Many people believe, for good reason, that the cryptocurrency Bitcoin is widely used by criminals. The growing number of firms looking to profit from the use of Bitcoin as a legal investment don’t like being associated with crime. So they decided to form an organization and pay an ex-CIA director to lend his prestige and credibility to a report that distorts the truth and whitewashes the huge and ongoing use of Bitcoin and other cryptocurrencies as key parts of criminal enterprises.
The Crypto Council for Innovation
The IPO of crypto firm Coinbase at a valuation of about $100 billion shines a bright light on the main asset it manages, Bitcoin. Coinbase, along with other crypto firms and major financial firms such as Fidelity, have formed a trade group called Crypto Council for Innovation whose purpose is to promote the benefits and general wonders of crypto and to “encourage the responsible regulation of crypto in a way that unlocks potential and improves lives.” They also will be “…addressing misperceptions and misinformation…”
To that end, the group has sponsored a paper. Here’s their description:
“In An Analysis of Bitcoin’s Use in Illicit Finance, a study authored by Michael Morell, former Acting Director, Deputy Director and Director of Intelligence at the Central Intelligence Agency (CIA) examines the general assertion that the Bitcoin market is rife with illicit activity. Morell concludes that Bitcoin’s use in illicit finance activity is limited and orders of magnitude lower than what has been cited by government officials. Morell’s analysis also reveals that the blockchain ledger is a highly effective crime-fighting and intelligence-gathering tool.”
The group is already meeting its goal of influencing public opinion. The headlines of articles include:
The pro-Bitcoin propaganda is working!
There’s the Report and then there are the Facts
Like all propaganda of its kind, the Morell report is all about starting with the conclusion you want – Bitcoin is great, criminals are fleeing from it! – and marshaling an impressive-sounding array of name-brand institutions and experts to say what you want. In this case, since the facts diverge from the desired conclusion so drastically, a good deal of work is required to reach that goal. Here are some of the major things the report did to whitewash the truth.
The report is self-serving
First and foremost, the people who wrote the report were bought and paid to do the job they did. Of course the report included words about how it was “objective.”
Think about it this way: suppose a governor of a state were accused of sexual harassment by multiple women and further accused of hiding actions leading to the deaths of thousands of seniors during the pandemic; how credible would a report be that was commissioned and paid for by that same governor? That’s what we have here.
The “experts” are nearly all anonymous
The report references experts from a wide variety of name-brand institutions who are said to support the report’s conclusions. This is an important subject. Don’t you think the report’s authors could get more than one such expert to go on the record? The one expert they got on the record has been retired for years.
Bitcoin technology is difficult for most people to understand
None of the report authors have any technical expertise. The ex-CIA man spent his early years on energy and East Asia, and then became a manager and communicator – which is what you would expect of someone who now spends lots of time working for media outlets like CBS
The report shows little understanding of Bitcoin technology
The words used in the second conclusion are one example among many: “The blockchain ledger on which Bitcoin transactions are recorded…” The way this is worded shows a lack of the most basic knowledge of how Bitcoin works, implying that Bitcoin is somehow not part and parcel of what some call the “blockchain ledger,” a phrase made up to describe one of the inextricable parts of the Bitcoin code base. In the normal world, transactions like buying a hose at a hardware store take place; some of those real-world transactions may later be recorded in a ledger; in Bitcoin, there is no difference between the transaction, the Bitcoin and the ledger.
Why do criminals like Bitcoin?
The report claims that criminals are fleeing from Bitcoin. Let’s step back and see what it is about Bitcoin that criminals like. The reason why criminals like Bitcoin and other cryptocurrencies is simple: it’s easy for them to avoid getting caught! It’s even better than wearing a mask when robbing a bank! It’s as anonymous as cash except that it enables the transacting parties to be an ocean away from each other.
How does Bitcoin enable criminals to exchange money secretly?
It is true, as the whitewashing report claims, that the Bitcoin ledger contains a complete record of Bitcoin transactions and is open for viewing to anyone. A knowledgeable person can look at any current Bitcoin holding and trace it back to the prior owner, the owner before, and so on to the transaction that created the Bitcoin. It’s totally transparent!
There’s a little wrinkle, though, that’s the key to everything: the buyer and seller of each Bitcoin transaction are identified solely by the public side of the encryption keys controlled by the transactors. The physical-world identity of the sender and receiver of Bitcoin is not recorded in any way, shape or form! In terms of the Bitcoin ledger itself, everything is 100% anonymous.
