Exclusive: Criminals want money to crypto, new report finds

For a long time, crypto has been viewed as a shady industry that finances drug trafficking, terrorism and other illegal activities, an opinion substantiated by the downfall of FTX and the Silk Road. New data collected by CryptoISAC and Merkle Science, however, suggests this conclusion may be unfair and that it is traditional financial systems that may be more conducive to criminal activity.

The report, titled ‘Blockchain’s Role in Mitigating Illicit Finance’ was published in collaboration with Robert Whitaker, the director of law enforcement affairs at Merkle Science and former supervisory special agent at the Department of Homeland Security. “Cash will always be king because of its true anonymous nature,” Whitaker said. 

He added that crypto exchanges in the U.S. are obligated to follow a strict compliance regime—including know-your-customer and anti-money laundering rules— that make it easier to “de-anonymize” transactions that occur on the blockchain, which serves as a deterrent. 

“It’s law enforcement friendly in the sense that it has an immutable ledger behind it that is public,” he said. Cash, on the other hand, is much more difficult—at times, impossible—to trace.

An estimated 2 to 5% of the global GDP is laundered through traditional financial systems every year, equating to between $800 billion and $2 trillion, according to a figure from the United Nations Office of Drugs and Crime cited in the report. 

In contrast, only 0.34% of total on-chain crypto transaction volumes were flagged as potentially illicit 2023, down from 0.42% in 2022, according to data cited from Chainalysis, a blockchain analysis firm.

Even stablecoins, which are used by some crypto criminals to protect their ill-gotten gains from volatility, are rarely used for illicit transactions. Between July 2021 and June 2024, only 0.61% of transactions involving Tether’s USDT and 0.22% of Circle’s USDC were flagged as potentially illicit, according to data collected by Merkle Science. 

The U.S. Department of Treasury came to the same conclusion, declaring “…the use of virtual assets for money laundering remains far below that of fiat currency,ˮ in their 2024 money laundering risk assessment. 

CryptoISAC was founded in May by industry leaders including Circle, Coinbase, Kraken, Evertas and Solana Foundation. 

The CryptoISAC report also calls for international collaboration to mitigate national security concerns since a large sum of illegal crypto activity takes place in offshore exchanges that are not subject to the same restrictions as those in the U.S. The report urges the Department of Justice to prosecute these cases and tailor legislative solutions to target the uniqueness of cryptocurrencies. “…Quit trying to stuff crypto, a round peg in a square hole called fiat-currency regulation,” as Whitaker said. 

The former supervisory special agent hopes his analysis will educate crypto skeptics on the topic and encourage policymakers to set forth clear and comprehensive regulations.

“We’ve already seen national security issues pop up, like funding terrorist groups, funding of illicit governments, funding sanctions avoidance. You know, crypto can be used for those things, and it is,” Whitaker said. “So, the longer we take and ignore the problem, the more we allow illicit actors to benefit from this space.”