Shift in Illicit Crypto Activity: Beyond Bitcoin

The Dominance of Bitcoin in Black Market Transactions is Fading, Urgent Shifts in Policy Approaches Needed

Exploring policy recommendations from the game theory approach to financial crime focusing on Bitcoin.

📈🔥 Significant shifts are underway in the ecosystem of illicit actors using cryptocurrency. According to a 2023 report by TRM Labs, Bitcoin is no longer the asset of choice for criminals. The report states, “The multi-chain era has had a sweeping impact on the distribution of illicit crypto volume as a whole, where Bitcoin’s share plummeted from 97% in 2016 to 19% in 2022. In 2016, two thirds of crypto hack volume was on Bitcoin; in 2022, it accounted for just under 3%, with Ethereum (68%) and Binance Smart Chain (19%) dominating the field. And while Bitcoin was the exclusive currency for terrorist financing in 2016, by 2022 it was all but replaced by assets on the TRON blockchain, with 92%.”

🤔💡 Ramifications Of the Shift

Clearly, this turns the adage of Bitcoin being synonymous with criminal activity on its head. Since inception, Bitcoin has functioned as a Schelling Point due to its network effect, market dominance, and liquidity. It has been the natural choice in the world of cryptofinance. In Game Theory parlance, a Schelling Point is a natural solution in situations where multiple parties must make decisions without direct communication. These points are intuitively obvious and often rely on shared expectations or common knowledge.

However, the ongoing separation of equilibria has seen a shift, with bad actors opting for a different point of convergence. This divergence from Bitcoin as a chosen asset raises questions about the dynamics of criminal behavior in the crypto space.

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📜🧠 Policy Takeaways

This shift offers some key learnings from a policy perspective. It underscores the necessity for policymakers to closely examine specific assets and blockchains that are currently favored by illicit actors and take appropriate action. It’s crucial to replace the current generic perspective on digital assets with a more nuanced one and shape policy narratives on criminal usage.

For instance, while discussing the use of cryptoassets in terror financing, we often overlook the fact that Hamas has actually stopped accepting Bitcoin donations to protect its sponsors from being unveiled.

But the most important aspect of this shift of illicit finance away from Bitcoin is that it represents the first-ever documented case of major crime displacement in the world of cryptoassets. It sheds light on the fluid nature of financial crime as it adapts to the path of least resistance.

🎮🧠 Perspectives from Game Theory

Taking a game-theoretic lens, with players consisting of product developers, regulators, and good and bad actors, enables a holistic and nuanced view of the space. Within such an intricate system, the interplay of independent actions and perspectives generates myriad scenarios, making it impossible for any set of players to control outcomes by themselves.

A game-theoretic approach to illicit finance reveals the need to step into the criminal mind, predict their next moves, and prepare accordingly. Traditional policy-making to combat illegal fund flows is often retroactive, with bad actors making the first moves that are then studied as emerging risks. However, with the exponential pace at which the digital asset space is evolving, we can no longer afford a reactive approach. We need predictive systems that forecast future patterns of illicit fund flows, enabling swift response to new threats.

🛡️🚫 Counter-crime Initiatives

The lessons from Bitcoin’s changing usage can also help counter-crime professionals understand the distinct features of organized crime syndicates. For example, crime rings still reliant on Bitcoin may signify a lack of agility in leadership. Furthermore, determining the position on an “agility spectrum” can provide actionable insights about a syndicate’s resourcefulness and technical expertise. This information can assist law enforcement in estimating the effort required to combat each crime ring. Those syndicates that pioneered the shift away from Bitcoin and are ahead of the curve operate with a higher level of ingenuity, continuously adapting to slip through the cracks.

💭🔑 Concluding Thoughts

The shift of financial crime away from Bitcoin highlights the need for a more nuanced approach in curating appropriate and dynamic regulatory and policy frameworks for digital assets and blockchains. It also emphasizes the dangers of applying broad strokes to the entire spectrum of cryptofinance in policy debates on criminal usage.

✍️ This article is a guest post by Debanjan Chatterjee. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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Q&A

Q: What factors have contributed to the shift of illicit activity away from Bitcoin?

A: The shift can be attributed to the rise of alternative blockchains such as Ethereum and Binance Smart Chain that offer greater anonymity and lower transaction costs. Additionally, the TRON blockchain has seen significant usage for illicit activities, replacing Bitcoin as the primary asset for terrorist financing.

Q: How does this shift impact the perception of Bitcoin in relation to criminal activity?

A: The shift challenges the notion that Bitcoin is synonymous with criminal activity. It suggests that criminals have become more strategic and adaptable, utilizing different cryptocurrencies and blockchains to evade detection. Policymakers and regulators need to recognize this evolution and adopt a more nuanced approach to combatting illicit finance.

Q: What challenges do policymakers face in responding to this shift?

A: Policymakers must closely monitor the specific assets and blockchains favored by illicit actors and take appropriate action. However, the rapidly evolving nature of the digital asset space poses challenges in crafting effective regulations and policies. There is a need for predictive systems that can forecast future patterns of illicit fund flows to minimize response time to new threats.

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🔗 Relevant Links:

• TRM Labs Report
• TRON Blockchain
• Hamas Stops Accepting Bitcoin Donations

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