CRYPTOCURRENCY IN THE SYSTEM OF MONEY LAUNDERING

Abstract

The target of the article is to study the place of the cryptocurrency in the process of money laundering. The subject of the article is to investigate the ways and means of usage cryptocurrency for money laundering, the possibilities, and limits. Problem’s setting. The authors of the paper have emphasized that despite the broad usage of cryptocurrency all over the world for different kinds of purchasing and transactions, there is no unified position regarding the definition of cryptocurrency, as well as its legal status. Moreover, the aforementioned circumstances trigger the difficulties during the criminal investigation of money laundering by using cryptocurrency. Thus, law informant agencies are facing challenges with the identification of criminals’ personality and the fact of crime commitment. In addition, in the article, the authors articulate the main concept of cryptocurrency: anonymity and decentralization, which engender the main aggro while crime investigation. Methodology. The research is based on an analysis of historical stages of cryptocurrency creation: from Friedrich August von Hayek’s idea of “currency independent from banking and governmental” to the establishment of decentralized currency. Moreover, there were analysed the cases of money laundering where criminals who used cryptocurrency have been identified and press charged. In addition, the comparative methods were used to collate different positions regarding cryptocurrency all over the world and inside Ukraine. The position of the main authorities and organizations regarding the legal status of cryptocurrency was investigated as well. The results of the study revealed that a cryptocurrency is a convenient tool for money laundering because it gives relative anonymity for the owner of the currency, as far as it does not require any personal information about the user and his location. Aforementioned feature minimizes the opportunity for law enforcement agencies to track back the criminal activity and to identify the criminal personality. Furthermore, cryptocurrency transactions are out of the government control because for conducting any transactions by using cryptocurrency, there is no need for their verification by third parties like a bank, governmental authority or nongovernmental organizations. In addition, the user can have more than one account and conduct transactions from different places at the same time.

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75
Vol. 4, No. 5, 2018
Corresponding author:
1 National University “Odessa Law Academy”, Ukraine.
E-mail: dyntuvaleriia@gmail.com
2 National University “Odessa Law Academy”, Ukraine.
E-mail: olegdykyj@gmail.com
DOI: hps://doi.org/10.30525/2256-0742/2018-4-5-75-81
CRYPTOCURRENCY IN THE SYSTEM OF MONEY LAUNDERING
Valeriia Dyntu1, Oleh Dykyi2
Abstract. The target of the article is to study the place of the cryptocurrency in the process of money laundering.
The subject of the article is to investigate the ways and means of usage cryptocurrency for money laundering, the
possibilities, and limits. Problem’s setting. The authors of the paper have emphasized that despite the broad usage
of cryptocurrency all over the world for dierent kinds of purchasing and transactions, there is no unied position
regarding the denition of cryptocurrency, as well as its legal status. Moreover, the aforementioned circumstances
trigger the diculties during the criminal investigation of money laundering by using cryptocurrency. Thus, law
informant agencies are facing challenges with the identication of criminals’ personality and the fact of crime
commitment. In addition, in the article, the authors articulate the main concept of cryptocurrency: anonymity and
decentralization, which engender the main aggro while crime investigation. Methodology. The research is based
on an analysis of historical stages of cryptocurrency creation: from Friedrich August von Hayek’s idea of “currency
independent from banking and governmental” to the establishment of decentralized currency. Moreover, there were
analysed the cases of money laundering where criminals who used cryptocurrency have been identied and press
charged. In addition, the comparative methods were used to collate dierent positions regarding cryptocurrency all
over the world and inside Ukraine. The position of the main authorities and organizations regarding the legal status
of cryptocurrency was investigated as well. The results of the study revealed that a cryptocurrency is a convenient tool
for money laundering because it gives relative anonymity for the owner of the currency, as far as it does not require
any personal information about the user and his location. Aforementioned feature minimizes the opportunity for
law enforcement agencies to track back the criminal activity and to identify the criminal personality. Furthermore,
cryptocurrency transactions are out of the government control because for conducting any transactions by using
cryptocurrency, there is no need for their verication by third parties like a bank, governmental authority or
nongovernmental organizations. In addition, the user can have more than one account and conduct transactions
from dierent places at the same time.
