The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1368-5201.htm

JMLC
22,2 The use of cryptocurrencies in the
money laundering process
Chad Albrecht and Kristopher McKay Duffin
Huntsman School of Business, Utah State University, Logan, Utah, USA
210
Steven Hawkins
Southern Utah University, Cedar City, Utah, USA, and
Victor Manuel Morales Rocha
Autonomous University of Ciudad Juarez

Abstract
Purpose – This paper aims to analyze the money laundering process itself, how cryptocurrencies have
been integrated into this process, and how regulatory and government bodies are responding to this
new form of currency.
Design/methodology/approach – This paper is a theoretical paper that discusses cryptocurrencies and
their role in the money laundering process.
Findings – Cryptocurrencies eliminate the need for intermediary financial institutions and allow direct peer-
to-peer financial transactions. Because of the anonymity introduced through blockchain, cryptocurrencies
have been favored by the darknet and other criminal networks.
Originality/value – Cryptocurrencies are a nascent form of money that first arose with the creation of
bitcoin in 2009. This form of purely digital currency was meant as a direct competitor to government-backed
fiat currency that are controlled by the central banking system. The paper adds to the recent discussions and
debate on cryptocurrencies by suggesting additional regulation to prevent their use in money laundering and
corruption schemes.

Keywords Cryptocurrency, Tax havens, Illegal transactions, Money laundering process,

