From speculation about its inherent value to theories about it being the payment method of choice for criminals, cryptocurrency is having a tough time keeping a clean name. One of the most common accusations is that cryptocurrencies perpetuate the sale of illicit drugs, a view recently expressed by United States Treasury Secretary Steven Mnuchin. CryptoX takes a look at the impact of cryptocurrency on illegal drug sales and whether it should shoulder more of the blame than cash.
U.S. government clamps down
The watershed moment for the U.S. taking decisive action against illicit drugs being purchased with cryptocurrency happened in 2013, when FBI agents rushed into the San Francisco Public Library to arrest Ross Ulbricht, a man who played a central role in the digitalization of the international drug trade. Operating under the pseudonym ‘‘Dread Pirate Roberts,” Ulbricht was the mastermind behind the Silk Road — an anonymous, Amazon-like marketplace located on the darknet — which let users buy and sell anything, regardless of legality. Although the site listed weapons, stolen credit card details as well as legal products, illicit drugs were by far the most common listing. The Silk Road pioneered the use of Tor, the network software used to access the darknet, and Bitcoin (BTC) escrow to conceal purchaser and seller identities and their activity. Although U.S. agents had hoped the seizure of the Silk Road would curb darknet activity, the news site DeepDotWeb wrote that the bust was “the best advertising the darknet markets could have hoped for,” with a number of copycat sites popping up in subsequent years. In 2014, the FBI seized 27 darknet sites during Operation Onymous, a joint effort between the FBI and the European Union Intelligence Agency Europol to stamp out illicit markets. In 2019, darknet markets are still selling illicit drugs that can be purchased with cryptocurrency, but U.S. law enforcement continues to take a hardline approach, arresting a couple in California on Aug. 6 for selling drugs on the darknet in exchange for Bitcoin and Bitcoin Cash (BCH).
Recent events seem to confirm the firm policy of U.S. government officials. Less than two weeks ago, the Department of the Treasury added multiple crypto addresses to its Specially Designated Nationals, or SDN, list under the Foreign Narcotics Kingpin Designation Act.
The addresses are said to be associated with three Chinese citizens, all of whom are active Bitcoin users. One Litecoin (LTC) address was also included in the list.
The Kingpin Act serves to clamp down on transactions between international drug traffickers seeking to smuggle drugs into the U.S. and ban transactions between those traffickers and U.S. entities. The act also gives the government the ability to coordinate and investigate foreign traffickers, the names of whom are brought to the attention of the president, who ultimately decides whether or not to impose sanctions.
Such legislative measures have been established in response to the state of illicit drug consumption in the U.S.: The country is currently in the throes of a serious opioid epidemic, with a person in America dying every 16 minutes from an opioid overdose. The White House issued two advisories outlining its concern that fentanyl, along with other synthetic opioids, are being purchased using cryptocurrencies.
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Intended to help financial institutions and digital payment platforms, the advisories named the cryptocurrencies most requested by sellers of illegal drugs:
“Individuals located in the United States search for fentanyl and identify potential websites that may provide the opportunity to purchase illicit drugs online. Foreign representatives will instruct the U.S.-based individual to send payments through CVC, such as Bitcoin, Bitcoin Cash, Ethereum, or Monero.”
In an act to clamp down on the online drug trade, the advisories urged financial institutions to come forward with any suspicious user data, including:
“Virtual currency wallet addresses, account information, transaction details (including […] hash), relevant transaction history, available login information (including IP addresses), information obtained from analysis of the customer’s public online profile and communications, mobile device information.”
Where are drugs bought with crypto?
According to Ciphertrace’s report on Anti-Money Laundering, or AML, almost all drugs sold on darknet marketplaces are purchased with cryptocurrencies. For the most part, “drug sales on the dark web” is a phrase that has become synonymous with “drugs purchased with cryptocurrencies.” The dark web is a part of the internet that is accessible via specialized network software that allows users to navigate anonymously while their activity is largely untraceable. Given the increased surveillance powers of governments — most notably in the U.S. following 9/11 — the dark web provides an environment that is attractive, lucrative and, for the most part, safe for illegal drug traffickers.
