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Crypto and Money Laundering: An Inconvenient Truth

2022-05-31

If you’re anti-crypto you essentially have two arguments. One, crypto is worthless, and two, it's a place for people to launder money. Obviously, crypto is not worthless, but is it the haven for illicit money laundering that television pundits and opponents make it out to be?   

No. 

There’s an inconvenient truth for those who wish to portray crypto as a money-laundering paradise. 

According to Chainalysis, a blockchain analysis company that specializes in crypto and blockchain analysis, of all transactions made with cryptocurrencies in 2021, 0.15% were associated with some type of illicit activity. 

The UN estimates that between 2% to 5% of traditional fiat (cash), about $800 billion to $2 trillion in current US dollars, was associated with some type of illicit activity. So let’s call it a trillion dollar a year problem.

Opponents have bent over backwards to try and create a narrative that Binance, and large exchanges more broadly, have been negligent in applying anti-money laundering and transparency protocols. Nothing could be further from the truth.

Recently, a journalist reached out and claimed to have evidence that Binance enabled the laundering of some $2.5 billion between 2017 and 2022. However, it’s clear that this journalist simply doesn’t understand the data nor how blockchain works.  

Crypto is an awful vehicle for laundering money for a few reasons. One, KYC is stringent in the industry and it’s simply much easier to open a bank account with fake identification documents at a small local or regional bank. Two, you simply cannot move large sums of money into crypto without people noticing, and three, it is trackable. Even most so-called  “privacy coins” are much more transparent and easier to trace than traditional cash.

Unlike cash, which is nearly impossible to track, Blockchain has proven to be one of the most powerful tools for law enforcement. The immutable, public nature of the blockchain makes crypto a poor choice for money laundering because it allows law enforcement to uncover and trace money laundering far easier than cash transactions. 

Look at the Bitfinex hack. You can - in theory - steal $3.6bn worth of Bitcoin, but you then can’t use them without getting caught.  

The unsuitability of crypto for money laundering can be demonstrated in that crypto represented an estimated 0.86% of annual money laundering, assuming $1 Trillion a year is laundered money in total last year. 

That said, while the fact remains that the traditional financial system is far more susceptible to money laundering and sanctions-busting than crypto will ever be, Binance is at the forefront of tackling global money laundering.

Fighting Organized and State-Sponsored Crime

The reality is that Binance has the world’s most sophisticated anti-money laundering systems and employs the most experienced anti-money laundering investigators not only in crypto but in the world and regularly provides law enforcement with leads and other information that helps them detect and deter crimes. 

Transactions on the blockchain are immutable and fully discoverable. So, unlike laundering of cash through banks, crypto money laundering is not difficult to identify and disrupt. If an allegation is made of direct exposure to Binance it can be confirmed or refuted by the transaction record.

Detractors deliberately conflate “direct” with “indirect” exposure and include deposit data. What does this mean?

For instance, imagine a drug dealer walks up to your house and slips a bag of illicit material into your mailbox. You obviously couldn’t have prevented them from depositing the illicit materials, but it’s now incumbent on you to do the right thing by contacting law enforcement and providing them with the info they need to catch the perpetrator. 

That is why Binance has spent tens of millions of dollars hiring and resourcing the most sophisticated cyber forensics team on the planet, composed of more than 120 security and industry experts across the globe, including former senior law enforcement investigators from the IRS, FBI, and Secret Service in the United States, Europol, Dutch and U.K police agencies in Europe and national level agencies in Asia and Latin America. 

It’s this work that the media rarely acknowledges. Not only do we work closely with law enforcement, some of the very people who took down the likes of Hydra and fought Lazarus work at Binance. 

Lazarus

Let’s look at some recent allegations around Lazarus, a cybercrime group run by the North Korean state.

At Binance we proactively share intelligence with law enforcement to map out North Korea’s modus operandi globally. We also leverage our internal investigations capabilities to block North Korean funds that attempt to touch our platform. There is not a single exchange out there that North Korea doesn't try to use, yet we believe no other exchange is as aggressive in its fight against them as Binance.

For example, many Binance team members were involved in the initial investigation that led to the identification of the group and the tracing of the funds from the $250 million theft from an exchange. The vast majority of funds went to other exchanges.

In addition, in the recent Lazarus theft from Ronin/Axie Infinity a large portion went directly to other major exchanges, and another large portion went to the Tornado Cash mixing service. At Binance, after joint efforts with Chainalysis, demixing, and working with law enforcement, Binance was able to freeze an estimated $5.8M worth of related cryptocurrency.

