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Q1 2019 Cryptocurrency Anti-Money Laundering Report

Cryptocurrency Thefts, Scams, and Fraud Could Tally More than $1.2 Billion in First Quarter 2019

Criminals stole more than US$356 million from exchanges and infrastructure during the first quarter of 2019. Among these losses, exit scams—which CipherTrace is considering the implosion of QuadrigaCX to be one—robbed cryptocurrency users of nearly US$195 million. On top of these numbers, the New York Attorney General’s Office revealed what they allege is a fraud involving the loss of $851 million by a major cryptocurrency exchange, Bitfinex. Cyber criminals also developed ingenious new techniques to drain millions more from user accounts and wallets. These thefts only represent the losses that are visible. CipherTrace estimates the true number of crypto asset losses was much higher.

46% Increase in the Number of Cross-Border Payments from US Cryptocurrency Exchanges Over the Last Two Years

CipherTrace research conducted in Q1 revealed a major hole in the current cryptocurrency regulatory fabric with respect to cross-border payments. An analysis of 164 million BTC transactions revealed that cross-border payments from US exchanges to offshore exchanges increased from 45% from the twelve months ending Q1 2017 to 66% in the twelve months ending Q1 2019. This is significant because according to the International Consortium of Investigative Journalists, “$8.7 trillion, 11.5 percent of the world’s wealth, is hidden offshore.”

Once these payments reach exchanges and wallets in other parts of the globe they fall off the radar of US authorities. For now, it is uncertain if these cross border inter-exchange payments trigger the FinCEN requirement that “MSBs must keep a five-year record of currency exchanges greater than $1,000 and money transfers greater than $3,000.” But experts recommend MSBs retain tax ID/SSN for these transactions.

A Significant Wave of Regulation Is Coming to the Cryptocurrency Economy

Ultimately, thieves and scam artists will need to launder the cryptocurrency stolen or scammed in Q1 2019. Furthermore, this will require innovative new ways to cash out, and turn all that tainted virtual money into clean, spendable fiat currencies. And they will also need to get it done under the much more watchful eyes of government regulators and banks as a tsunami of tough new global anti-money laundering (AML) and counter-terror financing (CTF) regulations will roll over the crypto landscape in the coming year. As of April 2019, 17 countries plus the European Union within the jurisdiction of the Financial Stability Board had at least some regulation or standard-setting bodies dealing with cryptocurrencies. These bodies will be responsible for implementing regulations that enforce FATF policy and AMLD5.

In light of the huge losses suffered by users of QuadrigaCX, regulators in Canada and around the world are rethinking controls on the internal business practices and security operations of exchanges. In addition, regulators are beginning to recommend bans on privacy coins, as criminals are coming to prefer these new anonymous altcoins to bitcoin because they are more difficult to trace. Banks also continue to face problems coping with the coming wave of regulations as they increasingly recognize there are undetected cryptocurrency operations that are using their fiat payment networks and customer accounts. Plus, courts in some countries have ruled that banks must do business with licensed cryptocurrency companies.

A tsunami of tough new global anti-money laundering (AML) and counter-terror financing (CTF) regulations will roll over the crypto landscape in the coming year.

Crypto Crime Evolves and Expands from the Virtual to the Real World

The previous year’s crypto crime spree was dominated by major external exchange hacks around the globe—with the biggest occurring in Q1 2018. However, in the first quarter of this year, insiders, extortionists and scammers attempted a more diverse range of crypto crimes. As just one example, kidnappers in Norway demanded nine million euros (approximately US$10.3 million) ransom in Monero, a privacy coin, for a billionaire’s wife, who has not yet been returned. There were also two large insider thefts/misappropriations (QuadrigaCX and Bitfinex). This shift suggests that security against external hackers at exchanges is maturing under the pressure from regulators and customers to take necessary measures to prevent losses.

In the first quarter of this year, cyber thieves, extortionists and scammers attempted a more diverse range of crypto crimes.

While not included in the current theft numbers in this report, on March 6, 2019, the UN Security Council reported North Korean state-backed hackers successfully breached at least five cryptocurrency exchanges in Asia between January 2017 and September 2018, causing $571 million in losses. Also, of note, but not included in this quarter’s theft numbers was the loss of 1,680 XMR Monero (around $80,000) due to a bug in the Ledger app.

The geopolitical implications of cryptocurrencies also took center stage in Q1 2019 with countries competing to attract crypto businesses and foster related economic growth. Conversely, overt attempts to evade sanctions by hostile nations show that economic adversaries recognize the money laundering and terrorist financing potential of crypto assets. On March 6, 2019, the UN Security Council reported North Korean state-backed hackers successfully breached at least five cryptocurrency exchanges in Asia between January 2017 and September 2018, causing $571 million in losses.

Q1 2019 Crypto Crime Highlights

  • Thieves and scammers stole more than $356 million from exchanges and users.
  • Customers suffered losses of approximately US$195 million when Canada’s major cryptocurrency exchange, QuadrigaCX, imploded after the CEO mysteriously perished in India, allegedly along with the passwords to virtually all of the exchange’s assets. CipherTrace analysis casts severe doubt that this was anything other than a theft, fraud, or foul play.
  • On March 26, the New York Attorney General’s Office brought suit against the parent company of Bitfinex and Tether.
    • The AG claimed Tether had failed to disclose a secret transfer of funds from the fiat pool of funds supposedly backing tether, which converted tether from asset-backed to debt-backed unbeknownst to tether holders.
    • Bitfinex allegedly lost $851 million. The source of the loss was a Panamanian payment processor also used by QuadrigaCX.
  • Iran announced the imminent launch of its long-rumored Crypto Rial, a state-backed stable coin developed with the express purpose of circumventing political sanctions and overcoming sanctions-related restrictions by SWIFT.
  • The Russian Duma approved international use of the domestically developed SPFS as a ‘SWIFT alternative’ for cross-border payments in an effort to avoid political sanctions.
  • The French government issued a report recommending a ban on privacy coins.
  • The UN published the findings of a private report that concluded North Korean hackers looted $571 million from five cryptocurrency exchanges in Asia.
  • Courts in some countries forced financial institutions to bank crypto asset businesses.
  • The Bank of Mexico reportedly proposed banning financial institutions from transacting with crypto exchanges, citing money laundering and terror financing risks.

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