Blockchain technology is a digital infrastructure that was designed to facilitate the transfer of digital cash. Although there are several versions of the blockchain, most blockchains are decentralised and permissionless (such as Bitcoin – BTC), meaning the technology is freely open to everyone (open source) with no oversighting authority. Blockchains utilise Distributed Ledger Technology (DLT) where transactions are recorded and protected by a perpetual cryptographic signature known as a hash. This in turn protects the currency from crypto-enabled and dependent crime both at the personal user and cryptocurrency exchange level.
Each block in the blockchain records several transactions and every time a new transaction occurs, a new record is recorded in the block. The record is added to the DLT of each participant which is permanent and virtually impossible to falsify or change. As most blockchains are open source, all participants of the blockchain can independently verify the legitimacy of transactions.
Most blockchains are decentralised and operate on a peer-to-peer network. A decentralised network is where the network operates without a central authority, administrator, or server. The blockchain is designed around a peer-to-peer (P2P) network communications environment consisting of a group of devices, otherwise referred to as nodes. Each node is an individual peer which in turn communicates and collectively stores or shares data with the other nodes on the network. The P2P network is the basis of blockchain technology where the ledger (DLT) records are shared with all other nodes in the blockchain to create multiple copies of transactions and prevent forgery.
Theoretically, the structure of decentralised blockchains is a series of interconnected but independent nodes. As opposed to the decentralised peer-to-peer (P2P) network, the centralised peer-to-peer network contains a central server that directs traffic to selected nodes in the network. In this regard, the centralised server facilitates communication between peers which in turn provides greater anonymity between users. A cryptocurrency is a digital or virtual asset whose integrity is preserved by cryptography meaning it is nearly impossible to counterfeit or double-spend. Cryptography is like encryption, where ordinary text is obfuscated into ciphertext and then back again upon arrival. Most cryptocurrencies operate on a decentralised, peer-to-peer model and are transferred via blockchain technologies. However, some cryptocurrencies are permissioned and centralised, meaning that they are fully or partly controlled by authorised users or administrators. The actual method of centralising the cryptocurrency or blockchain varies according to the type of cryptocurrency. A key feature of all cryptocurrencies is that they are generally free from government or central authority ownership and control. Stablecoins are a type of cryptocurrency whose value is tied to an outside asset, most noticeably a fiat currency such as the US dollar or gold. This acts to stabilise the price of the cryptocurrency to reduce the volatility of market fluctuations.
Cryptocurrency exchanges vary greatly in the products and services they offer, as well as the way they operate. However generally speaking, a cryptocurrency exchange is a virtual platform that acts as a conduit between the buyer and seller where cryptocurrencies can be exchanged for other assets such as other types of cryptocurrencies, fiat currencies (government-backed currencies), and precious metals such as gold. Many of the leading exchanges offer built-in wallets where clients can store their cryptocurrency in a wallet owned by the exchange. A crypto wallet is a tool that lets you buy, sell, store, and spend your cryptocurrency funds. The wallets act as a safeguard of the private keys to funds stored on a blockchain. As cryptocurrency is recorded and stored in the blockchain, proof of ownership is required prior to being able to use it. This is where wallets come into play as they store the digital private keys which prove ownership of the cryptocurrency. However, having a built-in wallet is not always ideal as the client is susceptible to the exchange being hacked. Some exchanges such as Binance support peer-to-peer sales meaning that the cryptocurrency is traded directly between the buyer and seller. In this case, the exchange only facilitates the connection between parties and it is not directly involved in the transaction.
There are various types of wallets each offering different levels of security, and some are only applicable to certain types of cryptocurrencies. Common wallet types include hardware, desktop, online, mobile app-based, and paper. There are also sub-categories of wallets including bitcoin hot and cold storage wallets. Hot and cold wallets signify whether the wallet is connected to the internet (hot), or completely offline (cold). As will be seen later, the structures of the cryptocurrencies and exchanges pose different challenges for anti-money laundering and identification of proceeds of crime.
Cryptocurrency mining is the process of solving cryptographic calculations for blockchain transactions. The miners are provided with rewards, usually, in the form of the currency they are mining. Miners use digital processes to undertake the cryptographic processes and the results are added to the ledger as new transactions. The process of mining requires huge amounts of computational output which in turn requires a large supply of electricity.