Regulatory bodies
Paper type Research paper

Introduction
Cryptocurrencies are a group of nascent electronic currencies that were invented in
2009. The first cryptocurrency, Bitcoin, was created by Satoshi Nakamoto, a pseudonym
for an individual or group of individuals, whose identity is still unknown. Over the past
decade, Bitcoin and other cryptocurrencies have revolutionized the financial world by
creating a stable form of currency that is not backed by any government and allows
encrypted, anonymous transactions (Swartz, 2014). By nature, cryptocurrencies allow
direct peer-to-peer transactions and eliminate the need for a bank or other intermediary
to facilitate financial transactions (Peters, 2015). Such anonymity has allowed the black
market to flourish as cryptocurrencies have enabled individuals to make illegal
financial transactions that are difficult, and in some cases impossible to track (Heilman,
Journal of Money Laundering 2016):
Control
Vol. 22 No. 2, 2019
pp. 210-216 While Bitcoin and the blockchain were initially thought to be anonymous, recent tools by both the
© Emerald Publishing Limited
1368-5201
FBI and other government agencies has allowed individuals, governments, and others “to track”
DOI 10.1108/JMLC-12-2017-0074 and “discover” many bitcoin users on the blockchain.
For the most part, cryptocurrencies are viewed as a contender to traditional fiat The use of
currency backed by central banks. However, because cryptocurrencies are not backed cryptocurrencies
by any government entity, the underlying value of cryptocurrencies is unknown
and fluctuates dramatically (Iwamura, 2014). Furthermore, both the academic
community and the financial markets are still unsure if cryptocurrencies are a
currency (such as the US dollar), a store of value (such as gold) or a combination of
both (Hayes, 2017).
211
The money laundering process
The money laundering process itself is complex and complicated. Money laundering by
definition is the act of channeling illicit funds through outside financial channels to make the
funds appeared legitimate (McDowell, 2001). In the past, money laundering was typically
done through established, small businesses or even through the financial channels of a large
corporation. However, with the advent of the internet, the money laundering process has
moved into the digital realm.
Preventive money laundering legislation was not enacted in the USA until the 1970s. The
most important piece of legislation was finally passed in 1986 when money laundering itself
was criminalized (Sultzer, 1996). Before this law, banks were only required to report large
financial transactions through the Bank Secrecy Act of 1970. Noncompliant banks, who did
not report their transactions, were often fined by the US Government. This law, currently a
core element of the USA financial system, requires that financial transactions of $10,000 or
more must be reported.
Money laundering is considered a problem for the worldwide community because
the actions of criminal individuals, as well as illicit businesses and organizations,
receive their funds from illegal and unethical sources such as fraud, corruption, child
and slave labor, prostitution, drugs, weapons and terrorist activities. As a result,
money laundering undermines the well-being and performance of the global economy
(Buchanan, 2004).
From the perspective of the money laundering organization, the main objective of the
money laundering process is to assimilate the funds from illegitimate sources into the
mainstream financial system and to make the funds appear “clean and usable” for
investments and other business ventures that support and protect the criminal
organizations (Levi, 2002). Furthermore, the money laundering process allows the criminals
that generate the illicit revenue to increase their own personal lifestyle expenditures. The
money laundering process itself has been broken down into three basic steps, namely,
placement, layering and integration (Gilmour, 2016).
Placement involves the process of taking “dirty money” and putting the funds directly
into the mainstream financial system. This can be done by depositing funds into one or
multiple financial accounts and/or getting funds exchanged for money orders, debit cards
and/or traveler’s checks. In other situations, bank accounts that are created for money
laundering purposes are often used as the vehicle to move the illicit funds into the
mainstream financial system (Isa, 2015).
Layering is the act of taking the dirty money and using it in a host of legal financial
transactions to obscure the trail as to where the funds have originated (Compin, 2008). This
may also involve transferring funds into an offshore account, which further obscures the
origin of the money.
Finally, integration is used to describe the act of taking funds and integrating those
funds into a mainstream economic activity such as investments, bonds, letters of credit,
etc.
JMLC The three steps described above allow illicit funds to enter the financial system, become
22,2 “washed” and then be used for investments and other expenditures that benefit the
criminals involved (Barbot, 1995). Some of these expenditures involve purchasing
equipment to further support illegal activities.
There are several different strategies used to move the money in the “placement”
phase of the money laundering process. For example, one type of strategy involves
212 using mainstream banks, a second strategy involves the use of secondary financial
institutions and a third strategy does not use any formal financial institution
whatsoever.
Placement is the most important step of the money laundering process because, at
this stage, money is exposed and can be tracked. The first route taken in the placement
process is the use of various methods that involve primary financial institutions. For
example, “smurfing” describes the process by which money is converted into a money
order or check, and perpetrators typically ensure that all deposits to financial
institutions are under $10,000 to avoid mandatory reporting by the Bank Secrecy Act
(Quirk, 1997).
Tax havens and offshore bank accounts are the most often used methods for moving
illegal funds. When funds are deposited into an offshore account, it is more difficult to trace
and can be transferred through multiple banks to obscure the trail (Picard, 2011).
Furthermore, if funds are moved from the jurisdiction they originated from, the funds
become harder to track and monitor.
Secondary financial institutions are also frequently used as a way to efficiently “place”
the money. The most traditional method used to launder money is to use cash-intensive
businesses as a front to deposit the money, where the illegal money is counted toward the
business’s revenue. Prime examples of this activity include using restaurants and other
businesses.
As discussed earlier, shell companies are also often used in conjunction with offshore
accounts as a way to launder illegal funds. At times, shell companies may not even conduct
any actual business in the country where the firm is registered. As such, the illicit money is
deposited into these accounts and characterized as “earnings/profit” of the shell companies.
The last method used to move dirty money is through the use of an informal
financial network. This type of network is most often seen in India and China. These
networks operate by one person exchanging money for an encoded note or chip.
Perpetrators will then move these funds into another country and exchange notes for
the same amount of cash that was originally deposited. Any handling fees are
subtracted from the total transaction and the informal networks eliminate any formal
records or paper trails (Passas, 2009).
The money laundering process itself has spread throughout the entire world with billions
of dollars being illegally transferred every year (Schneider, 2006). Efforts to curb money
laundering are often costly and ineffective. If left unchecked, money laundering can lead to a
lack of trust in the global financial system and even threaten government entities and
financial institutions throughout the world.

Cryptocurrencies: what are they and where are they from?