Professor Talis Putnins, co-author of an influential University of Technology Sydney report on cryptocurrency and illegal drugs, told CryptoX that cryptocurrencies have had a big impact on the way drugs are purchased:
“Cryptocurrencies have fundamentally transformed the way illegal drugs are bought and sold, shifting much of the activity from a cash-based, physical ‘on the street’ market to an online marketplace.The online illegal drugs trade needed two fundamental things to take off. One is an anonymous communications platform, which was provided by the darknet and underpinned by TOR (an anonymous communications protocol). And the second important piece was an anonymous or private way of making digital payments that was difficult to trace by authorities. That is the role that cryptocurrencies have played. Thus, they are an integral part of the online drugs trade.”
On the other hand, Europol spokesperson Jan Op Gen Oorth expressed the opinion that the transparent nature of cryptocurrency renders transactions easier to trace compared to those involving cash:
“Payment for drugs using cryptocurrencies naturally makes more sense when compared to, for example, bank transfers. On the other hand, most cryptocurrency transactions are far better traceable due to their inherently transparent nature than cash.”
How widespread is cryptocurrency in illegal drug sales?
By virtue of their unaccountable nature, it is hard to estimate the exact market share of cryptocurrencies in illicit trade. The University of Technology Sydney report estimates that around 46% of illegal activity per year is associated with Bitcoin. While it is fair to note that this figure does not represent illegal drug sales alone, the report found that Bitcoin is the most commonly used cryptocurrency for purchasing drugs on the darknet. Putnins also noted to CryptoX that, although the use of Bitcoin for illegal purposes has increased, legal transactions using the cryptocurrency are also on the rise:
“What our research shows is that the dollar value of illegal activity in Bitcoin has continued to rise, as has the number of Bitcoin users involved in illegal activity, those growth rates have recently been outpaced by the strong growth in legal users, largely speculators. As a result, the percentages or shares of Bitcoin activity that is involved in illegal activity have fallen in recent years. Therefore, while the online black market has continued to grow, cryptocurrencies are increasingly being used for legitimate reasons.”
A joint report between Europol and the European Monitoring Centre for Drugs and Drug Addiction (EMCDDA) found that when compared with the annual retail value of the EU drug market, darknet sales volumes are still modest but have potential to grow. The 2019 Global Drugs Survey notes an all-time high of 27.1% of surveyed drug users obtained illegal substances for the first time via the darknet in the last 12 months, up from 19.9% the previous year, which highlights the trend of the increasing digitalization of drug trade.
The report states that over the last six years, there has been a year-on-year increase in the percentage of surveyed participants obtaining drugs on the darknet. In addition, 30% of respondents claimed that the range of drugs they use has increased, and a further 5% reported that they had never tried drugs before accessing them via the darknet. The increase in both darknet sales and wider drug usage among respondents indicates that the digitalization of the drug trade is making narcotics more accessible — thanks to anonymous buying and selling as well as untraceable payments using cryptocurrency.
Moreover, according to the Global Drugs Survey, the ready availability of drugs on the darknet that are purchasable using cryptocurrency has increased their use and made them more attractive to those considering first time use:
“Over one quarter of participants reporting darknet market use in the last 12 months began their use in the year 2018: that is, they were new recruits to the darknet. These data confirm that darknet markets continue to attract new participants and that they are an increasingly significant players in the sale of distribution of illicit and prescription medication.”
How does cryptocurrency compare to other payment methods for drugs?
Prior to the advent of cryptocurrencies, cash was largely considered to be the most anonymous means of carrying out illicit transactions, owing to the fact that it is largely untraceable. However, even as Bitcoin’s popularity grows, cash still seems to retain its central role in facilitating criminal gains.
In its report, Europol notes that this happens for several reasons. The first of which is that cash is a tried-and-tested payment method that has been used for centuries. Consequently, well-established methods for laundering cash exist. Another advantage that cash has over its digital counterparts is the fact that it is equally as untraceable (with the exception of serial numbers) and anonymous while being easier to exchange.
Related: Crypto Vs. Cash — How the Numbers Stack Up on Drugs, Guns, Murders
Most — but not all — cryptocurrency exchanges and online wallet providers require at least some basic Know Your Customer, or KYC, procedures in order to confirm the identities of their customers. The Europol report states that exchanges are usually very cooperative when it comes to identifying bad actors. Cash, on the other hand, can be physically exchanged between strangers and laundered in any number of ways without information about those involved being made public.