It is estimated that as of January 2023, https://explodingtopics.com/blog/number-of-cryptocurrenciesthere are more than 20,000 cryptocurrencies in circulation. Other websites list the number at 9,756. However, there is only a handful that provides significant investment returns, with many having limited or no trading volume. The high-performing coins include the so-called flagship of cryptocurrencies, Bitcoin, along with Ripple, Ether, Monero, Litecoin, and Tether. These cryptocurrencies were developed to enable different capabilities and were not created to be investments; the investment and value followed later. This is important as there are thousands of cryptocurrencies that have been created for the sole purpose of fraud, scams, and for speculative investment.
A legitimate cryptocurrency is one that is not fake, was not created solely for highly speculative investment, are known brands, and represents a significant market share. Bitcoin (BTC) was the first cryptocurrency and is an open-source, peer-to-peer network. It was first released to investors in 2008 and despite being the most popular and valuable cryptocurrency, problems were subsequently identified with the blockchain. This included slow transaction speed, a limited number of consecutive users, and the high computational requirements for mining. This consequently causes high energy consumption and ultimately higher expense per transaction. As Bitcoin continues its global expansion, a range of Bitcoin-related products have followed its lead. According to the global business data website statista.com, there are approximately 14,000 Bitcoin ATMs globally in 2021.
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Less legitimate and likely fraudulent cryptocurrencies share many common features including fake websites, fake exchange points, fake mobile apps, and celebrities who use social media to endorse the cryptocurrency. Cryptocurrency scams often involve pump-and-dump schemes or Ponzi schemes and are often highly speculative investments.
Since its inception cryptocurrency has been used to facilitate crime. Some researchers argue that cryptocurrency was primarily created to facilitate crime (primarily crypto-enabled crime). As mentioned previously, the architect of the first cryptocurrency (Bitcoin) went to extreme lengths to protect blockchain users from fraud and hacking. However, there is no information to suggest that Nakamoto did not seek to enable crime through the creation of Bitcoin, only to protect its users. There are two general categories of cryptocurrency crime: crypto-enabled and crypto-dependent. Crypto-enabled crime is where the offender uses cryptocurrency to commit a traditional crime such as fraud and launders the proceeds via the blockchain. This is opposed to crypto-dependent crime where the cryptocurrency is the specific target or plays an essential function in the crime.
Cryptocurrency fraud can generally be categorised into four primary categories of crypto-enabled including fake Initial Coin Offering (ICO), Ponzi schemes, pump and dump schemes, and cryptocurrency theft. These types of fraud are not unique to cryptocurrency and form part of traditional fraud categories. They are therefore categorised as “crypto-enabled. Common categories of cryptocurrency-dependent crimes include those involving fake cryptocurrency traders, fake cryptocurrency exchanges, ransomware, and affiliate marketing. However, as will be seen below, we have found that crypto crimes often involve both crypto-enabled and crypto-dependent aspects. Cryptocurrency fraud, for example, will often use cryptocurrency to launder money. As the United Kingdom HM Treasury and Home Office state,
[cryptocurrencies] play a vital role in laundering the proceeds of cyber dependent crime, directly facilitating cyber-criminal financial flows.
Although cryptocurrency can be seen as a negative and controversial financial alternative, its original concept was revolutionary in the sense that it bought power back to the people in many regards. No longer are we slaves to the fiat (government-backed / owned) currencies and the ridiculous interest rates forced upon the populace by banks. Anyone with access to the internet and a PC can become part of the global cryptocurrency infrastructure. Instead of governments and banks maintaining the financial transaction ledgers, everyone who operated a blockchain node also by design had a copy of the ledger which could not be falsified. This was financial transparency at its best and it provided the financial freedom or personal control, that many (not all), have been looking for. However, as with any good thing, there are always criminals looking to take advantage; and this was no different for cryptocurrencies. These days, the primary drawback of cryptocurrencies is the high rate of crime including the facilitation of money laundering for crypto-enabled and dependent crime.
Fortunately, Cybertrace has many years of experience in investigating cryptocurrency crime, including transaction tracing via various blockchains. Should you need an investigation of a criminal act, or expert opinion for cryptocurrency-related crime, be sure to contact the friendly team at Cybertrace who will guide you through the complicated terminology and processes.
To learn more about this topic, check out the complete chapter published in Springer, Financial Technology and the Law (Chapter 10) which was written by our CEO, Dan Halpin, and Professor Alana Maurushat of WSU. This post is a modified extract from the chapter.
https://link.springer.com/book/10.1007/978-3-030-88036-1#aboutBook
Tags: what is cryptocurrency, crypto-enabled crime, crypto dependant crime, bitcoin
What is Blockchain Technology? To learn more about blockchain technology, which is the backbone driving cryptocurrencies. Check out our soon to be published post.
