This blog is part of the “Crypto Compliance Corner” series from our Chief Compliance Officer, Peter Singer.
Welcome back, my dear readers! Let’s face it, being part of history in unchartered territory is exciting, but it doesn’t come without risk. I am often asked about how Bitcoin is used for money laundering or *insert illegal activity here*. People then follow up by asking, “Isn’t that its only purpose?”
Again, this is not uncommon in new technology, and the bashing of it in last week’s House Finance Committee hearing (fast forward 16 minutes) on how digital currency is the future of money by a certain California Representative doesn’t help with quelling any fears, uncertainties, and doubts (aka FUD) that people may feel.
The Subcommittee on Monetary Policy and Trade #hearing on “The Future of Money: Digital Currency is happening right now and we are tuned in.
— Coinme (@CoinmeATM) July 18, 2018
If you’ve heard of the term money laundering, but aren’t exactly sure what it is (or your knowledge is rooted in money laundering you’ve seen take place in movies or television shows), here’s how I best describe it: money laundering is taking money earned from illegal activity and making it look like the money was earned legally.
If you’ve seen Breaking Bad, then just think of the car wash that Walt bought when Skyler is trying to make up enough customer receipts to add up to the millions of dollars he earned from meth sales. I know, I know, I used a TV example, but whatever. You understand it now, but if you haven’t seen Breaking Bad, then start binge watching right after you finish this post.
A newer method of money laundering is using those games whose ad you have to watch when you’re trying to get another bird card in Angry Birds 2. What’s the tie in? Criminals can buy stolen credit card information off the dark web with Bitcoin off of an exchange, which was purchased with money from drug sales (as an example).
They use these stolen cards to level up characters through the in-app purchases and then sell the boosted profiles on websites. The money now looks like it came from the sale of game profiles, which isn’t illegal, though I’d guess it may be a violation of the respective games’ terms of service. Because you want to own or do own Bitcoin, are you going to use it to buy stolen credit card information? NO — you just want the Bitcoin.
Yes, I acknowledge Bitcoin has been used for illegal activities, but do you know what else has? Frozen chicken. Yes, you read that correctly, and using frozen chicken for illegal activities has been happening for decades.
How? One way is called “black market peso exchange.” For example: drugs are smuggled into the U.S. from Columbia and sold for U.S. dollars (USD). Criminals take these U.S. dollars and sell them to a “broker,” who then uses the USD to buy pesos from the Columbian frozen chicken business owners that live in the U.S.
The business owners buy more product to ship over to Columbia where it is sold for pesos, which is then sold to the same “broker” who uses it to pay the drug cartel. When you buy that frozen chicken for next week’s dinner, is it because you want to support selling drugs? NO — you just want chicken. It is important to remember that just because items are and have been used for illegal activities, that doesn’t mean those items are inherently bad. So the next time you’re about to serve a nice cup of judgment to someone who supports virtual currency, think about that chicken dinner you just ate.
How do compliance officers prevent this from happening? Why should I trust a bitcoin company? What’s up with everyone wanting my ID suddenly? Tune in next time my friends! From my corner to yours — thanks for stopping by.