Key words: cryptocurrency, money laundering, criminal investigation.
JEL Classication: K14, K24, L86, O17, O33
1. Introduction
ХХІ century became the era of skyrocket and rapid
development of science and technology, which is
unthinkable without the World Wide Web. However,
the creation of the aforementioned indispensable tool
counts less than 50 years.
In 1969, Charley Kline made rst but an unsuccessful
aempt of remote login the computer of Stanford
Research Institute. is date can be considered as
a day of creation of a new way of interaction between
people all over the world. en in 1989, Tim Berners-
Lee oered CERN the concept of the new distributed
information system, which he named the World Wide
Web. Since that time all spheres of life step by step
have shied their main activities into the augmented
reality of the World Wide Web. e same fate befell the
economy, which during the last 15 years has digitalized
almost all main processes. e latest breakthrough in
the digital economy was done by the creation of new
means of payment – cryptocurrencies, which emission
and accounting are based on asymmetric encryption by
utilizing cryptographic methods of protection.
Currently, the aitude to the cryptocurrency has
dierent avenues, from complete abnegation of its
potential and benets to all-consuming adoration as
a future way for liberation out of nancial government
control. We do not support any of the radical viewpoints
regarding cryptocurrencies considering it as a tool,
which has advantages and disadvantages.
However, law enforcement agencies all over the world
identify the use of cryptocurrencies for commitment
to dierent types of crime, mostly correlated with

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economic and nancial spheres, in particular, money
laundering. Aforementioned anxiety triggers the
necessity for deep research of ways and means of using
cryptocurrencies in the process of money laundering,
which determines the relevance of this article.
2. Literature review
e study of using cryptocurrency for illegal
activities is under the consideration of such scientists
as Bezverbnyi K., Kasatkin A., Kornev I., Krylov G.,
Robbek A., and others. However, despite the signicant
contribution of the aforementioned scientists into
considering the topic, the current situation with usage
cryptocurrency for the commitment of economic
crimes demands the deeper contemplation of it,
especially regarding money laundering.
3. Brief characteristic of the virtual currency
e determination of money’s origin was always the
issue of discussions. Paul Anthony Samuelson wrote that
“money is an articial social convention” (Samuelson,
1993). Consequently, if the social convention was created
it must have a purpose. Aristotle suggested that exchange
requires the emergence of the equivalent payment
instrument (Bechler, 1995). Inasmuch as exchange can be
considered as a social agreement, thus the establishment
of the money can be seen as a social treaty.
However, there are a lot of supporters of another
theory of money’s emergence. For instance, K. Marx
laid the foundation of evolutionary theory, which later
was nalized by Ludwig Heinrich Edler von Mises.
He articulated that arise the inevitable tendency when
means of exchange which were used became less
exchangeable and were rejected one by one, until was
lived that single goods which became universally applied
as a means of exchange, in other words, as money (Mises,
2005). We support the viewpoint of David Rolfe Graeber
who admied that problem is that there is no evidence
which proves the aforementioned theory, and however
there are a lot of facts which refute it (Graeber, 2011).
Nevertheless, despite dierent opinion about roots
of money, nowadays they have important role all
over the world and can be considered as a bunch of
socially recognized information, which has their own
value, information about the amount of cost, which
is recognized by business entities in the transactions
correlate with goods and services, and sometimes with
money themselves as a commodity of a special kind
(Surikov, 2015).
Currently because of the Forth Industrial Revolution
(Schwab, 2016) and rapid development of IT technologies,
the framework of economy was changed and caused
the emergence of new phenomena – digital economy,
which can be considered as a series of economic, social,
and cultural activities that are performed online and are
related to the use of information and communication
technology (Zupan, 2016). us, the digitalization of
the economy has set up the boundless environment
with renewed trading rules. Furthermore, it triggers the
creation of the virtualization of the world bank system –
a transformation of banking on the base of informational
technology implementation into bank sector; according
to the form, it is a transition of bank sector into electronic
atness of utilization, which can be seen in following
forms: electronic banking, electronic payment systems
(domestic and international) (Pelo, 2015).
