Illicit Bitcoin Payments

This post was originally published on July 15, 2019, and sent to Messari Pro subscribers.

Earlier today U.S. Treasury Secretary Steven Mnuchin held a press conference covering Facebook’s Libra and Bitcoin ($BTC). Echoing previous comments from his department, and some recent ones from President Trump, Mnuchin covered the basic talking points of Bitcoin’s volatility and potential use in criminal activity (money laundering for drugs, terrorist financing, and tax evasion - the big three!) going so far as to call bitcoin a “national security issue.” All publicity may be good publicity for bitcoin, as legions of supporters will defend the ecosystem from this sort of narrative, but it’s still somewhat disconcerting that false narratives are being spread to a wide audience from the world’s most powerful people.

It’s no secret crypto has enabled illicit activity in the past (and continues to do so) given its global, permissionless nature. Marketplaces such as the infamous Silk Road have allowed billions of dollars to be spent on drugs, stolen credit card information, and worse. It’s easy to spin this into a story on how crypto is predominantly used for criminals, but luckily the data is on our side. Chainalysis, a leading blockchain forensics and compliance tech platform, has done extensive analysis tracing the flows of bitcoin and other cryptocurrencies to darknet marketplaces. The research shows that while the nominal amount has increased steadily over the years, its percentage of the overall economic network activity transacted has declined considerably.

In the first half of this year, illicit bitcoin payments increased to $515 million, putting us on pace for the first year of billion-dollar bitcoin commerce on the darknet. This sounds bad. But you have to put it in perspective. That’s less than 1% of all economic activity transacted in Bitcoin, and pales in comparison to what we see outside of crypto.

The United Nations Office of Drugs and Crime estimates the amount of money laundered across the world is 2%-5% of global GDP or between $800 billion and $2 trillion dollars. Most money launderers still use the US Dollar and existing banking system for convenience. We have another theory as to why this is suddenly a topic du jour. Mnuchin’s real punch line was this one:

“The US takes very seriously the role of the dollar as the world’s reserve currency”