Bitcoin recycling: how it works

We investigate the relationship between cryptocurrencies and money laundering, considering the activities of organized crime and the possible methods of contrasting the phenomenon.

The relationship between cryptocurrencies, such as bitcoin, and money laundering is at the center of heated debate. In this regard, it is useful to investigate how virtual currencies work, the role in facilitating illegal conduct and the possible measures to combat the phenomenon.

How cryptocurrencies work
The cryptocurrency or cryptocurrency is defined as currency generated and exchanged exclusively electronically and electronically and characterized by cryptography (hence the term), not the centrality of the issue (as it occurs through p2p exchange cd distributed ledger) and has no legal value, but it represents a "voluntary" means of payment among users. The characteristics of the cryptocurrency are as follows:

1 - The absence of a central monetary authority as the existence and validity of the same are proven by the distributed system (opposite of the principle of numeric trust);
2 - The distributed system controls both cryptocurrencies and their properties;
3 - The system determines whether new cryptocurrency units can be created and, if so, defines their origin and how to determine their owner;
4 - The properties of the cryptocurrency can only be proven by means of cryptography;
5 - The exchange of cryptographic units is allowed and the confirmation of the transaction can only be issued by those who can prove ownership of the cryptocurrencies involved in the transaction;

Always in order to exchange cryptocurrencies, the system if it simultaneously receives two requests to exchange a single unit, from precedence to the first.

Cryptocurrencies are divided into three categories namely:

Closed, that is, they cannot be converted into legal tender currency and can only be used for the purchase of virtual goods and services;
Unidirectional, i.e. once issued, they can be used for the purchase of goods and services, including real ones, but they cannot be converted into legal tender currency;
Bidirectional (e.g. bitcoin, the most famous) that allow any purchase and can be exchanged for legal tender currency.

According to Consob, cryptocurrency is characterized by:

A set of rules (called "protocol"), that is, a computer code that specifies how participants can carry out transactions;
a sort of "ledger" (distributed ledger or blockchain) that preserves the history of transactions unchangeably;
a decentralized network of participants who update, store and consult the distributed ledger of transactions, according to the rules of the protocol.
From a practical point of view, the user creates his own virtual currency account, very similar to an email address (e.g. vBTC or ETH address) but encrypted and totally anonymous, through the main blockchain platforms. Thanks to the creation of this virtual "wallet", the user will be able to use the cryptocurrency to purchase goods, services, or resell it for speculative purposes. The procedure for the user is actually very simple and involves the generation of a passphrase by the numerous sites that manage the virtual wallet which can also be used via a mobile app; it should be noted that if the user loses or forgets their login credentials, the virtual wallet becomes unusable.

The facilitation of recycling pipelines
Money laundering takes place when:

In the classic case of "washing" of the money, ie the elimination of any possible connection with the previous offense (replacement conduct)
In the movement, through negotiation tools, of goods of illicit origin (transfer conduct);
In carrying out other operations aimed at hindering the identification of the criminal origin of the goods, considered as a closing clause aimed at pursuing conduct not previously identified by the legislator and which are the result of the "creativity" with which the criminal groups work to launder the money dirty.   It is clear that the characteristics of cryptocurrencies in total anonymity and without the control of a centralized authority represents a formidable opportunity for money laundering and, in general, for the reinvestment of capital of illicit origin. In this regard, the United States Attorney General sued two Chinese citizens accused of having laundered, through numerous addresses (virtual wallets), about $ 234 million in virtual currency stolen from an investment company: the fraud is It was possible thanks to a trojan sent to an unaware employee. The attack started in 2018 and Americans suspect it was organized by North Korea to fund the nuclear program. And again according to two investigations by the Polish and US authorities respectively, the company Crypto Capital would have laundered $ 350 million of drug trafficking, also constituting a shadow banking system.

Organized crime action in Italy money washing BTC

Apart from the international scenarios, organized crime has also come to understand the potential of virtual currencies in Italy, above all to pay for consignments of drugs from South American suppliers. The case of a 'ndrangheta clan broker who could not pay the drug in bitcoin because the Brazilian narcos did not know how to use them, as verified in the context of the 2018' European 'ndrangheta connection' operation by the DDA of 2018, is emblematic Reggio Calabria.

On the other hand, the same secret services, in the country's annual report on security, have raised the alarm of the use by the consortia of the cryptocurrency to launder the proceeds of criminal activities to the extent that "in a context that has seen the so that, for the needs of managing and reallocating one's own resources, to continue to make use of sophisticated schemes, also thanks to the support provided by compliant and widely used professional firms also for tax evasion purposes - which hinge on: billing for non-existent transactions; establishment of fictitiously based corporate vehicles abroad (including in non-cooperative countries and / or with jurisdictions lacking in terms of anti-money laundering legislation); registration of companies to fictitious subjects; transfer of tax credits (functional to the realization of undue tax compensations), established through articulated illicit financial mechanisms; international smuggling of petroleum products, subsequently placed on national distribution circuits through the use of false tax documentation ". There is also common crime, given a recent November 2019 operation by the local police of Milan who, investigating an alleged case of real estate scams, discovered that the proceeds were invested in bitcoin.

The remedies 

The systematic use of these "digital shoulders" weakens not only the efforts to combat organized crime, but also takes important resources away from the Treasury despite the fact that the criminal legislation is sufficiently clear and complete in relation to the punishable nature of the conduct listed above. It is essential, however, the implementation and updating of the investigation systems of the specialized Police Forces also through sharing of banks of the Italian Exchange Office, Consob and Bank of Italy (which bodies are responsible for supervising suspicious transactions) in with a view to the circularity of economic / financial news; it is also useful to have unified investigative protocols at European level.

Lastly, mention should be made of the Eu-Of2Cen (European Union Online Fraud Cyber Center Expert Network) program which aims to facilitate the real-time exchange of information on fraudulent transactions between the various participating partners for an effective fight against cyber crime ; the program, in fact, could be implemented with a department specialized in the recycling of dirty money by means of cryptocurrency taking advantage of the experience of the various national authorities, including non-European ones.