Consequently, the high-speed rise of digital trade
market and virtualization of the world bank system
demanded the creation of the certain nancial tool,
which can be used via the Internet and ensured the
high speed of transactions. Such kind of instrument has
become virtual currency.
It should be noticed that comply with FinCEN’s
Regulations to Persons Administering, Exchanging, or
Using Virtual Currencies “In contrast to real currency,
‘virtual’ currency is a medium of exchange that operates
like a currency in some environments, but does not have
all the aributes of real currency” (FCEN, 2013).
Virtual currency is dierent than electronic money,
which is a digital means of at currency and is utilized
for electronic transfer of reecting at currency cost and
is considered as a legal means of payment (Karcheva
and Nikitchuk, 2015). Furthermore, the distinction
between virtual currency and other means of payment
is the method of the emission of payment units and the
organization of their storage and transfers system.
In addition, “unlike gold or silver virtual currencies
have no non-monetary use or value – they are just bits of
data” (WSBI, 2014). Furthermore, the value of virtual
currencies is based on the convention among system’s
users, which are working via the Internet (Dziuba and
Orzeszko, 2015).
According to the European Central Bank
position which was expressed in “Virtual currency
schemes – a further analysis” “virtual currency is
a digital representation of value, not issued by a central
bank, credit institution or e-money institution, which,
in some circumstances, can be used as an alternative
to money” (ECB, 2015). Moreover, in report of
the Financial Action Task Force, virtual currency is
considered as a “digital representation of value that
can be digitally traded and functions as (1) a medium
of exchange; and/or (2) a unit of account; and/or (3)
a store of value, but does not have legal tender status
(i.e., when tendered to a creditor, is a valid and legal
oer of payment) in any jurisdiction. It is not issued
or guaranteed by any jurisdiction and fulls the above
functions only by agreement within the community of
users of the virtual currency” (FATF, 2014).
us, “virtual currencies represent both the emergence
of a new form of currency and new payment technology
to purchase goods and services” (Bolt and Oordt, 2016).

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ere are three types of virtual currency: closed,
virtual currencies with the unidirectional ow, and
virtual currencies with the bidirectional ow.
In fact, closed virtual currency does not link to the real
economic sector. It is intended for payment for virtual
goods or services, for instance, virtual games, and
cannot be utilized out of the virtual community. As an
example, World of Warcra (WoW) Gold can be taken,
which is used in the computer game with a similar name
(Karcheva and Nikitchuk, 2015). All unconvertible
virtual currencies are centralized: according to the
denition, they are emied by the central administrator,
which controls system, sets the rules for using the virtual
currency, maintains a centralized payment register,
and has right to withdraw currency from circulation
(Karcheva and Nikitchuk, 2015).
e virtual currency with unidirectional ow. Such
currency can be purchased according to a specially set
course by using “real” currency; however, it is impossible
to comply with the same course to exchange it backward.
Such currency can be purchased according to a specially set
course by using “real” currency; however, it is impossible to
exchange it backward in conformity with the same course.
Its main purpose is the payment of virtual goods and
services, nevertheless, some of them allow paying for real
goods and services. As an example can be taken Facebook
Credit, Amazon Coins, Nintendo Points, bonuses for
passengers, who oen enjoy the services of the particular
airline (Badzym and Drevush, 2014).
Virtual currencies with the bidirectional ow. Such
currency can be purchased and bought according to
a certain exchange course, in other words, to convert
it (Badzym and Drevush, 2014). e term “converted
currency” does not mean its ocial convertibility
(for instance in a case of the gold standard) but only
indicates its “de facto” convertibility (for instance, due
to the existence of the relevant market). us, virtual
currency is “convertible” only until that time, while
individuals and legal entities carry out transactions
with it, and another except it as far as “convertibility”
of virtual currency does not insure by the legislation
(Karcheva and Nikitchuk, 2015).
e main propose of it is payment for real and virtual goods
and services (Badzym and Drevush, 2014). As an example
of “converted currency,” cryptocurrency can be taken.