As discussed earlier, cryptocurrencies are a nascent form of “digital” money that was first
created with Satoshi Nakamoto’s invention of the Bitcoin in 2009. In more simple terms,
cryptocurrency is a string of code that is recorded on an open public ledger to allow direct
peer-to-peer exchange without any middle entity. The code used for cryptocurrencies is
encrypted and verified on the “blockchain” – a large network of computers that verify every
transaction of the ledger (Litchfield, 2015). While the blockchain is public, identifying an The use of
individual person or company to a specific transaction on the blockchain is extremely cryptocurrencies
difficult. While certain cryptocurrency transactions, such as those recorded by Bitcoin,
Litecoin and Dash are difficult, but possible to trace, other cryptocurrencies, such as Monero
and Zcash hide each individual entry making financial transactions impossible to trace and
identify (Deepika, 2017). As most cryptocurrencies are difficult to track, many criminals on
the black market have begun to use cryptocurrencies throughout the money laundering
process to engage in illegal financial transactions.
213
To avoid regulators over the past few years, criminals have revolutionized the money
laundering process through cryptocurrencies. Before this new system of economic
exchange, criminals were forced to transfer and hide their illegal funds through the central
banking system. As a result, various governments were able to indirectly control money
laundering by slapping heavier regulations and fines on banks and financial institutions,
which made moving illegal funds increasingly difficult (Gao, 2009).
On the other hand, because cryptocurrencies do not involve central banks, cryptocurrencies
bypass the banking system altogether (Brenig et al., 2015). When each transaction is entered
into the blockchain, it is anonymously recorded. For example, in the traditional banking
system, accounts are used when money is deposited or withdrawn on behalf of the account
holder by the central authority or through the actions of its members with the approval of the
central authority. The amount of money within each account is confidential and the validity of
all transactions are verified through the central bank or authority within the system.
However, with cryptocurrencies, users do not hold accounts in the traditional sense. With
cryptocurrencies, each unit (or coin) of each cryptocurrency is tracked with a set of access
keys that identify each individual coin. The owner of the coin receives a private key, which
then identifies the individual as the legitimate owner of the funds (Reid, 2011). A transaction
involving any number of units cannot take place unless both the private and public keys are
used and encrypted. The public set of keys allow the community to track the movement and
expenditure of all units as an additional measure to prevent double spending. As such, in the
cryptocurrency system, users are not required to disclose personal information to engage in
financial transactions.
Cryptocurrencies provide additional economic incentives for criminals to use this system.
One growing benefit for criminals is the fact that cryptocurrencies as a whole are becoming
more widely accepted as a form of payment amongst retailers. Currently, this acceptance is
limited as cryptocurrencies often have to be exchanged for fiat currencies. However, this
process becomes less burdensome as more and more retailers accept Bitcoin.
Another more prominent benefit of using cryptocurrencies is the ease in which funds can
be moved from one country to another. In the layering step of the money laundering process,
illicit funds are not only used to facilitate a myriad of financial transactions but also
transferred to other financial jurisdictions where illegal organizations can access their funds
from their base of operations, protecting their funds from seizure (Gruber, 2015).
With cryptocurrency, all that is required to move and transfer funds from one country to
another is an internet connection. As there is no central authority regulating the
transactions, funds can easily be moved between countries within the network established
by the cryptocurrency. As the blockchain is compiled by peers, every node would have to be
disconnected to cause a system collapse. This design allows the network to be resilient from
outside disturbances, which facilitates a greater portability when transferring illicit funds
(Levi, 2015).
One pattern of behavior that aids in the process of money laundering is the act of tax
evasion. The act of tax evasion is defined as producing earnings outside an organization’s
JMLC tax jurisdiction or transferring funds to a “tax haven” where the earnings are not taxed or
22,2 taxed very little (Marian, 2013). This evasion undermines the revenues that countries
receive, with billions of dollars in losses of unreported revenue. The emergence of
cryptocurrency has presented itself as the ultimate tax haven.
In recent years, governments from around the world have begun to cooperate with each
other in an effort to target these tax havens. As international laws prevent governments
214 from directly targeting the funds within those tax havens, governments have placed
increasing pressure on the financial institutions used to transfer funds from one jurisdiction
to another (Alldridge, 2008).
With the use of cryptocurrencies as a tax haven, there is no financial institution for
governments to target. As a result, corrupt firms and criminal organizations can convert their
earnings into cryptocurrencies and then transfer these funds anywhere in the world to evade
tax authorities. This increased protection aids the money laundering process because it allows
criminal organizations to gain full access and control to all the revenue they produce.

