The Brave New World of Virtual Currency AML

October 3, 2017

Started in the mid-2000s, virtual currencies (“Vcurrency”) are becoming the alternative monetary instrument of choice in the illicit global financial system. Borderless, electronic, free from central banking authority, strict regulation or seizure; many observers including law enforcement claim that we are witnessing a “Wild West” in alternative currency. Until multilateral legislation is enacted to standardize and regulate it, Vcurrency will continue to threaten the traditional banking system and its existing regulated infrastructure. Criminals who work in the shadows of the dark web are now primarily paid in Vcurrency, which is an attractive way to launder funds.

Meanwhile, supporters of the legitimate utilization of Vcurrency laud the fact that all transactions are held in a public ledger that can be tracked and ultimately verified. They claim that anything done in the virtual world leaves a digital footprint. This was recently proven correct in the arrest of Russian Alexander Vinnik, accused of laundering more than $4bn in Bitcoin, including funds obtained from the hack of failed bitcoin exchange Mt Gox. While Federal authorities (Greek Police, and U.S. DOJ officials) sought to bring Vinnik to justice, the real story is the vital information that made it possible: a group of independent and informal Vcurrency investigators spent years tracking and tracing the laundering of Mt Gox’s missing billions in bitcoin.

“We won’t beat around the bush with it: Vinnik is our chief suspect for involvement in the MtGox theft (or the laundering of the proceeds thereof). This is the result of years of patient work, and these findings were surely independently uncovered by other investigators as well. Everyone who worked on the case have patiently kept quiet while forwarding findings to law enforcement, so as not to tip suspects off and to maximize the chances of arrests” – statement on July 27, 2017 from WizSec.

Vcurrency’s proponents argue that the Vinnik investigation was an example of how the system could be successfully audited, albeit the arduous amount of time and resources it took to uncover complex math problems and funds tracking. Without the assistance of independent and unpaid security researchers, this case may have remained cold.

Do law enforcement agencies and regulators have the capacity to confront these challenges?

Tumble Those Coins

As noted above, unlike with cash, all Vcurrency transactions are recorded, so commerce between legitimate businesses can be monitored. Yet ownership of Vcurrency and cash is not the same. Tumblers, as they are known in the Vcurrency ecosystem, offer a service that can effectively anonymize the owners of Vcurrency by exchanging their tokens with ones belonging to someone else who also wishes to protect their anonymity. Tumblers extract a percentage of each transaction, making a cut in the process and making money launderers salivate.

New coin implementations are offering Tumbler services as part of their blockchain networks that evades traditional public ledger accounts, offering near untraceable transactions. Cloakcoin, Dash, PIVX and Zcoin are some of the services that are using cutting edge methods that will make law enforcement, revenue services, and regulators dizzy with preoccupation on how to confront illicit financial transactions. The digital revolution in money laundering may be entering a golden age. How will governments and the private sector respond?