This article is for education and entertainment purposes only, not to encourage or incite any illegal activities. The penalties for these activities are very severe.
So, you've had enough of government regulation. The IRS doesn't seem to know what they're doing, you have a pretty good understanding of computer science, and you want to make a few bucks in a market that few people understand. You keep hearing about all the crimes being committed with cryptocurrency, and you want a piece of the action. Welcome to crypto's seedy underbelly.
Prevalence of Crypto Crime
When former Federal Reserve chairwoman Janet Yellen says that cryptocurrencies are used, "at least in a transactional sense, mainly for illicit financing," it's pretty easy for the uninitiated to think that the market is rife with low-lifes and scumbags selling drugs, guns, child porn, and credit cards for bitcoin. The reality is that the vast majority of bitcoin is used for investment purposes, largely done by financial institutions. A 2020 report by Chainalysis showed that only 0.3 of all cryptocurrency was used for criminal activity (in a trillion-dollar market at time of writing). The same year, the UN reported that 4%-5% of global GDP was used for the same purposes.
Most people like to keep their noses clean. They don't dare stray from the rules that grant them protection from the police. But if you see the truth- that the police are losing power and the justice system is a for-profit money pit- if you can see the diminishing risk and increasing reward, then keep on reading.
Privacy and Security
A common myth to dispel before you get started in your criminal enterprise is that blockchain transactions are private. Every transaction between public addresses is logged on the blockchain, so they are pretty easy to track. If law enforcement can track your illegal transactions back to a centralized exchange with your name and tax information on it, it’s game over.
Some coins have been built with privacy in mind. Popular examples are Monero and ZCash, which was co-founded by Edward Snowden. They use added cryptography to obfuscate source addresses on the blockchain. Because of their obvious utility in crime, you won’t be able to get them from your favorite centralized exchanges. You’ll have to buy BTC and trade that on a DEX to get them. It’s a must have for trading with shady strangers on the dark-web.
The dark-web consists of websites only accessible with the right software or authorization. The Tor darknet is the most popular, only accessible through the Tor browser. It works by routing your connection data through a network of volunteer nodes, concealing your location and identity so you can browse anonymously and securely.
Tor is all about anonymity. It works by taking traffic from your end and sending it through a series of relay nodes, then through an exit node. This obscures your identity, because the website you visit only connects with the exit node- which doesn’t know who you are. The website sees a different IP address.
Tor is slow and inefficient, but it’s the most secure darknet in the world. The only fault is the possibility that the exit nodes can watch you- rare, but not unheard of. You can add an extra layer of security by connecting to a Virtual Private Network. A VPN works similarly to encrypt your IP address BEFORE you go online. If you connect to a VPN, then connect to Tor, then even if someone is listening to the exit nodes, your IP is encrypted and you’ll be secure anyway.
Tor Hidden Service URLs look like gibberish because the URL is randomly generated when the site goes live. Here is an example of a real onionsite address for Duck Duck Go, the privacy oriented search engine:
https://duckduckgogg42xjoc72x3sjasowoarfbgcmvfimaftt6twagswzczad.onion/
It has 56 characters, and it ends in .onion. If there are fewer than 56 characters, the browser won’t connect to the site.
Pay attention to every link before you click. Right-click the link or the button on the website and click “Inspect element,” that will tell you exactly where the link goes. Some of the links I came across while researching this article lead to websites ending in .onion.net- this is a bogus website that you really don't want to visit.
Illicit Commerce
Protected by the armor of VPNs and armed with the Tor browser, you’re ready to venture into the darkened alleyways of the world wide web. Whether you’re a producer or a consumer of illicit goods, you’ll need to know where the markets are. You can find links fairly easily on the clear-net via blogs and such. As mentioned before, pay close attention to the links you copy.
The most popular dark web market is called Empire. Vendors are required to buy a vending license from the site, but anybody can browse and shop. Empire doesn’t allow the sale of firearms or child pornography, but you can get drugs or stolen data for pretty cheap. You can even get verified exchange accounts if you need to trade laundered money for cash. The site has a built-in escrow service which only accepts bitcoin and Monero (XMR), so bring plenty of those.
The trades are completely anonymous, and the site's escrow service works as a middle-man to make sure that nobody scams each other. In other words, you pay the site and they don't pay the vendor until they've shipped the goods. If you use Monero, your transactions between the escrow and vendor are completely anonymous.
Money Laundering
Due to the open nature of bitcoin’s blockchain, it’s pretty hard to move money around without getting found out in a hurry. Especially when centralized exchanges have know-your-customer rules they must abide by and control the majority of crypto-for-cash trades.
