We all know that people can use cryptocurrencies like Bitcoin – and they sometimes do – for illicit transactions. That accounts for things like internet scams as well as things like money laundering, funding terrorism, human trafficking, etc.
These potential problems were recently brought up as the US Government called for increased cryptocurrency legislation. So the question is, how often is cryptocurrency used for illicit purposes? We now have a definite answer: not often.
Behind the Study
Cryptocurrencies like Bitcoin are “pseudonymous”. That means that users don’t need to attach a name to an account, like with checks. So, theoretically, people can perform illicit transactions and – even if flagged as illicit – the transactions are very hard to trace. Of course, reputable exchanges are combating this through measures like enforcing KYC compliance.
However, cryptocurrencies are also “public”. Every Bitcoin transaction that has ever occurred in history can be publicly viewed. That means that illicit transactions can be, and often are, caught. Even when that doesn’t result in any arrests, the identified wallet can be flagged.
Elliptic is an organization with the goal of preventing and detecting criminal activity in cryptocurrencies. Their offices in London, New York, and Washington D.C. maintain possibly the largest databank of cash transactions ever. They don’t give this data to just anyone but they gave it to IBM.
IBM has been on the cutting edge of technology since its founding. This used to mean making computers. Now it means developing deep learning and artificial intelligence. Their Watson computer doesn’t just play chess and Jeopardy!. It also goes through large datasets and creates super-human understandings of those sets. So, what happened when it analysed Elliptic’s data?
What the Study Found
Mark Weber works with MIT and IBM in the Watson AI lab. The AI lab reached out to Elliptic and was able to obtain access to their Bitcoin data.
Elliptic and Watson identified 2% of the wallets as being ‘illicit’.
I’m using Bitcoin as kind of the frontrunner, but we can talk about any number of cryptocurrencies, Weber said in a recent video.
…We reached out to Elliptic precisely because we were having such a hard time getting real-world transaction data.
The Elliptic dataset was huge, consisting of 203,769 transactions over 234,769 payment flows. Elliptic and Watson identified 21% of the wallets as being “licit” – belonging to recognised individuals or organisations. It identified 2% of the wallets as being “illicit” – belonging to recognised criminal organisations or ventures.
At face value, these results are pretty good news for Bitcoin proponents. It was the largest and most comprehensive study of this kind ever conducted and its results are positive. However, there are reasons for critics to question the study.
Over 200,000 transactions analysed in the study is huge. However, there have been over 440M transactions since Bitcoin launched. That means that the analysis didn’t take the vast majority of transactions into account.
Further, fewer than one-fourth of the wallets looked at in the report were identified as licit or illicit. Even though the vast majority of the remaining wallets are bound to be licit, it’s possible that some illicit wallets got through.
Not that any of that is enough to say that the few evils facilitated by Bitcoin outweigh its positives.
Why Bitcoin Is Worth It
That brings us to why IBM turned its AI supercomputers on Bitcoin in the first place. Many of us see cryptocurrencies as a speculative asset or something that will, one day, be a cool non-physical currency. Some people, however, see it as something more than that.
Much of the world’s population remains unbanked. The reason may be that they don’t have access to a bank. Or, banks won’t work with them because they don’t have enough money to profit the bank. This, in turn, makes it harder for them to increase their worth.
Not having access to financial services also makes it inconvenient and dangerous to hold and send money. It also takes money to send money and transfer currencies. This is a huge problem for people trying to get ahead in low-income or unstable countries.
This is partially true because these countries seldom have strong or stable fiat currencies. That means that people who do business in these countries often have to trade in any number of foreign fiats. It’s also true because many families in these countries are supported by income earned by family members in other countries. These payments account for several times the total global aid budget.
That’s a problem because, as mentioned above, sending and transferring money comes with fees – which are worse if you’re unbanked. These fees account for an estimated 7% of the money sent back to these countries by foreign family members. That 7% is equal to almost a quarter of all global aid funds.
As a result, Bitcoin and other cryptocurrencies could be a significant player in fixing the problem of global poverty. That would be easier if countries were more positive toward crypto. And that’s more likely to be the case once we get past this hang-up on illicit transactions.
The Promise of Bitcoin
This study didn’t answer all of the questions that we have about cryptocurrencies and illicit transactions. However, it is a significant step towards proving its legitimacy and value. Some people are already convinced of crypto’s promise and some people never will be. For everyone else, there’s this study.
Jon Jaehnig is an American freelance writer specializing in Technology and Health. Jon has degrees in Scientific and Technical Communication and Journalism from Michigan Technological University and lives in Michigan’s Upper Peninsula with his wife and cat. For more from Jon, you can follow him on LinkedIn and Twitter.