A Ciphertrace report found that, while there is a variety of cryptocurrencies used on so-called dark markets, Bitcoin remains the coin of choice in 76% of transactions. This is perhaps unsurprising, considering Bitcoin is — by a considerable stretch — the most well-known and widely accepted cryptocurrency: Litecoin is reported as being used in only 7% of cases, while privacy coins such as Monero (XMR) are only cited as being used in 4% of transactions, contrary to popular belief.
How have cryptocurrencies changed the purchase of illegal drugs?
The most fundamental change that cryptocurrencies brought to the drug market is the ready availability of anonymous electronic payments. Beforehand, a drug trade would have to take place via traditional, offline networks where payments were made via a physical transfer of cash. This naturally restricts the accessibility of illegal drugs to established networks and exposes the entire supply chain and payment structure to a risk of interception by authorities. On the other hand, the anonymous digital payments made possible by cryptocurrencies are particularly attractive to drug dealers and play a role in creating an increasingly large and sophisticated network of dark marketplaces and “black e-commerce.”
According to Tom Robinson, co-founder and chief scientist at blockchain analytics firm Elliptic, the benefits of anonymity for drug dealers can be limited by the ability to cash out their crypto profits:
“The challenge for drugs traffickers is how to cash-out the proceeds of their sales. Most cryptocurrency exchanges make use of cryptocurrency transaction monitoring tools such as Elliptic’s, which use blockchain analysis to determine whether funds are coming from sources such as dark markets.”
Although Ciphertrace’s report found that a very small share of darknet transactions involve privacy coins, Robinson believes that they are nonetheless an impediment to law enforcement’s ability to help victims of cybercrime, compared to cases that involve other cryptocurrencies:
“One trend we are seeing is the increased acceptance of privacy coins such as Monero on dark markets where narcotics are available to purchase. Most new markets now accept Monero payments, typically alongside Bitcoin. This represents a threat to law enforcement’s ability to trace this kind of activity and bring those involved to justice.”
Robinson explained to CryptoX via email that while Monero use is increasing, he is surprised that it has not disrupted the overall popularity of Bitcoin in illegal trade:
“First, what has become apparent and is slightly unexpected is that the emergence of privacy coins has not overly impacted the widespread use of the less anonymous Bitcoin in illegal trade. The privacy coins offer many advantages to criminals, but it seems the ‘first mover advantage’ of Bitcoin makes it difficult to replace now that its adoption in dark markets has become widespread. Put simply, it is not the best cryptocurrency to use for crime, but nevertheless remains the most popular.”
Are cryptocurrencies the best payment option for drug dealers?
Anonymity is a fundamental characteristic of cryptocurrencies that has been both celebrated and criticized in equal measure ever since their invention. Nevertheless, people buying and selling drugs with cryptocurrency aren’t as untraceable as they might wish. The blockchain records publicly accessible details about every transaction made from one address to another. Unless the user launders the transaction through a series of intermediary accounts, both the origin and destination of the transaction can easily be discovered. The addresses can then be linked to public records, as was confirmed by Robinson:
“Cryptocurrencies are far less anonymous and less private than many people in the drug trade might hope. The analytical methods that we have developed for the Bitcoin blockchain allow a lot of the illegal activity to be identified and monitored. Continued raids and crackdowns by law enforcement agencies also speak to the ability of authorities to track at least some of the illegal activity in Bitcoin and other cryptocurrencies.”
Cryptocurrency is still a young technology with limited usage. Although it may make transactions more anonymous than conventional wire transfers, cashing out crypto that was previously used for illegal purposes remains a complicated and unsafe procedure. For these reasons, cryptocurrency is unlikely to fully replace cash as the currency of choice for illegal activity any time soon. While the view that cryptocurrency is just a payment system like any other may be more or less correct, its anonymity undeniably makes it more attractive to individuals looking to buy or sell illegal drugs. However, as technology advances and anonymous cryptocurrencies become more widely accepted, privacy coins have the potential to impact the structure and development of dark markets and the illicit drug trade in a significant way.