US Secret Service VS cryptocurrency

US Secret Service: illegal use of cryptocurrencies

The move to strengthen cryptocurrency regulation has taken another important step forward. In an official speech to Congress, the US Secret Service issued a severe warning about the illegal use of digital currencies, which could have a major impact on future legislation.

Focus: Fraud and money laundering

Robert Novy, deputy assistant director of the US Secret Service Investigation Office, provided a prepared report to Congress on June 20 and spoke on the House Financial Services Committee and the Subcommittee on Terrorism and Illicit Financial Issues and applied for measures to prevent Encrypted currencies such as Monero and Zcash are used for illegal purposes, and these currencies provide users with enhanced privacy and anonymity. The main issues mentioned in the report are fraud and money laundering:

"The main focus of the Secret Service on these issues is the use of digital currency in criminal programs that undermine the integrity of finance and payment systems, their use in fraud cases, and their use as a means of money laundering."

Novy went on to say that although the Secret Service has made some achievements in dealing with criminal activities related to cryptocurrencies, due to its large number, Congress needs to take action:

“We should consider taking more legislative or regulatory actions to address the challenges posed by anonymous cryptocurrencies.”

Greg Nevano of the Immigration and Customs Enforcement Investigation Department agrees with Novy's concerns about this cryptocurrency:

"Some of the newer cryptocurrencies are difficult to track. These new anonymous cryptocurrencies are clearly mature, leading to illegal use and evasion of law enforcement investigations. Although tracking illegal illicit money flows using these anonymous cryptocurrencies is more difficult, This is not impossible."

Since the early 1980s, the US Secret Service has obtained licenses to investigate fraudulent electronic transfers, and electronic transfers have evolved into one of the various hacker crimes and a cover for financial fraud. Now, digital currency has fallen into a similar situation. In recent years, criminals have increasingly used digital currency to facilitate illegal activities on the Internet. On a global scale, digital currency provides an effective way to transfer large amounts of wealth for crime. Some digital currency providers, exchanges and users are trying to evade the regulation of international laws and institutions established to combat illegal financing.

At the hearing, North Carolina Rep. Robert Pittenger said illegal use of cryptocurrencies was "one of the biggest threats to US national security," and Thomas Ott, deputy director of law enforcement at FinCEN (Financial Crime Enforcement), concluded: " We have found that billions of dollars worth of virtual currency are being used for suspicious activity."

As of April 2018, FinCEN confiscated cryptocurrencies worth more than $25 million through various enforcement actions. After investigation, FinCEN found that ransomware has paid $1 billion in cryptocurrency transactions over the past two years, and hackers on cryptocurrency exchanged $1.5 billion worth of cryptocurrency funds, and at least 4 billion since 2011. The cryptocurrency of the dollar passed the darknet transaction.

However, despite concerns about the potential use of cryptocurrencies in crime, Ott noted that most illegal activities still receive funding in a more traditional way:

“Although most illegal activities still receive funds through traditional financial methods, FinCEN believes that there are specific illegal financial risks in virtual currency. If there is not enough vigilance and timely action, the scale of such activities may increase.”

Anonymous cryptocurrency is the target of criminals?

Forbes' initial report listed "Monero (Menrocoin) and Zcash (large currency) and other cryptocurrencies" separately. It should be noted that these two currencies are not specifically mentioned in this report, but they are fully implied that this type of cryptocurrency is a concern:

"For anonymity-enhanced cryptocurrencies, tools that make blockchain network transactions more ambiguous (mixers, etc.) and cryptocurrency pools, we should consider adopting more legislation or regulation to deal with possible problems. ""

This can lead to strong dissatisfaction from some users and token developers, as privacy is often considered an advantage of alternative cryptocurrencies. Since anonymous currency cannot be tracked, people will not see the unfavorable transfer history of certain tokens.

This allows us to make a more reasonable comparison of cryptocurrencies with traditional fiat currencies, because fiat currencies have the same characteristics as anonymous cryptocurrencies, and bitcoin lacks these characteristics, which is why Bitcoin has been criticized.