Another case involved Eterbase, a Slovakian-based exchange that was hacked by Lazurus. While Binance is unable to comment on its specific correspondence with Slovakia's national police, we can say that following the allegation about Lazarus opening dozens of anonymous accounts on crypto exchanges, we fully cooperated with requests received from Slovak authorities and helped them to identify both accounts at Binance as well as other exchanges. 

North Korean operatives employ sophisticated means to evade restrictions at all financial firms. This includes front companies, high quality forged documents, third-country IP addresses and other means to bypass controls, such as VPNs. However, Binance was able to identify and close numerous accounts linked to North Korean operatives.

In summary, North Korea has attempted to use numerous crypto exchanges and traditional banks to launder funds for years. Binance leads the industry in identifying and neutralizing these operatives. We actively work with numerous Law Enforcement agencies to target North Korean campaigns by sharing intelligence, proactively freezing accounts and shutting down their networks before they can successfully escape with stolen funds.

Hydra

Let’s switch to looking at Hydra, a Russian darknet marketplace that was shut down after detailed law enforcement and crypto exchange collaboration that included leading law enforcement figures that today work for Binance. Some in the media would have you believe that Binance was the key crypto exchange that facilitated Hydra. Nothing could be further from the truth. 

It is Binance’s understanding that law enforcement requests were sent to Binance and all other major exchanges during the initial investigations into Hydra transactions. Binance believes it was the first exchange to respond and offer assistance. A review of Chainalysis, or any other tool, shows that every major exchange had indirect exposure to Hydra. It is also interesting to note that more traditional banking (non-crypto) channels were used to fund the operation of Hydra Market and to host the market itself.  

Without crypto, the Hydra case would very likely never have been solved. The ability to trace the flow of funds to identify where the market was hosted is the reason the case is closed.

Sadly, rather than profiling the truth about Binance’s industry-leading efforts to fight crime, a multinational media outlet claims Binance had direct exposure of $780 million on Hydra. This allegation is wildly inaccurate. Overall, Binance believes it has taken more action against Russian money-laundering operations than any other crypto exchange. This includes removing Suex, Chatex and Garantex from Binance.

Protecting Users

We’ve also seen television pundits claim that the industry considers the need for KYC verification to be “unfortunate”.  This is unequivocally false. Binance believes that strong KYC practices are important to protect Binance and its users. The only way that crypto will reach widespread adoption is through creating greater safeguards for new users - and KYC is a foundational element of that.

What rarely gets highlighted in stories about "crypto fraud" is that the vast majority of the victims’ initial transactions start at traditional banks. Usually, a victim is targeted using social media, email, or SMS and is convinced they need to send money to unlock their computer, save a loved one, pay a fine to prevent their arrest, etc. The initial - usually large - transactions come from the victim's bank account. 

Binance is working with law enforcement, judicial authorities and banks to improve our defences against these types of scams and protect our users. For example, we recently launched a campaign in Australia to encourage users to learn about protecting themselves from scams. 

And, we continue to build new partnerships with some of the world’s leading experts in the field.  Just last week Binance partnered with data analytics firm Kharon and cloud-native screening provider Neterium to further strengthen our KYC capabilities, and further improve our ability to detect illegal crypto activity on our platform.

An Inconvenient Truth

So, where does this leave us? It’s an “inconvenient truth” for those that are anti-crypto that the overwhelming majority of all money laundered goes through the traditional banking system, not crypto.

It’s also an inconvenience to some that Binance plays a significant leadership role in helping law enforcement deal with cyber and financial crime. For example, in the last few weeks, we have helped the U.S. Drug Enforcement Agency identify and seize over 100 accounts linked to suspected drug money laundering in Mexico. This is all part of our daily work and a key pillar of what we see as effective collaboration with Law Enforcement.

The fact is that Binance’s expert team of investigators wrote the playbook for leveraging blockchain tracing to identify and take down the worst of the worst actors in the crypto space, including Hydra Market.  They continue to leverage those skills to protect our users and help law enforcement target and dismantle those who seek to exploit the blockchain for criminal purposes.   

It’s also important to understand that media attacks on crypto and Binance will continue. Some large news organizations will continue to be influenced by actors seeking to limit the growth of crypto and Binance.

Being held to account is part of being a leader, and at Binance we welcome that.  We also believe strongly in the benefits of a strong, unbiased and independent media ecosystem and we hope that these publications continue to hold up the highest standards of journalistic integrity, and not be unduly influenced by those with an agenda.

As for Binance? We will continue to do two things. Protect users and build.