noted that CipherTrace has created a training program called the “Defenders League” where students are trained by professionals to investigate crypto criminal activities:
“It took a while to get the program going, but we already have about 30 students in the training program from a university in Monterey, California, that specializes in financial crime management. We also just created an inbound bot to qualify these cases. When law enforcement becomes more in tune to combat these crimes, this program will help.”
It’s also notable that the former U.S. Under Secretary of the Treasury for Terrorism and Financial Intelligence, Sigal Mandelker, recently joined a board of advisors at Chainalysis — a crypto forensics firm that provides crypto transaction data to the FBI and the Internal Revenue Service. It is rumored that Mandelker will help provide Chainalysis with insights on how to properly investigate crypto-related crimes, along with creating partnerships with federal officials.
Silk Road was just the beginning
While new procedures are being implemented to combat crimes related to crypto, new challenges have started to emerge, many of which stem from the short-lived success of Silk Road. According to Jefferies, there are still many versions of Silk Road today. He noted that drug dealers will often set up on four or five darknet markets while also creating their own websites as an alternative to generate extra revenue:
“We’ve seen an uptick in the number of new darknet markets emerging. We are tracking hundreds of vendors that sell drugs online. Our quarter-four report shows that Russia’s largest darknet market, Hydra, claimed to be doing 100,000 transactions a day with three million users.”
In addition, Jefferies mentioned that street crime is becoming more involved with crypto as well. “Drug dealers who would often only accept cash are now accepting cryptocurrencies, actually creating some advantages for law enforcement,” he said. Jefferies further pointed out that drug dealers and other criminals may be turning toward crypto due to the increase of crypto ATMs, or BTMs, which have made it more accessible. According to Statista, as of July 8, 2020, there are 6,366 Bitcoin ATMs in the U.S., and they continue to cause laundering concerns.
Todd Maher, the president of compliance at advisory firm BitSource AML Solutions, told Cointelegraph that while there has indeed been an increase in BTM usage, it hasn’t been proven that this is driving criminal activity: “Whether these BTMs are being used for the purchase of drugs has been inconclusive, with tools in place to assist in mitigating illicit usage risk,” further adding: “From the audits and clients that I service, the correlation of Bitcoin purchases to darknet markets and criminal addresses have been minimal.”
Maher further noted that each BTM operator is required to have an AML program in place to combat money laundering and terrorist financing. As a registered Financial Crimes Enforcement Network money service business, these providers also require a dedicated compliance officer, an annual audit of their AML program and regular training to assure that there is an acceptable culture of compliance within their operation. He elaborated:
“A BTM operation with strong internal controls is able to mitigate a great deal of inherent risk, leaving for a low residual risk. A risk assessment being conducted on their operation with an AML policy addressing these risks is the first step to combating financial crimes.”