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Bitcoin Crime May Be Much Less Than It Seems

For some, the concept of cryptocurrencies goes hand in hand with illegal activity. But recent research suggests that whales have very little to do with it.

Bitcoin’s (BTC) biggest boost before 2017 might have been news about the illicit market place Silk Road. Once the world found out about a place online where you could send untraceable money to buy drugs and weapons, it could never look back. Bitcoin attracted hoards of new followers, good and bad alike.

Soon enough, authorities closed the Silk Road, and the public largely forgot about crypto until 2017’s bull-run.

Unfortunately, this breakout into public consciousness created a lot of negative connotations for bitcoin. Before 2016, the most anyone had ever heard about bitcoin was that the price fluctuates often and it is used to fund illegal activity.

A 2019 Foley, et al paper found that up to 26% of bitcoin users and up to 46% of bitcoin transactions were used for illegal activity. These types of trades accounted for $7 billion in equity in bitcoin and $76 billion in trade volume in 2017.

Though striking, these numbers are not without caveats. Since 2017, bitcoin has seen much more mainstream interest, and with that has come more attempts at Know-Your-Customer (KYC), regulation, and better tracking protocols.

Some entities are even selling their services exclusively for such purposes. Anti-money laundering company (AML) AMLBot uses its algorithms to trace which addresses and bitcoin transactions have been involved in illegal activity.

Indeed, this tool has shown that regulatory trends in crypto are likely to decrease the amount of “black” crypto addresses. AMLBot told BeInCrypto:

“We think [the number of ‘black addresses’] will fluctuate around 2% due to deepening regulations, and strict AML/KYC policies on major exchanges. No matter what happens outside the exchanges, within the exchange BTC addresses are purifying.”

AMLBot’s crime-seeking methodology tags coins related to crimes ranging from illegal marketplaces, to ransomware attacks, to stolen coins. The technology marks illicit bitcoin as risky.

In AMLBot’s categorization system, suspicious activity might originate at crypto ATMs or no-KYC exchanges, while reliable coins might come from mining or highly regulated/self-regulated known wallets.

Money laundering is difficult, but criminals find a way. AMLBot gave BeInCrypto some examples:

“There are still a lot of loopholes for money laundering, like peer-to-peer exchanges, DEXs, exchanges with weak AML/KYC policies, etc. The easiest way is to sell with a discount.”

The qualifications for dirty bitcoin in Foley’s 2019 study include a similar algorithm known as the Union-Find algorithm. This popular method of tracking funds compares transactions and addresses to automatically approximate the provenance and destination of flagged funds.

This method is not 100% accurate, however. Plus, there are a lot more addresses now than there were in 2017. Therefore, the “46%” of addresses being related to crime needs to be updated.

So even if this $7 billion in illegal bitcoin remained in circulation today, it would be diluted by a much larger bitcoin market cap, which is now around $700 billion (putting that illegal equity at around 1%).

In fact, it has been found that bitcoin crime has dropped significantly year on year. Crypto crime in 2020 dropped to $1.8 billion, through October, compared to $4.5 billion the previous year.

Then we have to take into account what counts as “dirty” bitcoin.
One way that criminals launder their bitcoin is putting them through “mixers.” These essentially create many transactions for many wallets which intersect with “clean” bitcoin, so that in the end the dirty BTC is difficult, if not impossible, to track.

A result of this is that many legitimate and innocent users end up with bitcoin that has been flagged as dirty. The criminal activity allegedly related to such activity has since disappeared into the ether, so to speak.

Another issue with these high numbers is what qualifies wallets as being dirty. AMLbot, for example, tags wallets that are associated with markets which do not use, or use poor, KYC standards.

Likewise, some OTC or P2P services, like Local Bitcoins which recently announced it would shut down operations in several states can qualify an address for flagging.

Because of a lack of KYC, criminally-tainted bitcoin is more likely to end up on unregulated exchanges and OTC/P2P services. However, it is a fallacy to say that all such wallets conduct illegal activity. Innocent normies used P2P service Local Bitcoins, too.

In this case, some bitcoin may be flagged as dirty when it is not, and some bitcoin may have been successfully laundered. This makes it harder for these algorithms to track criminal activity (though the tracking is getting better).

For this reason, the amount of tainted bitcoin in the literature may be higher than the actual amount in circulation. Tracking illicit volume amplifies the problem as dirty crypto is diluted ever faster.

While it is clear some illegal activity is funded by bitcoin, it is a misconception to say that most, or even a lot, of bitcoin is part of the dark underbelly of the internet.

AMLBot conducted research of the top 100 bitcoin wallet addresses, and found that the vast majority of them were squeaky clean.

According to Glassnode, there are about 100 addresses containing more than 10,000 BTC (about $400 million, at press time). This includes an address with $1.9 billion in BTC that has not been touched since 2014.

While whales might divvy up their bitcoin between addresses, these 100 wallets still account for a humongous percentage of bitcoin in existence, and the vast majority of those wallets have no flags for dark dealings whatsoever.

Amazingly, out of these top 100 coins, only six contained any bitcoin originating on the darknet. And of those wallets, only three had more than 1% of the total value coming from possible illicit activities.

Likewise, while 15 addresses have been flagged with any kind of risky behavior, only five of those had more than 1% of their funds causing alarm.

While privacy coins are resistant to regulation, AMLBot believes that they will be squeezed out by most governments and reputable exchanges. The coins may be marginalized, but will still remain popular, “in certain circles.”

While research in the past has suggested that bitcoin is tied closely with criminal activity, recent data suggests that the proportion of illicit bitcoin is shrinking.

With the crypto market cap reaching over $1 trillion, governments are going to want to regulate this market. However, the incoming SEC Chairman Gary Gensler and the current Comptroller of the Currency have been surprisingly open to blockchain.

Likewise, despite the federal lawsuit against Ripple, most major cryptocurrencies remain legally intact when it comes to United States federal prosecution.

A combination of better technology and understanding governments could lead to a safe, secure, decentralized digital monetary system in the future.

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Crypto Stats


CryptoCurrencyUSDChange 1hChange 24hChange 7d
Bitcoin58,021 0.13 % 7.16 % 13.34 %
Ethereum2,843.6 0.13 % 2.75 % 20.27 %
Binance Coin631.50 0.73 % 4.00 % 19.65 %
Tether1.000 0.04 % 0.09 % 0.11 %
Polkadot43.88 0.58 % 0.43 % 36.39 %
Cardano1.360 0.49 % 1.19 % 17.27 %
XRP1.590 0.46 % 10.13 % 36.03 %
Uniswap40.83 0.41 % 0.14 % 23.97 %
Litecoin272.41 0.45 % 4.28 % 13.18 %
Chainlink38.41 0.46 % 4.38 % 9.59 %