The United States’ concerns about the rise of cryptocurrency use in illegal activities have only been growing as developments in the space continue to push the envelope. There is a global race to launch stablecoins that could be potentially utilized by more than half the world’s population. Meanwhile, Facebook is committed to launching a Libra stablecoin that is regulatorily compliant and can be used by over 2.5 billion Facebook subscribers. Russia is leading the world’s first multinational stablecoin initiative along with the Eurasian Economic Union and BRICS countries, which could be utilized by 41% of the world’s population, and Tether launched an offshore yuan-pegged stablecoin dubbed CNHT, which can be transmitted person-to-person via blockchain-based mobile devices.
Amid these developments, stringent U.S. federal laws and the subsequent Anti-Money Laundering measures adopted by traditional financial institutions are forcing sophisticated transnational organized syndicates and foreign adversaries such as China, Russia, North Korea and Iran, as well as terrorist groups and other non-state actors, to shift the movement of their illicit proceeds outside of the established financial industry. To avoid the scrutiny of U.S. law enforcement, these actors are increasingly employing non-traditional methods by moving crypto funds peer-to-peer via mobile devices, crypto exchanges and darknet markets into and out of the U.S.
Accordingly, U.S. law enforcement and regulatory agencies have responded to these concerns by continuing law enforcement efforts, establishing a Cryptocurrency Intelligence Program and proposing new regulations and tax reporting requirements to pave the way for the widespread adoption of blockchain technology.
U.S. law enforcement efforts
In a C-Span interview, the Department of Justice’s Associate Deputy Attorney General Sujit Raman discussed the challenges U.S. law enforcement faces in tracking peer-to-peer crypto tumbler payments made at encrypted dark markets and crypto exchanges via mobile devices that criminals increasingly use.
Nevertheless, despite these challenges, the U.S. Department of Justice recently charged two Chinese nationals with laundering over $100 million worth of cryptocurrencies via 113 virtual currency accounts from a hack of a cryptocurrency exchange by North Korean actors that were trying to evade U.S. sanctions. This ruling comes as a result of a multijurisdictional investigation undertaken by the Internal Revenue Service’s Criminal Investigation Division, the FBI, Homeland Security Investigations, and the Korean National Police of the Republic of Korea.
The DoJ also announced that the dark net’s “go-to” money launderer, who acted as a “Bitcoin mixer” — soliciting $300 million in cryptocurrency from criminals, slicing and dicing the coins, and then remixing them in an ultimately futile attempt to obscure their source — was indicted.
The darknet is really just the internet with a critical twist. Anyone with access to the internet can access the darknet, but must do so using Tor — The Onion Router. In its most basic form, Tor is an encrypted interconnected web of computers across the globe that allows anyone to access the internet with complete anonymity. Tor is not in and of itself illegal, but it can be used by criminals seeking to conceal their activities and evade law enforcement detection.
Darknet marketplaces also require payments to be made in cryptocurrency, stablecoins or cryptocurrency tumblers like Monero (XMR) to add another layer of anonymity to the transactions that occur on the dark marketplace.
Laundering money through cryptocurrencies and stablecoins leaves a permanent trail on the blockchain. Criminals have repeatedly been undone because they’ve relied on crypto for a part of their nefarious activities. Sometimes, they’ve been arrested years after their alleged crimes.
To avoid detection, criminals use cryptocurrency tumblers such as Cloakcoin, Dash, PIVX, and Zcoin, which have built-in mixing services as a part of their blockchain network. Monero, drug dealers’ favorite crypto, provides anonymity without tumbling services due to its privacy-centric blockchain design. Such cryptocurrency tumblers further impede tax collection and detecting Anti-money Laundering practices by law enforcement officials.
The Cryptocurrency Intelligence Program
The Immigration and Customs Enforcement, or ICE, is the principal criminal investigative agency within the U.S. Department of Homeland Security, which developed a new technique to track unlicensed crypto activity. The ICE enforces more than 400 Federal statutes that target darknet markets to combat the illegal movement of crypto funds with the help of agents who have been receiving “advanced darknet training” since at least September 2019. The ICE revealed the existence of a Cryptocurrency Intelligence Program in the agency’s 2021 budget proposal.
The proposal states that the program will seek to identify unlicensed crypto capital flows taking place across peer-to-peer marketplaces, online forums, crypto exchanges, blockchain-based mobile devices and darknet markets.
The CIP was developed by the ICE’s Bulk Cash Smuggling Center, which identifies, investigates and disrupts cryptocurrency smuggling activities around the world.
New crypto regulations
Just this February, the U.S. Treasury Secretary Steven Mnuchin told the Senate Finance Committee that his agency’s investigative arm would soon introduce stricter regulations around digital currencies to help expose “secret” accounts and other nefarious activities.
“We want to make sure that blockchain technology moves forward,” he told lawmakers, following with, “We want to make sure cryptocurrencies aren’t used for the equivalent of old Swiss secret number bank accounts.” His goal is to ensure law enforcement can see where the money is flowing, and that it’s not used for money laundering, he said.
IRS issues new tax compliance form for individuals
Taxpayers are required to report and pay taxes on income from virtual currency use. The Internal Revenue Service issued a new tax compliance draft 2019 Form 1040 Schedule 1, asking individual taxpayers to respond to a question similar to that relating to foreign financial accounts.
The newly added question was: “[A]t any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Also, the American Institute of Certified Public Accountants issued further non-binding guidance, in a practice aid on how to account for cryptocurrencies.
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