4. e stages of cryptocurrency creation
Despite the signicant popularity of cryptocurrency
in Ukraine and other European countries, its particular
denition still has not been articulated. We support the
viewpoint that “cryptocurrency is a digital decentralized
currency, a unit of which is a coin cryptographically
protected against tampering since it is an encrypted
information that cannot be copied, while all information
about transactions is stored in the blockchain system”
(Inshyn, Mohilevskyi, Drozd, 2018).
Very oen the creation of cryptocurrency correlates
with the replication to the social demand for a currency
independent from banking and governmental
institutions, aer economic crises in 2008 when they
lost their reliability.
However, the idea of private money is not new; it was
articulated in the book of Austrian economist Friedrich
August von Hayek “e Denationalization of Money.”
His main idea was that government should be deprived of
the money’s emission monopoly with a target to prevent
the ination process (Hayek, 1976). Furthermore,
Milton Friedman in 1999 during the interview admied
that “…the Internet is going to be one of the major
forces for reducing the role of government. e one
thing that’s missing, but that will soon be developed,
is a reliable e-cash, a method whereby on the Internet
you can transfer funds from A to B without A knowing
B or B knowing A, the way I can take a USD 20 bill
and hand it over to you and then there is no record of
where it came from” (WSBI, 2014). His prediction was
precision because progressive instruments and systems
are establishing neoteric paradigms for transactions and
new channels of capital (Hileman and Rauchs, 2017).
It should be noticed that the roots of cryptocurrency
go to the end of the previous century, in particular, in
1983 David Chaum oered the idea of combining
transparency and anonymity of transaction for all users
by utilizing “Blind signature” (Chaum, 1982).
en in 1990th, the movement of crypto-anarchists
was formed – cypherpunk whose idea was the usage of
cryptography and other similar tools for changing the social
order. In 1993, one of the founders of the cypherpunk Eric
Hughes announced the condentiality of transactions by
using multi-step encryption and published.
In 1994, Timothy C. May published the work “e
Cyphernomicon: Cypherpunks FAQ and More, Version
0.666” where he described safe untraceable encrypted
transactions, which would use the P2P system which does
not need verication by third parties and would cause the
independent from the government (May, 1994).
In 1998, Wei Dai oered cryptocurrency “b-money”.
He wrote “I am fascinated by Tim May’s crypto-anarchy.
Unlike the communities traditionally associated with
the word ‘anarchy’, in a crypto-anarchy, the government
is not temporarily destroyed but permanently forbidden
and permanently unnecessary. It’s a community where
the threat of violence is impotent because violence
is impossible, and violence is impossible because its
participants cannot be linked to their true names or
physical locations” (Dai, 1998).
In 2005, Nick Szabo created “Bitgold”. As a libertarian
wing of cypherpunk inspired by the novel of Ayn Rand
“Atlas Shrugged” he wanted to create “Galt’s Gorge”
in the cyberspace – free trade zone. Firstly he came to
the idea of creation smart-contracts, which was based
on blockchain system in 1990th, and later on invented
cryptocurrency.

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5. e analyses of Bitcoin as a cryptocurrency
Currently, the most popular cryptocurrency which
is used by bidirectional ow is Bitcoin. Bitcoin is
decentralized P2P (Person to Person) payment network,
which serves its users without central bodies and agents.
From the users’ point of view, Bitcoin is analogue of
cash but only for the Internet (In Bitcoin information
site). e maximum amount of Bitcoin in the world is
restricted and cannot be more than 21 million.
e creation of Bitcoin is correlated with the name of
Satoshi Nakamoto, who on September 3, 2009, via the
Internet published an article “Bitcoin: A Peer-to-Peer
Electronic Cash System” (Nakamoto, 2009), in which
he described the main principals of new cryptocurrency.
e main characteristics, which distinguish Bitcoin from
traditional electronic money and cashless selements,
that Bitсoin is not debt obligations of the issuer.
