How to Spot a Nefarious Cryptocurrency Platform

Do you ever wonder if your cryptocurrency platform cashes in ransomware payments? Maybe not, but it might be worth investigating. Bitcoin-associated ransomware continues to plague companies, government agencies and individuals with no signs of letting up. And if your platform gets sanctioned, you may instantly lose access to all your funds.

What exchanges or platforms do criminals use to cash out or launder ransomware payments? And what implications does this have for people who use exchanges legitimately? 

Blacklisted Exchanges and Mixers

Between 2014 and 2017, the BTC-e crypto exchange allegedly cashed out nearly 95% of all ransomware payments worldwide. Feds asserted that BTC-e ringleader Alexander Vinnik also played a role in the theft of about 800,000 bitcoin (about $400 million at the time) from the Japanese Mt. Gox exchange. Eventually, the U.S. government indicted Vinnik, who was sentenced to five years in jail. BTC-e eventually shut down, along with all its accounts. Meanwhile, many legitimate BTC-e customer account holders remained stuck in limbo.

Then came SUEX, the OTC cryptocurrency broker reportedly receiving $160 million from ransomware and other scammers. In 2021, the U.S. Treasury’s Office of Foreign Assets Control (OFAC) placed the Russia-based broker on the Specially Designated Nationals and Blocked Persons (SDN) List. Americans are prohibited from doing business with any company on the SDN list.

More recently, the virtual currency mixer Tornado Cash was sanctioned. According to the U.S. Treasury, the mixer “has been used to launder more than $7 billion worth of virtual currency since its creation in 2019.” A State Department spokesman said the mixer had provided “material support” to the Lazarus Group — an organization believed to work on behalf of the North Korean government. As of August 2022, the platform was also on the SDN List. 

Given these incidents, how can you tell if a crypto platform is being used for nefarious purposes? What signs indicate that criminals could use your exchange, too?

Putting Things In Perspective

The reality is that malicious actors can use any financial entity for fraudulent purposes. In 2021, the illicit share of all cryptocurrency transaction volume reached an all-time low of 0.15%. Meanwhile, the UN estimates the amount of fiat money laundered globally in one year is 2 to 5% of the global GDP, or $800 billion to $2 trillion.

It’s not unheard of for criminals to use multinational banks to launder money. But if you invest in crypto and your platform gets sanctioned overnight, you might not be able to recover your coins the next day.

How Crypto Platforms Deter and Detect Illicit Activity

Three key policies can help crypto businesses to deter money laundering and ransomware payouts. When evaluating the platform you use, ask if they implement: 

  1. Know Your Customer (KYC). This means requiring customer verification when establishing a business relationship when a customer carries out a transaction and if required by law. Verification can include collecting customer data such as their name, address and date of birth.

  2. Travel Rule. According to the Financial Action Task Force’s “Travel Rule,” crypto platforms must collect and share data on parties in transactions. The data collection threshold (transaction size) differs between countries.

  3. Transaction monitoring. This includes a system for ongoing transaction monitoring to detect signs of money laundering. For example, exchanges can analyze wallet addresses and transaction hashes.

Some red flags crypto businesses look out for that might indicate money laundering include:

  • Transactions of unusual size, location or pattern. For example, a sudden, large transaction between two parties with no prior connection. 
  • Sending cryptocurrency to darknet marketplaces, mixing services, questionable gambling sites, fraudulent exchanges and platforms with lax anti-money laundering (AML) standards. Blockchain analysis can detect the use of mixing services.
  • Structuring several transactions, all just below reporting thresholds. This is how criminals break down large payouts into smaller sums.

Cryptocurrency Business Regulation

Given the ongoing cryptocurrency scams, many are calling for regulatory action. A recent DIFC Fintech conference outlined the current cryptocurrency regulatory scenario. Some of the highlights include:

  • Approximately 95% of regulators have a team working on crypto regulations now.
  • The crypto industry is lobbying for clear regulatory action. Regulations can have a positive effect on cryptocurrency business development.
  • When global cryptocurrency exchange Binance introduced KYC verifications, more than 96% of its customer base complied.
  • The SEC imposed approximately $2.35 billion in total monetary penalties against digital asset market participants in 2021.

Complex Cryptocurrency Jungle

In a recent executive order and strategy documents, President Biden pledged to support the development of cryptocurrencies and to restrict their illegal uses. But regulation often hinders innovation speed. Meanwhile, the United States continues to develop cryptocurrency policies with a global impact. These policies include sanctioning cryptocurrency exchanges, recovering ransomware payments and improving collaborative security efforts with other countries.

KYC and AML policies have been applied to U.S. cryptocurrency exchanges for years. Still, this can’t prevent actors from pivoting to exchanges in other less regulated countries that enable illicit transactions. For now, the only way to combat this is to continually monitor for platforms involved in illegal activity. 

In November 2021, less than two months after the SUEX sanctions, the Treasury Department followed up with sanctions on Chatex, another Russian platform, as well as three of Chatex’s suppliers. Then, in April 2022, the Treasury Department added a third exchange operating in Russia, Garantex, to the SDN List. 

Looking Ahead

So far, the efforts to fight cryptocurrency crime are all a step in the right direction. Still, no in-depth analysis has measured the overall impact of these actions on levels of crypto crime. 

Sanctions and policing efforts have also been accompanied by a call to develop a U.S. central bank digital currency (CBDC). However, a CBDC collides with privacy and sovereignty issues that largely gave rise to cryptocurrencies in the first place. 

Undoubtedly, no simple solutions exist for cryptocurrency-related crimes. But easy answers never existed with paper money either.

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Author: Jonathan Reed