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What we do in the (digital) shadows: anti-money laundering regulation and a bitcoin-mixing criminal problem

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Abstract

The aim of this article is to provide a brief introduction to the problems raised by Bitcoin regarding money laundering. At first, and as a fundamental step for a legal analysis, we begin by providing a brief explanation of how the bitcoin works and the relevance of its functioning for a criminal investigation. Then, we analyse the legal framework applicable to Bitcoin in light of the provisions relating to the prevention and repression of money laundering, with particular emphasis on the problem surrounding mixers. After pointing out possible lawful uses for mixers, we discuss the criminal problems surrounding the punishment of self-laundering.

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Notes

  1. On the several definitions of virtual currency and specifically on Bitcoin, cf. Guaita Martínez, Carracedo Garnateo [17], pp. 42-47.

  2. During the current chapter we will follow closely the explanations provided by Antonopoulos [2], Vigna, Casey [34], and Furneaux [16].

  3. Nakamoto [24].

  4. Cook [5].

  5. Such as https://www.blockchain.info.

  6. For a complete description of how the blockchain works cf Guaita Martínez, Carracedo Garnateo [17], pp. 48-54. Also, particularly in the financial sector, Correia [6], pp. 69-74.

  7. Regarding the use of open source tools to identify clusters of addresses and possibly the identity of its holder, United States v. Gratkowski, n.° 19-50492 (5th Cir. 2020): «Federal agents used an outside service to analyze the publicly viewable Bitcoin blockchain and identify a cluster of Bitcoin addresses controlled by the Website. Once they identified the Website’s Bitcoin addresses, agents served a grand jury subpoena on Coinbase—rather than seeking and obtaining a warrant—for all information on the Coinbase customers whose accounts had sent Bitcoin to any of the addresses in the Website’s cluster».

  8. For a distinction between cyber enabled crime and cyber assisted crime, Wegberg, Oerlemans [35], p. 420.

  9. Concerning the use of bitcoins in the dark web, Silva Ramalho [28], pp. 396-398.

  10. Describing this case, FATF [12], pp. 10-15.

  11. Paradoxically, its success in the licit markets can also be seen as an incentive for its illicit use, since the widespread use of bitcoins increases criminal opportunities – in this sense, see Albrecht, Duffin & Morales Rocha [1], p. 212.

  12. The example is taken from Albrecht, Duffin & Morales Rocha [1], p. 213.

  13. For a defense of “pseudonymization” as the correct technical term, see MacRae, Franqueira, [21], p. 39.

  14. In fact, “alleged anonymity that Bitcoin guarantees to its users, which so frightens the authorities in various sectors, is more legend than fact”, in the words of Sicignano [27], p. 256.

  15. On the subject of deanonymization techniques, see MacRae, Franqueira, [21], p. 39; Spagnuolo, Maggi & Zanero [31], pp. 457-468; Meiklejohn, Pomarole, Jordan, Levchenko, McCoy, Voelker & Savage [23], p. 130.

  16. FATF [9].

  17. FATF [10].

  18. FATF [11].

  19. European Central Bank [8].

  20. Department of the Treasury – Financial Crimes Enforcement Network [7]

  21. For a discussion concerning an interpretation for the possible – but non literal – inclusion of cryptocurrencies in the 3rd and 4th AML Directives, Kaiser [19], pp. 212-215; Valcke, Vandezande & Velde [33].

  22. In this sense, Frick [15], pp. 99-112.

  23. Highlighting this risk, see Haffke, Fromberger & Zimmerman [18], p. 135.

  24. In this sense, Campbell-Verduyn [4], p. 286.

  25. Concerning the self-laundering debate, see Sousa Mendes [30], Patrício, Igreja Matos, [25]; Ross [26], p. 297; Beaussonie [3], p. 192; Márquez de Prado [22]; Bermejo [13], pp. 20-27; Zaragoza Aguado [36], pp. 41-54.

  26. Concerning attacks to addresses and wallets as an inherent risk to the Bitcoin ecosystem, see Financial Times [14]. For an overview of the different risks, see Kaushal, Bagga, Sobti [20], pp. 176-178.

  27. As written by Tran, Luu, Kang, Bentov & Saxena, [32], p. 693.

  28. See Haffke, L., Fromberger, M., Zimmerman, P. [18], p. 12.

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Authors and Affiliations

  1. Morais Leitão, Galvão Teles, Soares da Silva & Associados, Lisbon, Portugal

    David Silva Ramalho & Nuno Igreja Matos

  2. University of Lisbon’s Faculty of Law, Research Center for Criminal Law and Criminal Sciences (CIDPCC), Lisbon, Portugal

    David Silva Ramalho & Nuno Igreja Matos

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  1. David Silva Ramalho
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  2. Nuno Igreja Matos
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Correspondence to David Silva Ramalho.

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D. Silva Ramalho: lawyer at Morais Leitão, Galvão Teles, Soares da Silva & Associados; Assistant Teacher at the University of Lisbon’s Faculty of Law, Master in Criminal Sciences; Researcher at the Research Center for Criminal Law and Criminal Sciences (CIDPCC).

N. Igreja Matos: lawyer at Morais Leitão, Galvão Teles, Soares da Silva & Associados; Assistant Teacher at the University of Lisbon’s Faculty of Law; Researcher at the Research Center for Criminal Law and Criminal Sciences (CIDPCC).

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Silva Ramalho, D., Igreja Matos, N. What we do in the (digital) shadows: anti-money laundering regulation and a bitcoin-mixing criminal problem. ERA Forum 22, 487–506 (2021). https://doi.org/10.1007/s12027-021-00676-4

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