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Illicit use of cryptocurrencies – Regulatory and market evidence

The Digital Regulator


Two authoritative market intelligence reports on the illicit use of cryptocurrencies, released in February 2021 (by Chainalysis and CipherTrace), evidence a marked decrease in the phenomena during 2020 – compared to 2019 – but also new worrying trends in the areas of ransomware and Decentralised Finance (DeFi). Further regulatory action to combat the illicit use of cryptocurrencies is therefore expected. Progress in the implementation of existing regulatory Guidance and a further growth in overall cryptocurrencies transactions should lead to a further decline in the illicit use of cryptocurrencies in the coming years.

Regulators have feared the illicit use of cryptocurrencies since bitcoin was born. Still in 2017 about one-quarter of global bitcoin users were involved in illicit activities, for a total transactional value of around USDbn 76. The authorities took concerted action in 2018 under the leadership of the G20. The resulting Guidance issued by the Financial Action Task Force (FATF) in June 2019 basically subjects virtual assets (VA) and their providers (VASP) to the same standard and procedure governing transactions in fiat currencies and their providers. Yet, as apparent from statements by US Treasury Secretary in February 2021, the illicit use of cryptocurrencies continues to worry regulators, who see it as growing.

The last few weeks have offered several noteworthy regulatory developments in the digital space, such as steady progress of many Central Bank Digital Currencies (CBDC) projects, the approval of the first bitcoin Exchange-traded Fund (ETF) in North America, and material developments in the lawsuits in the US involving the Ripple Labs on the one hand and companies Tether and Bitfinex on the other hand.

Regulatory fears, actions and market evidence

The most recent market intelligence on illicit use of cryptocurrencies made available during February 2021 by Chainalysis and CipherTrace are summarised as follows.

  • A marked decrease in the illicit use of cryptocurrencies – The year 2020 recorded a transactional value of USbnD 10 associated with illicit on-chain activities. This number represents 0.34% of the total value of cryptocurrencies transactions. One year earlier, in 2019, the same value stood at USDbn 21.5, corresponding to 2.1% of the total value of cryptocurrency transactions. While the year-on-year percentage drop is obviously influenced by the increase of overall cryptocurrencies activities in 2020, the absolute figures show that the decrease was substantial from 2019 to 2020. While cryptocurrencies remained appealing for criminals during 2020, the reduction of cryptocurrency-related crime in 2020 suggests that crypto crime decreases in line with an increase in the legitimate use of cryptocurrencies and the implementation of new regulatory requirement.
  • Scams, darknet and ransomware as most noticeable categories – In both 2019 and 2020, the first and second most important category of illicit cryptocurrency transactions were scams and darknet markets. The year 2020 saw, however, an important novelty: A 311% increase over 2019 in the ransomware category of illicit cryptocurrencies transactions (from USDm 85 to USDm 350). This category is particularly worrisome, as ransomware attacks can disrupt local governments and businesses, such as hospitals, for weeks. From a geographic point of view it emerged that Russia receives the largest share of darknet market funds; China receives the largest share of funds sent from addresses associated with stolen funds and ransomware; and the US receives the largest share of funds originating from scams and stolen funds.The emerging trends of 2020
  • Most money laundering activities are serviced by a small group of providers. These are typically third-party services nested into one or more larger exchanges, that tap into those exchanges’ liquidity and trading pairs.
  • Most of the growth in darknet market activity can be attributed to the marketplace Hydra, a provider that serves uniquely Russian-speaking countries. Hydra is by far the largest darknet market in the world and accounted for over 75% of darknet market revenue worldwide in 2020.
  • DeFi platforms emerge as major vectors for fraud and money laundering due to their vulnerability to hacking and the predisposition of peer to peer transactions to be used for money laundering. This pattern was virtually negligible in all prior years, as DeFi was itself negligible.

Bitcoin’s unique features of being at the same time a public blockchain while granting anonymised users’ addresses makes it amenable to anonymous yet traceable digital payments. In 2018, a study extrapolated from a sample of users known to be involved in illegal activities that about one-quarter of global bitcoin users were involved in illicit activities – corresponding to a value of all sort of illicit transactions of around USDbn 76 in 2017. The authors set this figure against a transactional value focused on the US and on drugs of around USDbn 100 in 2010.

In July 2018, the G20 tasked the FATF to address the anonymity surrounding cryptocurrency payments. The FATF completed its work on 21 June 2019 and issued a Guidance clarifying the application of anti-money laundering and counter-terrorist financing requirements on VA and VASP. On 25 February 2021, the FATF re-affirmed the strategic importance of mitigating money laundering and terrorist financing risks of VA and anticipated updating the Guidance to facilitate its implementation and to tackle the risks in DeFi.

