Unpacking Crypto: New Currency or Money Laundering Tool?

Cryptocurrency is full of contradictions. Bitcoin, the first cryptocurrency, was invented in 2009 by the mysterious Satoshi Nakamoto (presumed to be a pseudonym). The year before he published a famous whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” The document detailed the concept of a currency that didn’t rely on the infrastructure of a traditional financial institution. Many see Nakamoto’s invention as a work of innovative genius. Others think it’s nonsense—an overhyped fad that’s destined to implode.

Cryptocurrency is often characterized as a revolutionary tool that helps combat centralized financial power. Yet it also attracts criminals who use it to steal and commit fraud.

There are a lot of gray areas when it comes to cryptocurrency; it’s complicated. But what’s not at debate, is that crypto-based transactions and crime are both at an all-time high, and retailers should take note.

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An Evolving Concern

The volume of cryptocurrency transactions grew to $15.8 trillion in 2021, up 567 percent from 2020, according to Chainalysis’s 2022 Crypto Crime Report. At the same time, fraudulent transactions totaled $14 billion in 2021, an increase of 79 percent from the previous year. Moreover, from early 2021 to mid-2022, approximately 46,000 people reported losing over $1 billion in crypto scams, which is about sixty times more compared to 2018, according to the Federal Trade Commission’s 2022 Consumer Protection Data Spotlight.

While crypto-based crime continues to rise, most retailers don’t have to worry about shady characters coming into their stores and using cryptocurrency to fraudulently purchase goods—at least not yet.

Cameron McDougal

“That’s not how it works,” said McDougal, a criminal analyst with the US Department of Homeland Security who specializes in financial investigations, including those involving cryptocurrency.

McDougal said that typically criminals aren’t using cryptocurrency to steal from individual retailers. Rather, cryptocurrency serves as more of a “value transfer mechanism,” and by the time it enters the picture, the merchandise has already been stolen and is working its way up the criminal operation ladder.

In a common scenario, thieves steal merchandise from stores. That merchandise goes to a fencing operation, which then sells it to a bigger supplier higher up the chain. The stolen goods are ultimately converted into cash.

But large amounts of illegal cash are difficult and risky to move and store. On top of that, the money can’t be deposited into a traditional bank account because financial institutions have anti-money laundering protocols and regulations in place. These require customer information and other identifying data.

Cryptocurrency, on the other hand, has mechanisms that enable criminals to distance themselves from illicit funds, but it’s a complicated process. The ways in which crypto could potentially impact the retail industry continue to evolve.

Pluses and Minuses

There are hundreds of different cryptocurrencies, with the most popular being Bitcoin, which represents nearly 70 percent of all cryptocurrency use, said McDougal. Other popular cryptocurrencies include Ethereum, Tether, and USD Coin.

Bitcoin is unique in that it’s the first functional digital currency to run on a blockchain and the first digital currency to be successfully maintained in a decentralized manner. Another unique aspect of Bitcoin is that it’s finite. McDougal said that Nakamoto wrote the cryptocurrency code so that there will only ever be a total of 21 million Bitcoins in circulation.

“Once all those coins are mined, they’re done. There’s no way to go back into the algorithm and add more Bitcoin, and this adds to its value,” he said.

There are currently about 19.1 million Bitcoins mined, and it’s estimated that by 2140 all Bitcoin will be mined. Crypto mining refers to a complex process that requires advanced computer equipment to solve math equations. McDougal said a mining operation often resembles something from the 1980s, with entire rooms filled with a network of CPUs. “It’s very expensive to operate,” McDougal said.

People earn Bitcoin rewards by competing to solve a very complex set of algorithms that includes thousands of verifications, McDougal said. The first mining operation to complete the process is rewarded with 6.25 Bitcoins—although that amount is scheduled to be cut in half in May 2024.

McDougal said that in addition to creating new Bitcoin, crypto mining is also the process by which transactions are verified.

When Bitcoin was launched, it was positioned as a currency that could be used for a variety of transactions, from buying a pair of pants to a luxury car. And while a growing number of retailers are now accepting Bitcoin— including such notable companies as Starbucks, AT&T, Microsoft, and e-commerce platform Overstock—the majority have yet to embrace cryptocurrency, especially when it comes to larger purchases, like real estate, for example.

Moreover, when you purchase something with cryptocurrency, in most cases you have to convert the digital funds into fiat money, like US dollars. To convert cryptocurrency like Bitcoin, you generally must go through certain banks or a cryptocurrency exchange, which allows customers to trade cryptocurrencies for other assets. These can include conventional fiat money or other digital currencies.

McDougal explains that while you may be able to buy a TV, watch, or even a car with crypto, you can’t put all your assets into crypto and buy necessities like food, housing, medical, and insurance. “At some point, you’re going to have to convert the value you have stored in crypto to whatever fiat currency you use to buy those necessities.” Whether more retailers accept cryptocurrency in the years to come is a hotly debated question, as there are multiple factors working both for and against it.

Helping bolster cryptocurrency are technological innovations that make cryptocurrency transactions faster and more efficient, including decentralized networks that enable instant payments across a network of users. And consumers can use a preloaded crypto debit card to make purchases, and the retailer, through partnerships with payment-processing companies, receives fiat money as payment, such as US dollars.

Additionally, the success and widespread use of cryptocurrency ultimately depend on the number of people who accept and legitimize it. While there are still plenty of holdouts, a growing number of regulators and policymakers are supporting cryptocurrency, so it’s no longer seen as an obscure financial oddity.

