U.S. government clamps down
The critical moment when the U.S. had to take decisive action against illegal drugs being bought with cryptocurrency occurred in 2013 when FBI agents hurried to the San Francisco Public Library to detain Ross Ulbricht, a guy who played a fundamental part in the digitalization of the global drug trade.
Running under the pseudonym “Dread Pirate Roberts,” Ulbricht was the mastermind behind the Silk Road — an anonymous, Amazon-like marketplace located on the darknet — that allow users buy and sell anything, irrespective of legality. Even though the website recorded weapons, stolen credit card information in addition to legal goods, illegal drugs were undoubtedly the most frequently encountered listing. The Silk Road initiated using Tor, the system software used to get the darknet, and Bitcoin (BTC) escrow to hide customer and vendor identities and their action.
Though U.S. representatives had expected that the seizure of the Silk Road would suppress darknet action, the news website DeepDotWeb stated the bust has been “the best advertising the darknet markets could have hoped for,” using quite a few copycat websites popping up in following decades.
In 2014, the FBI captured 27 darknet websites during Operation Onymous, a concerted effort between the FBI and the European Union Intelligence Agency Europol to stamp out illegal markets.
In 2019, darknet markets are still promoting illegal drugs which could be bought with cryptocurrency, but U.S. law enforcement proceeds to have a hardline strategy, arresting a few in California on Aug. 6 to selling medications on the darknet in exchange for Bitcoin and Bitcoin Cash (BCH).
Recent events appear to verify the company policy of U.S. government officials.
Over two weeks ago, the Department of the Treasury added multiple crypto addresses to its Specially Designated Nationals, or SDN, list under the Foreign Narcotics Kingpin Designation Act.
The addresses are supposedly connected with three Chinese taxpayers, all of whom are busy Bitcoin users. 1 Litecoin (LTC) speech was also contained in the listing.
The Kingpin Act functions to clamp down on trades between global drug traffickers trying to inject medication in the U.S. and prohibit transactions between these traffickers and U.S. entities. The action also gives the authorities the capacity to organize and explore foreign traffickers, the names of whom have been attracted to the attention of the president, who finally decides whether to impose sanctions.
Such legislative measures are established in reaction to the condition of illegal drug consumption in the U.S.: The nation is presently in the throes of a severe opioid outbreak, as an American dies every 16 minutes from an opioid overdose.
The White House issued 2 advisories representing its concern that fentanyl, alongside other synthetic opioids, are being bought using cryptocurrencies.
The advisories names the cryptocurrencies most used by those selling illegal drugs:
“Individuals located in the United States search for fentanyl and identify potential websites that may provide the opportunity to purchase illicit drugs online. Foreign representatives will instruct the U.S.-based individual to send payments through CVC, such as Bitcoin, Bitcoin Cash, Ethereum, or Monero.”
Within a way to slow down on the Internet drug commerce, the advisories encouraged financial institutions to come forward with any questionable user information, including:
“Virtual currency wallet addresses, account information, transaction details (including […] hash), relevant transaction history, available login information (including IP addresses), information obtained from the analysis of the customer’s public online profile and communications, mobile device information.”
Where are drugs bought with crypto?
For the most part, “medication sales on the darknet” is a term which is now synonymous with “drugs bought with cryptocurrencies.” The darknet is part of the net that’s available via technical network applications which permit users to navigate anonymously while their action is mostly untraceable.
Given the greater surveillance powers of authorities — many especially from the U.S. after 9/11 — that the darknet offers an environment that’s attractive, rewarding and, for the most part, secure for prohibited drug traffickers.
Professor Talis Putnins, co-author of an influential University of Technology Sydney report about cryptocurrency and prohibited drugs:
“Cryptocurrencies have fundamentally transformed the way illegal drugs are bought and sold, shifting much of the activity from a cash-based, physical ‘on the street’ market to an online marketplace.The online illegal drugs trade needed two fundamental things to take off. One is an anonymous communications platform, which was provided by the darknet and underpinned by TOR (an anonymous communications protocol). And the second important piece was an anonymous or private way of making digital payments that was difficult to trace by authorities. That is the role that cryptocurrencies have played. Thus, they are an integral part of the online drugs trade.”
On the other hand, Europol spokesperson Jan Op Gen Oorth voiced the opinion that the translucent nature of cryptocurrency renders transactions easier to follow compared to those involving cash:
“Payment for drugs using cryptocurrencies naturally makes more sense when compared to, for example, bank transfers. On the other hand, most cryptocurrency transactions are far better traceable due to their inherently transparent nature than cash.”
How widespread is cryptocurrency in illegal drug sales?
Because cryptocurrency is harder to trace, it’s not easy to gauge the precise market share of cryptocurrencies in illegal commerce.