Authority and regulatory perspectives

Cryptocurrency itself is a specific form of virtual currency. Virtual currencies originated
when the internet was born to facilitate transactions on the Web. Virtual currencies closely
mirror the currencies issued by central banks in the sense that they have third parties that
verify the transactions and supply of each virtual currency.
The first major efforts that were made by the USA Government to regulate virtual
currencies was the prosecution of e-gold in 2007. E-gold was backed by gold and other
precious metals to facilitate transactions through the trade of precious metals. However, it
was discovered that the company that backed e-gold had approved transactions that clearly
supported illegal activity and other money laundering activities.
As e-gold required a central authority that approved all transactions, the government
could easily source records and track payments. The company first objected to the US
Government’s accusations by stating that it could not be targeted as it was not a money-
producing business. However, the government was able to prove that e-gold had failed to
obtain a license from the federal government to transmit money. The government
interpreted the law as any organization or entity that transmitted money, whether it was fiat
back currency or not, was subject to the rules and regulations surrounding the transfer of
funds. This case was important as it set the standard that allowed the government to, for the
first time, target businesses that dealt in virtual currencies, including cryptocurrencies.
However, unlike e-gold, cryptocurrencies cannot be easily investigated or prosecuted
because cryptocurrencies are decentralized. In theory, cryptocurrencies have the potential to
destabilized fiat currency and induce a state where the economy is not directly controlled or
regulated by the government. Because of this risk, certain countries including India and
China have strict laws against cryptocurrencies (Filippi, 2014). On the other hand, countries
such as Japan have enacted laws and regulations specifically accepting cryptocurrencies as
a legitimate form of currency (Chohan, 2017). Even so, most governments are now just
beginning to discuss legislation and other routes that could potentially influence and even
regulate the use of Bitcoin.

Conclusion
The use of cryptocurrencies in the money laundering process has the potential for
widespread implications for economies around the world. Throughout history, money
laundering has always been a significant challenge for governments. As the creation of the
central banking system, money laundering has bypassed formal financial controls through
placement, layering and integration. Cryptocurrency is closely tied with money laundering The use of
because of the anonymity it provides. With the use of cryptocurrencies in the money cryptocurrencies
laundering process, criminal organizations are able to channel funds with increasing ease
and evade investigation by authorities.
Although the price of Bitcoin and other cryptocurrencies fluctuate widely, they have
proven to become more stable and accepted over time. If the use of cryptocurrency in the
money laundering process is not addressed further, the unethical use of cryptocurrencies
could be used to ultimately undermine the stability of the global economy. The solution to
215
the illegal use of cryptocurrencies lies in the regulation and prosecution of money laundering
wherever it is discovered, and the close regulation of cryptocurrency itself, including
common anti-money laundering controls such as know your customer and other preventive
measures, which would aid in preventing this new type of currency from being used for
unethical and often illegal purposes.