That doesn’t mean there aren’t ways around banks or centralized exchanges. For example, if you can find a cryptocurrency ATM you’ll be able to buy crypto for cash and send it directly to your wallet. Money Service Businesses, like those Pawn and Loan stores that you see in strip malls, often have less stringent KYC rules than institutional banks (which the shady owner might just ignore altogether if the price is right). And of course, you can buy a fake or stolen centralized exchange account in a different country with fewer regulations. You can snag one of those from black markets.
Once you’ve got your money in a non-custodial wallet, you can trade as much as you like on decentralized exchanges. Trade dirty bitcoin for clean ethereum, then trade that for a couple different stablecoins, then buy new bitcoin and take it back to the MSB or ATM you started at. More trades makes it harder to trace the origin of the money, especially if you use privacy coins to block the origin of the trade.
If you don’t want to do it all yourself, you could employ a mixer. A mixer is a pool of cryptocurrencies, where you pay a certain amount into a pool and the protocol pays out that same amount later. They were originally designed to make crypto trades more private, and for the most part these services are above-board and legitimate. Still, the government keeps a close eye on mixers and has even imposed sanctions on a few of them.
Just like you can launder cash through a casino, you can launder crypto by playing online games. You’ll lose your dirty money, and win clean money. This is a very high-risk option.
Cover your tracks by starting new addresses for dirty money and only using them once. Only store clean money in your usual wallets, or the wallets that you take back to the bank or ATM.
Terrorist Financing
Terrorists need money too, and they don’t have a ticket to the all-you-can-spend IRS money buffet like the U.S. Military does. Some terrorist groups like ISIS own enough land that they can tax people who live there, and loot artifacts and rob people and other such brute-force methods. Some groups are a lot more sophisticated, like when al-Qaeda insiders bet against airline stocks right before 9/11. Other groups such as Hamas and the Taliban are very smart about using social media to spread the word of Jihad. If these groups are adept enough with finance and the internet, you can bet they’ll get involved in cryptocurrency.
Terrorist groups rely largely on donations, from political leaders or business who support their cause or even from regular Joes like you and me. When money can get frozen at the border, or transactions can get blocked by credit card companies, or money services charge way too much- crypto looks like the perfect solution.
The Ibn Taymiyya Media Center (ITMC) was the first group to start a cryptocurrency crowdfunding campaign in 2016. They spread the word through infographics on their social media accounts, including a single bitcoin address. They explicitly stated that the money would be used to buy weapons. According to Chainalysis, the campaign ran for two years and drummed up over $10,000.
The Al-Qassam Brigades, a branch of Hamas, used an even more complex system because they kept getting caught. They gave donors step-by-step instructions on how to keep their donations as private as possible, such as trading cash through a money service in their network or by generating new public addresses on public wifi. This method worked until 2020 when Israeli and U.S. government forces shut them down and seized their funds.
Both groups are still trying new things to get bitcoin donations, and it mostly centers around advertising the campaign on social media. They provide bitcoin addresses and information to help potential donors avoid getting caught. Every time they get shut down, they just start a new one.
According to a Coinbase report in late 2021, terrorist financing only made up 0.05% of all illicit trading volume. Remember, 0.3% of all crypto trading is suspected to be illicit- 0.05% of that comes out to 0.0015% of all crypto activity. At the time of writing, the total market cap is just over $1 trillion, meaning $1.5 million dollars is spent every year funding terrorist organizations.
Tax evasion
Of all the crimes listed in this article, this is probably the one that gets the most attention. It’s also the hardest to pull off. There are few things professional investors fear more than the IRS, and the IRS always knows where to dig its claws. They offer threats such as; “up to 5 years imprisonment” or “fines up to $100,000 plus cost of prosecution”. They increase funding for cryptocurrency-related tax investigations every year. The IRS has all the digital forensics in the world at their disposal, and the blockchain is the most transparent payment system ever designed. Now, they've even got the blockchain analytics giant Chainalysis on their side. No wonder most everyone would rather stay on the safe side.
Still, if you tread carefully and cover your tracks thoroughly, it’s possible to fly under the IRS radar. You’ll need to be very familiar with privacy coins and cold-storage wallets. You’ll have to generate your cold-storage address on public WiFi or with a VPN so your IP address isn’t associated with it. If you set up a smoke-and-mirrors network of privacy coins leading your funds in small increments to your off-the-grid cold storage, then maybe- just MAYBE- you might be able to hide from the all-seeing eye of the IRS.
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