Criminals have long turned to cryptocurrencies like Bitcoin to carry out crimes including ransomware and extortion. But as law enforcement has improved at tracking the semi-anonymous currencies, criminals have had to devise new tactics for turning ill-gotten crypto proceeds back into cash.
In response, a new breed of middlemen have emerged to help them launder billions of dollars. So-called over-the-counter (OTC) brokers have emerged as the lynchpin of a new type of money laundering, helping to turn at least $2.8 billion worth of Bitcoin into cash for criminal entities in 2019, according to a new report from crypto forensics firm Chainalysis.
OTC brokers are a familiar fixture in both the crypto and conventional stock trading worlds, and many of them are legitimate. In the case of Bitcoin, they connect buyers and sellers who want to trade large amounts of the currency without listing it on an exchange—often out of concern that making the trade public could cause a price swing. The OTC desks collect a small fee for the service.
Popular cryptocurrency exchanges like Coinbase operate OTC desks while specialized OTC firms such as Cumberland arrange billions of dollars worth of transactions daily (neither Coinbase nor Cumberland are named in the Chainalysis report). Eric Turner, the director of research at cryptocurrency data firm Messari estimates that around two-thirds of Bitcoin traded on any given day flows through OTC brokers.
The arena is lightly regulated, however, as OTC brokers in the U.S. And abroad face fewer regulations, including know-your-customer laws. This has allowed shadowy operators, who often conduct business via Skype or messaging apps like Telegram, to offer criminals a safe way to convert Bitcoin into hard currency.
In its report, Chainalysis cites a “Rogue 100” group of criminal OTC brokers who control Bitcoin addresses—a form of digital wallet—through which hundreds of billions of dollars flowed in 2019. The firm says the Rogue 100, none of which are directly identified in the report, often transact with each other and also transfer Bitcoin through intermediary accounts to make it harder to trace.
When it comes time to convert the Bitcoin into hard currency, Chainalysis says the Rogue 100 rely heavily on two major overseas exchanges, Huobi and Binance, to cash out. While the exchanges are nominally subject to know-your-customer laws, the criminal OTC brokers are still finding room to operate—particularly on Huobi, says Chainalysis.
The report says that 70 of the Rogue 100 operate on Huobi. It’s unclear whether any group on the list operates on Binance, suggesting most allegedly illicit activity on the service is done by smaller players. Chainalysis does not explicitly say the exchanges have direct knowledge of the illegal activity. Instead, it says the exchanges should be more consistent in scrutinizing OTC brokers.
In response to the Chainalysis allegations, Binance chief compliance officer Samuel Lim, said Binance is compliant with all regulations and know-your-customer regulations in all jurisdictions that it operates in. He added: “Binance is committed to cleaning up financial crime in crypto and improving the health of our industry. We will continue to improve on our proprietary KYC and AML technology, as well as the third-party tools and partners we work with, to further strengthen our compliance standards.”
Huobi did not respond to multiple requests for comment.
New money-laundering infrastructure
Chainalysis, whose customers include major U.S. And European law enforcement agencies, did not provide specific identities of the Rogue 100 OTC brokers. But in an interview with Coins2Day, co-founder Jonathan Levin said that, given the low barriers to entry in establishing an OTC shop, some may be lone individuals operating through apps.
Others, however, may be long-established criminal networks. Levin notes that criminal gangs have offered money laundering services for decades and have, in recent years, added Bitcoin laundering as an additional product. On a practical level, this means the perpetrator of a ransomware attack may use a Bitcoin OTC broker run by established criminals to turn its proceeds into cash.
While corrupt OTC brokers would have obvious appeal to criminals looking to sell Bitcoin, the appeal for buyers is less obvious. According to Chainalysis senior economist Kim Grauer, part of the answer is price. In studying OTC transactions, she says buyers often obtain a discount when dealing with the likes of the “Rogue 100.”
All of this poses new challenges for law enforcement, which, in recent years, has made enormous strides in understanding cryptocurrencies and, in some cases, recovering them.
According to Jarod Koopman, the Director of Cybercrime at the Internal Revenue Service, his agency and others have seized millions of dollars of Bitcoin stolen from exchanges and used in other crimes—in part by using forensic services like Chainalysis to trace it. But criminals have begun to take new steps to cover their tracks, and the role of OTC brokers has emerged as a major new area of concern, he acknowledged in an interview with Coins2Day. Koopman says OTC brokers and other types of peer-to-peer transfer services can “break the chain” as law enforcement seeks to track the flow of illicit funds.
Levin, of Chainalysis, says that law enforcement can address such challenges by working more closely together on tracing funds, and applying additional scrutiny to exchanges and crypto currency brokers.
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