References
Alldridge, P. (2008), “Money laundering and globalization”, Journal of Law and Society, Vol. 35 No. 4,
pp. 437-463.
Barbot, L.A. (1995), “Money laundering: an international challenge”, Tulane Journal International and
Comparative Law, Vol. 3, pp. 161-200.
Brenig, C., Accorsi, R. and Müller, G. (2015), “Economic analysis of cryptocurrency backed money
laundering”, ECIS 2015 Completed Research Papers. Paper 20.
Buchanan, B. (2004), “Money laundering–a global obstacle”, Research in International Business and
Finance, Vol. 8 No. 1, pp. 115-127.
Chohan, U. (2017), Assessing the Differences in Bitcoin and Other Cryptocurrency Legality across
National Jurisdictions, University of New South Wales Business School, Sydney.
Compin, F. (2008), “The role of accounting in money laundering and money dirtying”, Critical
Perspectives on Accounting, Vol. 19 No. 5, pp. 591-602.
Deepika, P. (2017), “Cryptocurrency: trends, perspectives, and challenges”, International Journal of
Trends in Research and Development, Vol. 4, pp. 4-6.
Filippi, P. (2014), “Bitcoin: a regulatory nightmare to a libertarian dream”, Internet Policy Review, Vol. 3 No. 2.
Gao, S. (2009), “Conceptual modeling and development of an intelligent Agent-Assisted decision
support system for anti-Money laundering”, Expert Systems with Applications, Vol. 36 No. 2,
pp. 1493-1504.
Gilmour, N. (2016), “Understanding the practices behind money laundering–a rational choice
interpretation”, International Journal of Law, Crime, and Justice, Vol. 44, pp. 1-13.
Gruber, S. (2015), “Trust, identity, and disclosure: are bitcoin exchanges the next virtual havens for
money laundering and tax evasion?”, Quinnipiac Law Review, Vol. 32, pp. 135-208.
Hayes, A.S. (2017), “Cryptocurrency value formation: an empirical study leading to a cost of production
model for valuing bitcoin.” Telematics and Informatics, Vol. 34 No. 7, pp. 1308-1321.
Heilman, E. (2016), “Blindly Signed Contracts: anonymous On-blockchain and Off-blockchain bitcoin
transactions”, Financial Cryptography and Data Security, Springer, Berlin, Heidelberg, pp. 43-60.
Isa, Y. (2015), “Money laundering risk: from the bankers and regulators perspectives”, Procedia
Economic and Finance, Vol. 28, pp. 7-13.
Iwamura, M. (2014), “Can We stabilize the price of a cryptocurrency? understanding the design of
bitcoin and its potential to compete with Central bank money”, International Finance Journal.
Levi, M. (2002), “Money laundering and its regulation”, The ANNALS of the American Academy of
Political and Social Science, Vol. 582 No. 1, pp. 181-194.
JMLC Levi, M. (2015), “Money for crime and money from crime: financing crime and laundering crime
proceeds”, European Journal on Criminal Policy and Research, Vol. 21 No. 2, pp. 275-297.
22,2
Litchfield, H. (2015), “A novel method for decentralised peer-to-peer software license validation using
cryptocurrency blockchain technology”, Australian Computer Society.
McDowell, J. (2001), “Consequences of money laundering and financial crime”, Economic Perspectives,
Vol. 6 No. 2, pp. 6-8.
216 Marian, O. (2013), “Are cryptocurrencies ‘super’ tax havens?”, Michigan Law Review, Vol. 112, p. 38.
Passas, N. (2009), Informal Value Transfer Systems, Terrorism, and Money Laundering, Northeastern
University, Boston.
Peters, G.W. (2015), “Trends in cryptocurrencies and blockchain technologies: a monetary theory and
regulation perspective”.
Picard, P. (2011), “Bank secrecy, illicit money, and offshore financial centers”, Journal of Public
Economics, Vol. 95 Nos 7/8, pp. 942-955.
Quirk, P.J. (1997), “Macroeconomic implications of money laundering”, Trends in Organized Crime,
Vol. 2 No. 3, pp. 10-14.
Reid, F. (2011), “An analysis of anonymity in the bitcoin system”, Privacy, Security, Risk and Trust,
Springer, New York, NY.
Schneider, F. (2006), “Money laundering and financial means of organised crime: some preliminary
empirical findings”, Global Business and Economics Review.
Sultzer, S. (1996), “Money laundering: the scope of the problem and the attempts to combat it”, TN Law
Review, Vol. 63, pp. 135-234.
Swartz, N.D. (2014), “Bursting the bitcoin bubble: the case to regulate digital currency as a security or
commodity”, Tulane Journal of Technology and Intellectual Property, Vol. 17, pp 320-335.

Further reading
Chan, J. (2017), The Digital Shadow Economy: Money Launderers, Firms, and Governance, National
University of Singapore, Singapore.
Hughes, S. (2014), “Regulating cryptocurrencies in the United States: current issues and future
directions”, William Mitchell Law Review, Vol. 40.

Corresponding author
Chad Albrecht can be contacted at: [email protected]

For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: [email protected]