However, Novy said criminals prefer cryptocurrencies with the following characteristics:

(1) is widely used as a medium for the exchange of criminal activities;

(2) has the highest anonymity;

(3) Preventing theft, fraud and legal seizure;

(4) can be exchanged with your own currency at any time;

(5) It has the characteristics of rapid and secretive transnational transfer.

Earlier this year, a report revealed that the US Army is investigating the tracking of the Monero deal. This report may indicate that such an investigation was not successful. Despite the rapid development of the cryptocurrency industry in the past 12 months and the recent listing of blockchain analysis products, the use of cryptocurrencies for criminal activities remains the focus of policy makers and law enforcement officials. Novy stressed that the Secret Service and law enforcement agencies will "follow the anonymity of the Internet or digital currency and persist in law enforcement."

Focus on all illegal activities and focus on global cooperation

In his speech, Novy outlined the various illegal uses of digital currency, with special mention of ransomware, which can invade a user's computer and require users to pay in the form of cryptocurrency (usually bitcoin). Novy also mentioned that cryptocurrencies make international fraud easier, so it is necessary to cooperate with other countries to combat fraud and criminal activities, and “continuous international cooperation law enforcement” is needed to effectively deal with criminal activities in this field.

Ott said: "We have found that Australia, Japan and South Korea have made great strides in narrowing the regulatory gap in this area, but most jurisdictions still have no regulatory framework or are developing regulatory frameworks to address virtual currency issues. The United States will face illegal financial risks before these companies comply with the same international anti-money laundering and counter-terrorism financing standards as other financial institutions."

Nevano also pointed out that unregistered P2P cryptocurrency exchanges are advertised on sites such as Craigslist, which are the focus of FinCEN's efforts to combat money laundering and other illegal activities.

At the same time, Novy also urged legislators to give law enforcement agencies more power. For example, some companies or entities “obstruct access to digital evidence” by refusing to surrender customer data or equipment. Law enforcement agencies should have the power to deal with these situations: “Congress should Continue to maintain attention to ensure that law enforcement agencies have legal access to key sources of evidence, regardless of the form in which they are stored.” Novy did not mention specific companies or events, and Apple was reluctant to help the FBI cracked with 2016. The iPhone related to the San Bernandino shooting case may be a stark example.

The report pointed out that centralized exchanges have always been "particularly effective enforcement control points." The collapse of BTC-e and LibertyReserve contributed to the rise of decentralized exchanges to a certain extent. This trend, along with techniques that can leverage the use of existing exchanges to monitor cryptocurrency usage, may facilitate the further development of decentralized exchanges.

The report also highlights the global nature of cryptocurrency networks and related law enforcement challenges, as well as the need to strengthen international cooperation through organizations such as the Financial Action Task Force. Of particular importance is the lack of consistency in global anti-money laundering regulations and regulation, which allows criminals to circulate to jurisdictions with the least resistance to illegal activities, and makes law enforcement much more complicated.

Nevano added: "Although some P2P cryptocurrency exchanges do register and comply with compliance regulations, most do not comply. Instead, these illegal P2P exchanges position themselves as money launderers in the cryptocurrency world. There is a type P2P exchanges receive illegal income by charging a premium to customers who need to be anonymous."

Finally, Nevano concludes: "The actions against these illegal P2P exchanges help uncover the pseudo-anonymity of cryptocurrencies. Regulators can conduct forensic analysis of computers, mobile phones and other electronic products by tracking suspicious transactions, and Use advanced blockchain tracking tools to identify criminals who use cryptocurrencies to engage in illegal activities."

Earlier, the US Department of Justice announced an investigation into the manipulation of bitcoin prices. It can be seen that the US federal law enforcement agencies have no signs of slowing down the control of the illegal use of cryptocurrencies.

Translator interpretation

With the application and popularization of cryptocurrencies, there has been more and more discussion about cryptocurrencies. The use of cryptocurrencies in money laundering and other illegal activities has pushed them to the controversy. It is undeniable that due to the high degree of anonymity and cross-border capabilities of cryptocurrencies, some lawless elements have tied them to cybercrime such as darknets and money laundering.

How is cryptocurrency money laundering [1]?