Any person, who has access to the Internet and
enough amount of computer memory, can be a user
of Bitcoin. For this purpose, utilizer has on the ocial
website to choose “wallet” and to install it. e wallet
can be installed on the personal computer, mobile
phone, or can be available via the Internet. It should
be noticed that wallet has the specic address and it
contains information about closed keys “seed” for all
Bitcoin, which belongs to the particular user. By utilizing
the aforementioned wallet user can do any transactions.
Essentially, all owners of Bitcoin’s accounts, wallet,
as well as participants of transactions, are holders of
individual accidentally generated numbers, which
become key or “password” for that element or activity.
Any key or “password” is absolutely unique and
anonymous because does not need user’s personal
data and owner of that key becomes the owner of
the account, wallet or transaction. Peer-to-peer
system which is utilized by Bitcoin allows users to do
transactions between themselves without interruption
of the third party. Operations are checked by network
nodes and records to a distributed ledger database –
blockchain.
Blockchain automatically gives information to one
party that another party of the treaty legally has paid for
goods or services. In the aforementioned transaction,
there isn’t a third party. e system literally is controlled
by all participants. Any person who participates in
cryptocurrency commerce has the same capability to
control the movements of cryptocurrency. All veried
transactions are included into blockchain.
e transaction is a transfer of value between Bitcoin’s
wallets which are included into blockchain. Bitcoin’s
wallet applies the key to sign a transaction. Key provides
mathematical proof that Bitcoin comes from the owner
of the “Wallet”. All transactions are transmied between
users and commonly begin to be conrmed by the
network during the next 10 minutes through the certain
process – “mining”.
“Mining” is a process of producing electronic money with
aid of solving by the computer, certain the cryptographic
algorithms (Lyubshina and Zolotaryuk, 2016).
Bitcoin is mined by blocks, the initial size of one block
is 50 Bitcoin, however, aer every 250000 blocks, and
their amount is declining twice. On the average, each
block is mined in 10 minutes. To save the aforementioned
parameter aer any 2016 mined blocks, the complexity of
their mining is adjusted. Since the amount of equipment,
which is used for mining constantly increase, thus the share
of mined blocks for each of them constantly decrease. By
simple calculation can be determined the amount of Bitcoin
which is generated per day: 25×24×6 = 3600. ereby, the
amount of emission is known in advance (Robbek, 2014).
It should be noticed that governments of dierent states
of the world have a dierent opinion about the legalization
of Bitcoin inside their countries. For instance, the new
law, which has come into a force in Japan, allows utilizing
Bitcoin as a legitimate means of payment.
As for Ukraine, according to the explanation of
National Bank of Ukraine regarding the legality of
“virtual currency/cryptocurrency” Bitcoin usage in
Ukraine – Bitcoin is a monetary surrogate, which does
not have provision by the real cost and cannot be used by
individuals and legal entities on the territory of Ukraine
as a means of payment, as far as it contradicts norms
of Ukrainian legislation (Natsionalnyi Bank Ukrainy,
2014). It should be noticed that the explanation of
the National Bank of Ukraine cannot be considered as
a norm as far as it does not provide any responsibility;
therefore, it can be utilized as a kind of notication or
warning (Drozd, Lazur and Serbin, 2017). It should be
noticed that “an ambiguous approach to cryptocurrency
in dierent countries of the world creates additional
problems for determining the legal status of
cryptocurrency” (Drozd, Basai, Churpita, 2017).
e aforementioned position of National Bank of
Ukraine was formed because transactions with Bitcoin
does not allow to identify persons who realized them
and it opens signicant opportunities for crimes
commitment, which correlate, in particular, with money
laundering. For instance, FBI reported that if Bitcoin
becomes more widely accepted among vendors and
users, the FBI anticipates seeing increased Bitcoin
money laundering activities (FBI, 2012).
6. e place of Bitcoin in the money
laundering process
Money laundering can be dened as a nancial
transaction and other activities, which are commied for
a particular target of concealment the real origin of the
revenue. It should be noticed that “money laundering
begins with the fruits of a crime – the underlying or
“predicate” oense – and ends with funds that can be
used safely or at least with minimal risk, for any purpose”
(Levi and Reuter, 1997).