The report mostly disputes claims few people make
In the introduction they talk about “…public statements from officials on both sides of the Atlantic who have suggested that Bitcoin is used primarily for illicit activities.” In fact the argument most often made is NOT about the fraction of Bitcoin used for criminal purposes, but about the fact that the nature of Bitcoin makes it DESIRABLE for criminals to use, and that criminals in fact make use of it. At no point do the authors argue against the fact of criminals’ preference for Bitcoin. The authors’ first major conclusion is “The broad generalizations about the use of Bitcoin in illicit finance are significantly overstated.”
The first major section of the report is “Bitcoin’s Use in Illicit Activity is Relatively Limited” The authors don’t deny that criminals like to use Bitcoin. They even admit that it is the currency most often found in Dark Net Markets, i.e., places where illegal substances and objects are bought and sold.
They argue that the fraction of Bitcoin activity performed by criminals is decreasing
As the speculative frenzy for Bitcoin buying and selling continues to grow, this is plausible, but irrelevant to the core observation that criminals like using Bitcoin and that it enables their activity.
Suppose a city suffers 100 murders per year. Then the population of the city greatly increases, but 100 people a year are still murdered. Is the fact that a decreasing fraction of the population is murdered every year something to be celebrated? Would you want to proclaim that your city’s murder rate is going down?
The report they rely on does not support their conclusion
The Chainalysis report they quote does not claim that criminal use is decreasing, but that overall use is growing: “One reason the percentage of criminal activity fell is because overall economic activity nearly tripled between 2019 and 2020”
The also report states: “However, as always, cryptocurrency remains appealing for criminals as well due primarily to its pseudonymous nature and the ease with which it allows users to send funds anywhere in the world instantly, despite its transparent and traceable design.”
The uncertainty of the Chainalysis data about criminal use is ignored
Because of the difficulty of identifying the participants in Bitcoin transactions outside of highly regulated exchanges that enforce standard bank KYC provisions, identifying which are criminal is mostly guesswork.
For example, the 2020 report identified 1.1% of 2019’s transactions to be criminal activity. In the latest 2021 report that number was revised to 2.1%, nearly double! They admit the same uncertainty about their numbers for 2020 saying “we should expect 2020’s reported criminal activity numbers to rise over time as well.”
The authors minimize the extent of the use of Bitcoin by criminals
The revised Chainalysis 2019 number shows “$21.4 billion worth of transfers” by criminals. This is no small amount! It is about the same as the worldwide total amount of money lost to credit card fraud by banks! Vastly more people use credit cards than hold Bitcoin, and the yet the total amount of crime is about the same!
The supposed use of blockchain analysis for fighting crime
The report’s second conclusion finishes with: “Put simply, blockchain analysis is a highly effective crime fighting and intelligence gathering tool.” If this is true, don’t you think the report would have included some juicy examples of crimes that had been foiled or intelligence that was gathered from Bitcoin? The authors fail to give a single example – not one of a crime that has been solved by using “blockchain analysis.” And not one example of intelligence that has been gathered. Do you think this might have something to do with the fact that exactly zero personal identity information is contained in the blockchain? You know, the reason criminals like it?
On the other hand…
Criminals are everywhere. Criminals like money. Criminals have been finding ways to exchange and launder money as long as there has been money. Fully regulated banks that enforce KYC (Know Your Customer) identification standards are still used for criminal purposes. The most recent report (from 2015) from the US Treasury estimates that about $300 billion is laundered every year in the United States. This is in spite of the massive AML (anti-money-laundering) regulations imposed on banks that cause them to produce a flood of required AML reports to the feds, who proceed to catch and stop only a small fraction of the crime. Only this year, after years of increasing regulations and costs with ongoing ineffectiveness, has the relevant agency started to take steps towards measuring effectiveness instead of just requiring “churning out more data that proves to be less than helpful” in actually catching the bad guys.
Bitcoin promoters are anxious to upgrade the reputation of their currency. The report they sponsored for that purpose marshals an impressive array of classic propaganda techniques to convey its misinformation. Why not just state the facts?
The facts in this case are simple. Criminals make extensive use of our existing financial institutions. They manage to do so in spite of huge, costly efforts of banks, regulators and enforcement agencies, who end up catching only a small fraction of the crime. Criminals were early to jump on the Bitcoin bandwagon because of the anonymous, instant transactions it enabled. Criminals use Bitcoin today and are highly likely to continuing doing so, just as they continue to use existing banking mechanisms and largely escape capture. There is nothing about the “transparency” of Bitcoin that makes it easier to catch bad guys than existing systems.
I hope that the relevant organizations abandon the time-wasting report generation approach they’ve taken to finding financial crime in most areas other than credit card fraud and shift to a more entrepreneurial, results-oriented model with proper incentives to the participants. Here is the idea of the approach in general, and here’s an example of how it’s worked out in credit card fraud.