The regulatory fears remain however as strong as ever. To illustrate, less than one month ago, the US Treasury Secretary raised again the concern that cryptocurrencies may be used mainly for illicit purposes and noted this as a “growing problem”.

The United Nations estimated the amount of money laundered globally in one year is 2 to 5% of the global Gross Domestic Product, or USD 800 billion to USD 2 trillion. The reports summarised above suggests that the role of cryptocurrencies-related illicit activities in the global criminal context is relatively small. The summary evidence also confirms that even though cryptocurrencies transactions lend themselves to anonymous transactions, such transactions are better suited for investigative analyses than traditional financial transactions. Going forward, we expect regulators to strengthen Know-Your-Customer (KYC) focus at crypto exchanges, seek ubiquitous implementation of FATF Guidance across the cryptofinance space, and start focusing on reinforcing KYC and Anti-Money Laundering (AML) practices at DeFi applications. Together with a steady growth of cryptocurrencies transactions, these regulatory measures should lead to a further decrease in the illicit use of cryptocurrencies.

Other Noteworthy Developments

Steady progress of many CBDC initiatives

  • A survey published by the Bank for International Settlements (BIS) showed that in general central banks (CB) are progressing from conceptual research to practical experimentation with CBDCs. The BIS expects that CBs collectively representing a fifth of the world’s population are likely to issue a general purpose CBDC in the next three years.
  • The BIS also informed that its Multiple CBDC initiative will be joined by the CBs of China and the UAE, adding to a membership comprising the CBs of Hong Kong and Thailand. The project aims to develop a proof-of-concept prototype to facilitate real-time cross-border foreign exchange payments on distributed ledger technology (DLT).
  • The ECB informed that it may only allow digital euro holdings up to a threshold around EUR 3’000. The rationale of the threshold is to discourage large holdings of digital EUR and avoid competition with commercial banks. The ECB confirmed an implementation timeline by 2025. The work is still at the conceptual stage currently.
  • The US Federal Reserve Bank said that a digital dollar may be attractive in that it promotes a more efficient payment system in terms of speed, cost and security. It confirmed being looking into a concept of a digital dollar.

The first bitcoin ETF becomes reality in North America.

  • Canada becomes the first North American country to introduce a bitcoin ETF. The Ontario Securities Commission approved the request filed by Accelerate Financial Technologies for its Accelerate Bitcoin ETF. The fund will offer units denominated in both United States and Canadian dollars with a 0.7% management fee.
  • The Australian Securities and Investments Commission clarified that a bitcoin ETF is possible, so long as there are appropriate rules in place in the market on which it is traded.

Two material lawsuits development in the US.

  • The Securities Exchange Commission (SEC) and Ripple Labs released jointly a press release updating the investors and the broad public that the settlement of the lawsuit opened by the SEC against Ripple is unlikely to happen anytime soon.
  • The New York State Attorney banned cryptocurrency companies Tether and Bitfinex from doing business in the State and issued fines to them. The companies were found guilty for having produced false statements regarding Tether’s backing and for covering up losses at Bitfinex.

The Organisation for Economic Co-operation and Development (OECD) released a report summarising the regulatory approaches to assets tokenisation

  • The OECD report established that different jurisdictions have approached tokenisation in different ways. Some have applied existing financial regulations to tokenised assets; others have introduced new tailor-made frameworks or adapted existing rules to accommodate the application of DLTs in tokenisation. The level of development of the market for tokenised assets seems to explain to an extent the policy choice. Regulators in most jurisdictions with active tokenised markets have adopted a technology-neutral approach to policies around tokenised assets and their markets. This is the case for instance in Switzerland.


Like transactions in paper money and coins, also cryptocurrencies transactions lend themselves to anonymous transactions. Compared to paper and coins fiat transactions, however, cryptocurrencies are transparently traceable on the blockchain of distributed ledger. Market intelligence shows that the combination of strengthened regulatory requirements surrounding VA and VASP and a steady growth of cryptocurrencies transactions is leading to a decrease in the relative and absolute value of the illicit use of cryptocurrencies

The last few weeks have offered several noteworthy regulatory developments in the digital space, including the ban of companies Tether and Bitfinex from the State of New York, the approval of the first bitcoin ETF in North America and steady progress of several CBDC projects.

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Mattia Rattaggi

External Regulatory Analyst METI Advisory AG

Yves Longchamp

Head of Research AMINA Bank AG

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