Dark Side Of The Moon: Cryptocurrencies in Illegal Activities

If we look at the last decade of the financial sectors, the biggest innovation is undoubtedly cryptocurrencies. Their volatile structure is making them in demand in the eyes of traders. However, this is not the only feature that attracts newcomers.  Many people choose Bitcoin because they think it is an anonymous cryptocurrency, although it is not. Wallet addresses are unique and the computational process is needed to solve them. Once computers code the process for us, it only can be considered pseudonymous. The code acts as a placeholder of the wallet owner’s identity, but it cannot relate to an ID number or any registered record, since Bitcoin does not require trust from a governmental third party. This complexity embraces lots of illegal activities as well as regular transactions. 

There are not a quite number of researches, since the data about illegal activities are hard to track and find. The most comprehensive one was conducted by Sean Foley, Jonathan R. Karlsen, and Talis J. Putnins in 2018. According to the research, illegal trade(drugs, hacks, and thefts, illegal pornography, even murder-for-hire), the financing of terrorism, and money laundering are the most common types of illegal activities using Bitcoin. What they methodologically do is to focus on the seizures of Bitcoin by law enforcement agencies. Then, they look into the darknet marketplaces and the users involved in any illegal activities. The results are tremendously striking: 26% of all Bitcoin users and 46% of the transactions are associated with illegal activities. They also state that illegal users are likely to transact more frequently than regular users. Additionally, the former group has a less average transaction volume than the latter. 

What this research tells us is the benefits of Bitcoin are just the tip of the iceberg. On the other side, there are dozens of things we have to deal with and experts are trying to get a proper solution. The most recent data show that the proportion of illegal activities is decreasing and there are two main reasons for that decline.  Firstly, Bitcoin is becoming more and more mainstream and enlarges its user portfolio on a huge scale. Even if the absolute volume of illegal transactions increases, it cannot compete with the regular transactions proportionally. Secondly, new alternative cryptocurrencies are emerging and they are more opaque than Bitcoin. Thus, they conceal the user’s activity more successfully.

The Next Move For A Safer Market

Some people believe that the restoration of the system to reduce the rate of illegal actions is unnecessary.  According to them, since bad features are a part of the market and get into the price function, illegal activities eventually reduce Bitcoin prices.  A decline in prices will lessen the trading volume, as well as the number of illegal actions. Others are strongly against an idle market and claim the necessity for a regulatory third party. We cannot predict the future, but it will not be absurd to say that the first option is more likely.

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