Hide the illegal source of money, known as money laundering. The first step in money laundering in virtual currency is to layer it. In the traditional money laundering process, the money is used to buy expensive items, such as gold and silver jewelry or car properties, and then resell them. In the virtual currency world, shunting involves moving virtual currency into a block system by using mixers and tumblers (Mixers and tumblers) to take a set of bitcoins with different addresses and transaction records and then return them. Another set of bitcoins of equal value) and the blockchain will move them back and forth. The criminal will transfer the stolen bitcoin to the address owned by the money launderer; then the same amount of bitcoin will be transferred from other users to a new "clean" address in the hands of the criminal. The anonymity of virtual currency makes tracking these tricks much harder than the final cash.

The second step in money laundering is integration. After the illegally obtained funds are injected into the cryptocurrency system, they are placed in a virtual shell and then transferred. However, the integration of these funds into the mainstream tiered exchanges, OTC and other cryptocurrency financial systems still exposes the risk, because exchanges participating in cryptocurrency trading activities and other third parties will monitor trading activities and may issue suspicious activities. Report (Suspicious Activity Reports). In order to avoid monitoring, the money laundering service team may transfer to the pool of funds after receiving the black money, then transfer the coins in the pool to the exchange, then turn around between the exchange's virtual currency, and finally use the new virtual currency. go. This approach can not only reduce the cost of transfer, but also use the international exchange to set up more than two international auditing barriers.

Digital currency provides an effective means for financial transfer and theft of illegal purposes on a global scale, and is increasingly favored by criminals, which has also attracted the attention of regulators. At the Chicago Kensington Blockchain Technology Conference in August 2018, Kenneth A. Blanco, head of the Financial Crimes Enforcement Agency (FinCEN), said that cryptocurrencies have unique advantages in certain application scenarios, but they also provide illegal for criminals. Financial trading opportunities; FinCEN now receives more than 1,500 financial institutions' suspicious activity reports (SARs) on cryptocurrencies every month. US Deputy Treasury Secretary Thomas Ott also said that billions of dollars of virtual currency have been seen for suspicious activity. The US Secret Service announced that they had seized more than $28 million in cryptocurrencies during the criminal investigation.

Compared with other financial instruments, virtual currency is more convenient for money launderers. For law enforcement agencies, it is increasingly difficult to find money laundering behaviors, and it is increasingly difficult to pursue the source and destination of funds. The main difficulties in the supervision of virtual currency crimes are as follows. First, the anonymity of virtual currency enhances the concealment of money laundering behavior. The virtual currency's customer information, transaction information and capital flow are not easy to obtain. Second, the virtual currency transaction is difficult to trace, and the virtual currency can be independent of third parties. In the case of currency transfer, transaction data may be updated at any time, making it difficult for relevant departments to conduct electronic forensics in the first place; third, virtual currency cross-border circulation is convenient, and it is easy to break through the limitations of time and space, and it is very difficult to pursue the source and destination of funds; Fourth, virtual currency is outside the traditional financial system. There is no legal basis for supervision, and supervision by a single country is not effective.

In order to combat blockchain financial crimes, FinCEN issued industry regulatory rules for the provision of currency transfer services in 2011, and the exchange should exercise its regulatory obligations as a registered financial institution under the Bank Secrecy Act; FinCEN also Strengthening identity management requires that bitcoin exchanges and miners must register for Money Services (MSB) and must comply with anti-money laundering (AML) and counter-terrorism financing (CFT) standards. The US Secret Service called on Congress to consider possible legislation on cryptocurrencies, saying that more legislative or regulatory actions should be considered to deal with anonymously enhanced cryptocurrencies, transactions aimed at obscuring blockchains and cryptocurrency pools. The potential challenge. The US Securities and Exchange Commission (SEC), the US Commodity Futures Trading Commission (CFTC), the US Internal Revenue Service (IRS) and other regulatory agencies and law enforcement agencies in some states have also begun to work closely together to promote international cooperation against cryptocurrency crimes. Effective cryptocurrency regulation policy.

[1] Crypto CrimeReport by Chainalysis,

Compilation: Member of the Block Technology Research Awards Project Team Chen Nanxi Original from: Forbes

Source: Block Technology Research and Supervision