Even with this momentum behind it, there are still some substantial drawbacks to cryptocurrency. For one, unlike fiat money, cryptocurrency accounts are not insured by the government, so there is typically no bank or other entity to raise a red flag about suspicious transactions.

As opposed to credit or debit cards, where there’s a process in place to help get your money back if something illegal happens, like a fraudulent purchase, cryptocurrencies typically do not come with any legal protections. If something happens to your account or cryptocurrency funds, the government isn’t obligated to help you recover your money.

Also, cryptocurrency payments typically are not reversible. Once you pay with cryptocurrency, you can usually only get your money back if the person you paid sends it back.

Tracing Funds

One factor that attracts criminals to cryptocurrency is the common belief that it’s anonymous, but as with most things crypto, it’s not that simple. Unlike fiat currency, cryptocurrency, including Bitcoin, only exists electronically. You can use your phone, computer, or a cryptocurrency ATM to buy digital currency. Once purchased, cryptocurrency is stored in a digital wallet, which can be on your computer, an external hard drive, or online. The wallet has a specific address—a combination of letters and numbers, similar to a bank account number.

While the address links to a specific digital wallet, it doesn’t identify the individual(s) using the wallet. “The thing that makes crypto unique is criminals can move crypto into these wallets and there’s no way for us to figure out who that person is,” McDougal said. “And you can create hundreds of wallets almost automatically on your phone or your laptop.”

However, as a safeguard, most cryptocurrencies use public blockchains, a type of public ledger that lists every cryptocurrency transaction. All digital wallet addresses represent a destination on the blockchain. Blockchain entries usually include information like the transaction amount, date, and time, as well as the sender’s and recipient’s wallet addresses, which can sometimes be used to identify the people involved in a specific transaction.

Kristen Spaeth

“A blockchain ultimately allows investigators the ability to trace the flow of funds,” said Kristen Spaeth, a senior investigator on the global intelligence team at Coinbase, a cryptocurrency exchange platform. “If a retailer is able to identify a cryptocurrency address, they have the ability to view detailed information on a public blockchain explorer and ultimately trace the funds to a cash-out point.”

But Spaeth also pointed out that the majority of blockchain explorers don’t attribute addresses or wallets to known entities. “At that point, the use of a commercial blockchain analytics tool would be incredibly helpful in identifying where the funds were sent,” she said.

Spaeth said that because most major retailers either don’t accept payments in cryptocurrency yet or are just beginning to implement crypto as a payment method, her team hasn’t seen an influx of crypto retail crime. But she has worked on crypto-related investigations that include retail fraud.

One example involved counterfeit-branded goods being sold online for cryptocurrency that ended up being a scam with elements of money laundering. Spaeth explained that a retailer identified its products being sold on a website in exchange for cryptocurrency and reached out to Coinbase for assistance.

“We were able to trace the payments sent to the website to a crypto exchange which ultimately identified the operator and seller of the counterfeit goods,” Spaeth said. “Despite the common misperception that crypto transactions are always anonymous or impossible to trace, the public nature of the blockchain often offers a huge advantage to investigators. Through further investigation, we were able to uncover that the seller was only claiming to sell the counterfeit items and never actually shipped anything to the purchasers.”

Red Flags

Spaeth said that when it comes to organized retail crime, cryptocurrency is most commonly used to enable the sale of shoplifted goods and stolen account credentials on darknet markets or resale websites, which sometimes accept payment in cryptocurrencies.

In a typical scenario, a bad actor purchases a victim’s account credentials for anything from a bank account to a department store credit card, likely obtained through a system hack or phishing expedition. If a retail customer has their credit card saved to their account, the bad actor could use it to purchase goods.

“In my experience, gift cards are usually one of the most popular purchases in these situations,” she said. “Because of the traceability of cryptocurrency payments to these markets, law enforcement can identify buyers and trace the marketplace vendor’s cash-out points.”

McDougal said that while it’s difficult to quantify, the US Dept. of Homeland Security is seeing a steep increase in the use of cryptocurrencies in most major crime areas, and that includes organized retail crime. Further, McDougal said that when it comes to cryptocurrency, retailers should be most concerned with legitimizing the sources of funds. Retailers can invest in blockchain technology, which enables them to trace where cryptocurrency funds are going. But retail organizations don’t have subpoena power, so they’re unable to demand documents and other information that may identify the specific individual(s) who eventually receive the funds back on an exchange. He added that there are third‑party companies that can help retailers trace and track cryptocurrency, but they don’t have subpoena power either.

“The best option for retailers is to partner with agencies like Homeland Security Investigations or local law enforcement. We have blockchain tools where we can track and trace and figure out who was the individual that withdrew the stolen proceeds on the exchange,” he said.

McDougal also stressed that if a retail supplier accepts cryptocurrency or pays in cryptocurrency, you can go to blockchain.com to locate its wallet address, which identifies where the funds are sent. If the wallet address is not on a legitimate exchange, like Coinbase or Binance, that’s a red flag. “You’ve got to ask yourself, ‘why am I paying into this account that didn’t require anyone to fill out paperwork, provide identification or undergo a background check.'”

McDougal said that even after years of conducting cryptocurrency financial investigations, he’s still unsure if the digital currency is just a fad or the next big thing. “Even after all this time, I still can’t speculate on that,” he said. “I can see it going either way.”

Sam Boykin

Originally from North Carolina, Sam Boykin is a San Antonio-based writer who has written for a number of regional and national publications, including Men’s Journal, Outside, and USA Today. He previously served as editor-in-chief for the San Antonio Business Journal and managing editor for the Sacramento Business Journal.

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