Whether they are dark traders from the "Silk Road" or the masterminds of Ponzi schemes, they all need to launder money. When countries and even international organizations impose strict controls, they have to find new ways. For example, virtual currency online exchange.
1. Digital currency trading has also become one of the methods of money laundering
New cryptocurrency exchanges allow users to conduct anonymous transactions, making money laundering more convenient. ShapeShift AG is one such online exchange, which was established by several venture capital firms in the United States. Users can anonymously exchange Bitcoin for other cryptocurrencies that cannot be traced by the police.
In the past two years, nearly $90 million has been laundered through similar exchanges. Most of the transactions are beyond the reach of U.S. authorities, with unknown owners and registration locations in Eastern Europe and China.
Since ShapeShift’s service began in 2014, a large group of criminals have benefited from it. After hackers believed to be from North Korea used the so-called WannaCry ransomware to extort millions of dollars from businesses and governments, criminals used ShapeShift to convert Bitcoin into Monero, an untraceable cryptocurrency.
For the next year, ShapeShift made no changes to its inability to identify customers, and continued to conduct millions of dollars in illegal transactions.
Voorhees has long scoffed at such constraints. "I don't think people should have to record authentication information for the occasional crime," he said in an interview in May.
Bitcoin and cryptocurrency are software based on a distributed ledger technology maintained by thousands of computers. Most cryptocurrencies that utilize blockchain technology or distributed ledger technology are publicly viewable, allowing users to track the currency's path from one anonymous online account or wallet to another. However, this anonymity can be broken when criminals exchange Bitcoin for U.S. dollars.
To test the scope of money laundering using cryptocurrencies, by analyzing the underlying applications of these currencies, the Wall Street Journal created a computer program to track more than 2,500 investment scams, hackers, extortion and other transactions using BTC, ETH criminal funds.
2. Money laundering in exchanges is the hardest hit area for money laundering
88.6 million U.S. dollars of stolen money was laundered through 46 exchanges, and this may be just the tip of the iceberg of criminal activities. The identities of many criminals are still unknown, some are on the run and some have been arrested. Only a small portion of the stolen money, probably less than US$2 million, was recovered during law enforcement, and the court did not give a precise figure.
Now, let me show you how one of the stolen funds tracked by the Wall Street Journal used ShapeShift to cover up its whereabouts. An entity calling itself Starscape Capital, which used high returns to lure investors, raised $2.2 million.
Investors transfer Ethereum to an anonymous wallet in the form of Ethereum payment. Then the company's official website immediately went down, and investors began to complain online that their money was missing.
Ethereum, like many cryptocurrencies, although the identity of the wallet holder is anonymous, can also be traced. So these scammers have to hide their tracks before cashing out. They split the millions into different paths and moved them to two exchanges.
A Wall Street Journal investigation found that part of the money was transferred to an Asian exchange called KuCoin through another anonymous wallet. KuCoin stated that they monitored suspicious transactions during the investigation and would freeze the account, but declined to comment on Starscape's issues. Another $517,000 was transferred directly to ShapeShift and then converted into Monero, and the traces of this part disappeared.
Monero can be used to launder Bitcoin, or it can be exchanged for various hard currencies, and the original transaction cannot be found at all. The founder of Starscape has also not been identified. Voorhees points out that ShapeShift does provide a level of transparency — like Bitcoin, it allows users to trace the path of a transaction without identifying the owner.
The exchange’s system lets users see which anonymous user received the currency, but as for Monero, the receiving addresses and transaction totals remain secret, and their traces are cut off. Voorhees said ShapeShift and similar cryptocurrency exchanges do not have custody of user funds, so they are not subject to anti-money laundering rules. "It's all nonsense for the government to use this kind of thing to say it wants to protect investors."
3. Financial crimes leave the U.S. Treasury Department helpless
The U.S. Treasury Department obviously disagrees with this statement.
At a recent event, Kevin O’Connor, an official with the Treasury Department’s Financial Crimes Enforcement Network, said that any exchange with US users must comply with the rules. A spokesman for the Financial Crime Unit said that these remarks were not specific to ShapeShift and that all exchanges should take note.
Other exchanges, including U.S.-based Bittrex, say they comply with federal rules and will verify the source of funds, including how many times they passed through wallets. Even so, the Wall Street Journal found very clear criminal activity at Bittrex, with approximately $6.3 million in funds transferred to the exchange. Some of the funds were seized by law enforcement.
①Fund flow
Under the wave of temptation caused by Bitcoin, the investors behind ShapeShift from Europe, California and Colorado who have invested more than 12 million US dollars said, Voorhees, The same gentleman who once said he wished the national government to disappear has convinced them. He told them he was a pragmatic man who would abide by federal laws.
"I believe in Erik, I know him, it's not his first time being a boss." Paul Veradittakit of Pantera Capital said. The focus of Pantera Capital is to invest in the encryption industry, and they also invested in ShapeShift. He said that Pantera tested the exchange model that did not require user information and decided that it was worth taking a gamble, especially after meeting Erik.
He also said lawyers assured him that an exchange that only offered cryptocurrency trading would likely be subject to federal financial regulation. Mr. Voorhees, a fair-faced, thin 34-year-old man, discovered Bitcoin in 2011 after joining the Free State Project.
In 2012, he founded the gambling website Satoshi Dice, which pays in Bitcoin. Later, he also worked at a Bitcoin exchange, but that exchange collapsed because the founder was suspected of money laundering. He thinks Bitcoin could cut estate taxes. "You have a sum of money and you want to give it to a person. The amount that person receives is the amount you want to give. The money can be hidden and the regulatory authorities cannot see it. Isn't it good?" This is what he said in 2013 A question raised.
②Stock Exchange
Voorhees sold Satoshi Dice’s shares and exchanged them for Bitcoin. And in order to avoid taxes, he moved the account to Panama. Then he bought back the investors' shares and sold the website for Bitcoins, which are now worth $800 million.
The U.S. Securities and Exchange Commission later accused him of selling Satoshi Dice stock and another Bitcoin company as selling unregistered securities, and he then paid $50,000 in settlement fees. After leaving Panama, Voorhees decided to open his own exchange, buy cryptocurrencies and sell them at a higher price.
The Wall Street Journal also traced funds from addresses provided by Moriuchi to controlled darknet vendors and promoted stolen credit cards and access to ShapeShift e-commerce accounts. Centra Tech is developing a cryptocurrency debit card project and began raising funds last year. The company’s owners, Sohrab Sharma and Robert Farkas, claimed to have partnered with Visa and Mastercard and ultimately raised $32 million in funding.
Federal prosecutors said what they said was false, and Centra’s founder was arrested in South Florida earlier this year and charged with fraud. The pair have pleaded not guilty and Sharma's lawyer declined to comment. Lawyers for Farkas said the funds Centra transferred to ShapeShift were not investors' money and did not belong to their clients.
The company’s money was also transferred to exchanges such as ShapeShift, but the founder refused to admit that it was customer money. Although most of the funds were seized by the court, some still entered exchanges such as ShapeShift. Although the government seized most of the money, millions of dollars flowing into exchanges, including ShapeShift, had been liquidated before the arrests.