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In the world practice, the biggest case in the history
of online money laundering is Liberty Reserve.
In May 2013, the U.S. Department of Justice has
pressed charges against the company “Liberty Reserve”
(which was the system of electronic transactions
and located in Costa Rica) and seven its managers
and employees. ey were accused of commitment
unregistered commercial activity with the provision of
money transfer services and money laundering by the
assistance of transactions of illegal income more than
6 billion US dollars. is system was functioning in
colossal dimensions, counted millions of users all over
the world, including 200000 users in the USA. In its
framework, approximately 55 million transactions were
carried out; almost all of them were illegal. Inside the
system, their own virtual currency “Liberty Dollars”
or LD was used, however, in the initial and end point
of transaction money were converted and stored in
at currency (USD). As a result of conducted well-
coordinated actions, the Ministry of Finance of the USA
determined “Liberty Reserve” as the nancial agency,
which triggered concern in terms of money laundering
comply with Chapter 311 US Anti-Terrorism Act
(Patriot Act) and completely deprived its access into the
nancial system of the USA (FATF, 2015).
As an example of the utilizing Bitcoin cryptocurrency
for criminal activity, successful functioning of hiding
website “Silk Road” can be taken. It was the biggest
virtual market of drugs trading. All transactions via
that website were conducted with aid of Bitcoin and
anonymity for users was given through the functioning
in Darknet, which viability was carried out by using the
TOR soware.
“Silk Road” was functioning as a peculiar Bitcoin’s
bank, where any user had to have account for conducting
transaction via the website, if it was possible not less than
one (or even thousands) Bitcoin address “Silk Road”,
which were aached to user’s account on the website and
were stored on the server, which was controlled by “Silk
Road”. For purchasing, a user sent mined Bitcoin to the
Bitcoin address of “Silk Road” which was aached to his
account on the website. Aer the realization of purchasing,
the user’s currency transferred in the system of escrow
account until the complete end of the transaction, then
Bitcoin of user/customer transmied from escrow account
to Bitcoin address of the Silk Road’s seller. Furthermore,
“toggle-switch” was used for any buyer which directed all
payments with aid of complicated series quasi-random
fake transactions … almost excluding the opportunity to
binding payment to any Bitcoin, which was sent from the
website (Mergenovna, Krylov, Bezverbnyi, Kasatkin and
Kornev, 2016).
Currently, the aforementioned website “Silk Road”
has shut down, and persons who governed it were
brought to criminal responsibility.
7. Conclusions
To sum up, it should be emphasized that modern
technologies facilitate using cryptocurrency, in
particular, Bitcoin for money laundering. is process
has become more complicated and intelligent, as far as
elaboration allows:
rstly, to eliminate bonds between real person and
account of virtual currency because Bitcoin address and
protocols do not require the client’s identication;
secondly, to conduct conversation by utiliz ing simplied
system, which does not need a person. Whereas, virtual
currencies’ exchange does not have strict regulation, as
those, which work with at currencies and according to
the law have to store particular documentation about
clients;
thirdly, to create unlimited amount of account,
which objectively makes it impossible to control all
transactions;
fourthly, to utilize tools which block the opportunity
to track back particular activity (anonymizers etc.). For
instance, Dark Wallet, which mixes together several
transactions and complicates the opportunity to track
back the particular address of Bitcoin wallet, which
sends Bitcoin. In addition, transactions can be done
through the TOR network, which directs particular
web-trac through several relays, in that way hiding the
real user’s IP-address.
us, Bitcoin allows conducting dierent schemes of
money laundering, which almost block the possibility
of the criminals’ identication. is feature triggers new
challenges for law enforcement agencies to seek out new
forms and methods of money laundering investigation.
Moreover, the aforementioned characteristics of
cryptocurrency are pushing lawmakers all over the
world to unify the legislative system regarding utilizing
cryptocurrency as a means of payment. Without its
recognition by government, it is almost impossible
to combat and prevent the commitment of money
laundering.
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