Bitcoin … the new paradise for money laundering

Pierluigi Paganini November 19, 2012




In the last decade the cybercrime had made a substantial leap forward of the main threats to the security of each government. The turnover has reached unimaginable numbers attracting ordinary crime and creating new partnerships between organized crime and cybercrime making impossible to indistinguishable them.

Group of criminals are paying cybercriminals to receive support to realize complex cyber frauds, vice versa cyber criminals in many cases are reinvesting their earns in other criminal activities binding to major criminal cartels, crime has no limits, it expands like wildfire infiltrating every sector of society.

In addition to the usual cyber criminals activities such as development / distribution of malware to steal sensible information (e.g. banking credentials, personal information), cyber espionage and sales of hacking services a new phenomenon is becoming a very important, money laundering through the use of virtual currency schemes.

According several studies and reports of law enforcement and secret agencies money laundering using digital currencies such as Bitcoin is a possible emerging threat, despite there is little information on this phenomenon and lack of knowledge of virtual currencies and their dynamics.

Gaming platforms and digital communities offer many opportunities for money laundering, accessing to these channels is often possible to convert real currencies in virtual credits avoiding surveillance mechanisms.

To understand the money laundering its fundamental acquire knowledge on its lifecycle that is mainly composed of three distinct phases:

  • Placement, the act to introduce illegal funds into a financial system making for example transactions into bank accounts or acquiring services in a virtual world.
  • Layering. Transferring and dispersing illegal funds in the financial system. In the ordinary financial system this is possible using a maze of complex transactions involving multiple actors such as banks and corporations , in a virtual world the operation is quite simple making a series of unknown transactions to transfer digital currency.
  • Integration. This is one of the most critical stage, the “cleaned” funds are introduced again in the economic system, typically reinvesting them in legitimate business.

The lack of control on the financial flows to and from the cyberspace makes recycling operations through a virtual currency extremely efficient and very difficult to prevent, it must be also considered the absence of a regulation to approach the cyber laundering phenomena.

Bitcoins but also Linden Lab’s Second Life virtual currency (‘Linden Dollars’) are two valid example on how is possible to exchange money for virtual currencies and back.

Second Life is considered a pioneer in money laundering but the volume analyzed are still limited if compared with estimated world money laundering, in Q2 of 2011, the total amount of Linden Dollars held by Second Life virtual community was of US$30 million.

The anonymity of transactions and their instantaneity are crucial prerogatives of digital currencies such as Bitcoin,  its community is growing in the time attracting also an increasing number of legitimate companies that accept payments with virtual money.

The popularity of Bitcoins is largely increasing with the widely of underground community and with the spread of anonymizing networks such as Tor, the members of these “virtual worlds” accepted to adopt virtual currency to stay far from any king of control performed by law enforcement. The Deep Web is full of place where it is possible to acquire any kind of odds and services, legal and not, market place such as Silk Road has increased in impressive way its earns thanks to the explosion of the number of transactions performed by its members.

According an interesting research  made by the Carnegie Mellon computer security professor Nicolas Christin on the earning of one of the most famous black market in  the deep web, Silk Road, it seems to be able to realize $22 Million In Annual Sales only related to the drug market.  Total revenue made by the sellers has been estimated around USD 1.9 million per month, an incredible business also for the Silk Road operators that receive about USD 143,000 per month in commissions. The study highlights that the famous market reach $22 million in annual sales and around double the commission respect six months ago.

The figures must induce serious reflections on the use of digital currencies, they are becoming more attractive to criminal groups that exploring new channels to money laundering. Despite the volume of transaction is not really concerning Law enforcement, FBI first, are worried by the diffusion of the Bitcoin network that could be used by groups of criminals for financial illicit activities..

The editorial staff of Wired obtained a not classified document, titled “Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Deterring Illicit Activity,”   prepared by the FBI related to Bitcon system.

The report highlights the difficulty made to obtain information on suspicious transaction records and the impossibility to track users that made them.

The Bitcoin economy according the FBI report is not negligible, considering a quotation of about $12 per bitcoin and a total amount of more than 10.4 million bitcoins in circulation, we are facing with an economy of around $118 million, really desirable for the cybercrime.


The absence of central authority and any other control entity make new payment methods ideal for cyber criminals that using virtual currencies could make complex transfers not regulated by authorities and not traceable.

According AUSTRAC (Australian Transaction Reports and Analysis Centre) CEO John Schmidt traditional methods of money laundering still dominate:

“By far the bulk of attempted money laundering activity continues to be undertaken through the mainstream financial system,” “At this stage, digital currencies are not widely accepted as payment for goods and services, limiting the opportunities for criminals to use digital currency to convert, move and launder illicit funds, as well as the amount of illicit funds that can be laundered,”.

but the situation could change radically in the coming years.

The fight to money laundering through virtual currency schema is complex, the lack of any regulatory authorities and the  peer-to-peer architecture design make impossible the tracing of criminal activities, no governments could succeed in to oblige Bitcoin users to comply with local laws.

Simple scenarios for money laundering

The way to do money laundering through virtual currency schema for cyber criminals are multiple and depend on the specific virtual currency schema adopted.

Most famous schema are Second Life and Bitcoins, in both cases a launderers create up several virtual accounts using fake information. The network of accounts are used to perform a large number of transactions. The launderer can acquire products and services in the virtual world from its accounts, he has finally to direct all his proceeds to a subset of accounts that he maintains as collectors. At this stage he can withdraw those funds either from any kind of financial services such as bank account, it would be impossible to trace the source of those funds.

The transit from virtual currency to real one is a critical step, to avoid and elude law enforcement controls, the launders often use anonymizing software such as the famous TOR network.


Today virtual currencies are still used for low value transaction, but it’s easy to predict a sensible increase in use of electronic payment systems, probably  new payment methods will be defined in coming years, of course also the use by criminals will increase, for this reason it is absolutely necessary to define a global recognized regulatory to contrast the money laundering phenomena.

Pierluigi Paganini


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