Crypto is King: The rise of cryptocurrency in global financial crime

SSHRC Insight Grant

In analog times, when cash was king, money laundering required criminals to haul large sums of cash. Money laundering is said to have originated with the Mafia: organized criminals purchased "Laundromats" to commingle ill-gotten gains with legitimate business sales to obscure their illicit origins. With the advent of globalization and digitization, money laundering went online and global. But they were still constrained by the very nature of fiat currency: cash is anonymous whereas online transactions would henceforth require complex legal structures across multiple jurisdictions to obscure beneficial ownership and traceability. Cryptocurrency---a form of decentralized digital currency that, at least initially, was unregulated by any government---was revolutionary because it enables anonymity on a global scale to move vast amounts of value (technically, transactions involving cryptocurrency are pseudo-anonymous in the sense that they may be traced in limited circumstances).

In the process, crypto such as Bitcoin greatly reduced the cost of doing business for transnational organized crime while at the same time being able to move vast sums without attracting much suspicion. The meteoric rise in the value of cryptocurrency is driven in part by the exponential growth in demand for crypto by transnational organized crime syndicates, such as perpetrators of ransomware attacks. Crypto is not only enabling criminal harm and exploitation on a global scale. It has also become the tool of choice for criminals to evade tax obligations that might have accrued when they ran their gains through a brick-and-mortar business. In countries such as El Salvador and other already fragile 'narco-states', the consequences of adopting cryptocurrencies such as Bitcoin for political stability are significant.

In part because of the relative newness of cryptocurrencies, there is limited scholarly research on the role of cryptocurrency in money laundering. Informed by a growing theoretical interest in the subfield of illicit international political economy (IIPE), this project will inform domestic and international law, policy, regulation and transnational governance networks while innovating theory and method in the study of cryptocurrency to generate more research on what is arguably the single greatest challenge in global financial crime today. The dearth of work in this area is also a function of the logistical and methodological problems of acquiring reliable data on the scale and nature of illegal activities. Uncovering approximate data on illicit crime is constrained by access and militates against generating rigorous research,. To this end, the project will train graduate students in methodological techniques to study IIPE in general, and the role of cryptocurrency in money laundering in particular. The methodology will be informed by Social Network Analysis (SNA). SNA involves the use of computers to analyze clustered facts (in this case, drawn mainly from case law) concerning global financial crime, which is also an approach deployed in prior research by the applicants.

The project will advance knowledge in the three distinct but related research fields of the three co-applicants: law, politics and criminology. Each research field suffers from a dearth in theoretical (in the sense the boundaries of the research topic remain contested) and empirical understanding of the emerging use of cryptocurrency for money laundering purposes. The research will provide legal scholars, political scientists and criminologists with both an anecdotal and empirical foundation concerning the role played by crypto within global financial crime with a focus on offshore tax evasion, international money laundering and terrorist financing.