The University of Technology Sydney report estimates that around 46% of prohibited activity annually is associated with Bitcoin.
Although it’s reasonable to remember that this figure doesn’t represent illegal drug sales alone, the researchers discovered that Bitcoin is the most widely used cryptocurrency for buying drugs on the darknet. Professor Talis Putnins, warned that even though using bitcoin for prohibited purposes has improved, lawful trades using the cryptocurrency will also be rising:
“What our research shows is that the dollar value of illegal activity in Bitcoin has continued to rise, as has the number of Bitcoin users involved in illegal activity, those growth rates have recently been outpaced by the strong growth in legal users, largely speculators. As a result, the percentages or shares of Bitcoin activity that is involved in illegal activity have fallen in recent years. Therefore, while the online black market has continued to grow, cryptocurrencies are increasingly being used for legitimate reasons.”
The 2019 Global Medicine Survey notes an all-time high 27.1p% of surveyed medication users got prohibited chemicals for the first time through the darknet in the previous 12 months, up from 19.9% the preceding year, which highlights that the tendency of the increasing digitalization of drug commerce.
The report says that within the previous six decades, there’s been a year-on-year gain in the proportion of surveyed participants getting drugs on the darknet. Additionally, 30% of respondents asserted that the selection of medications they use has improved, and a further 5% reported they had never tried drugs prior to obtaining them through the darknet.
The gain in both darknet earnings and broader medication use among respondents suggests that the digitalization of the drug trade is earning narcotics more reachable — due to anonymous purchasing and selling in addition to untraceable payments with cryptocurrency.
Moreover, according to the Global Drugs Survey, the ready availability of drugs on the darknet that are purchasable using cryptocurrency has increased their use and made them more attractive to people contemplating first-time use:
“Over one quarter of participants reporting darknet market use in the last 12 months began their use in the year 2018: that is, they were new recruits to the darknet. These data confirm that darknet markets continue to attract new participants and that they are an increasingly significant players in the sale of distribution of illicit and prescription medication.”
How does cryptocurrency compare to other payment methods for drugs?
Before cryptocurrencies, fiat cash was mostly thought of as the most anonymous way of carrying out illegal transactions, because of the fact it is largely untraceable. But even as Bitcoin’s popularity grows, cash still appears to keep its central role in facilitating offender profits.
Europol’s report notes that this occurs for a number of reasons. The first one is that hard cash is a tried-and-tested payment system that’s been utilized for centuries. Consequently, well-established procedures for laundering funds exist. Another benefit that traditional cash has over its electronic counterparts is the fact it is equally as untraceable (with the exclusion of consecutive numbers) and anonymous while being simpler to swap.
Most cryptocurrency exchanges and online wallet providers need at least some fundamental Know Your Client, or KYC, information to be able to validate the identities of the clients.
The Europol report says that exchanges are normally very cooperative in regards to identifying poor actors. Cash, on the other hand, can be exchanged between strangers and laundered in numerous ways without advice about these involved being forced public.
A Ciphertrace report discovered that, despite the fact that there are many different cryptocurrencies utilized on the black markets, Bitcoin is still the coin of selection at 76% of trades.
That is unsurprising, considering Bitcoin is the very well-known and broadly approved cryptocurrency: Litecoin is reported to be used in only 7% of cases, whilst solitude coins like Monero (XMR) are just cited as being used in 4 % of trades, in spite of popular belief.
How have cryptocurrencies changed the purchase of illegal drugs?
Why use cryptocurrency to buy illegal drugs?
Cryptocurrencies can provide fast and anonymous digital payment.
Before cryptocurrency existed, such transactions were carried offline, and the payment involved a physical transport of cash.
Of course, these previous payment methods limited the availability of illegal drugs because there always was a risk to be intercepted by governments.
The co-founder and principal scientist in blockchain analytics company Elliptic, Tom Robinson, said that the advantages of anonymity for both drug traders can be restricted by the capability to cash out their crypto gains:
“The challenge for drugs traffickers is how to cash-out the proceeds of their sales. Most cryptocurrency exchanges make use of cryptocurrency transaction monitoring tools such as Elliptic’s, which use blockchain analysis to determine whether funds are coming from sources such as dark markets.”
“One trend we are seeing is the increased acceptance of privacy coins such as Monero on dark markets where narcotics are available to purchase. Most new markets now accept Monero payments, typically alongside Bitcoin. This represents a threat to law enforcement’s ability to trace this kind of activity and bring those involved to justice.”
Robinson stated that the usage of Monero is rising:
“First, what has become apparent and is slightly unexpected is that the emergence of privacy coins has not overly impacted the widespread use of the less anonymous Bitcoin in illegal trade. The privacy coins offer many advantages to criminals, but it seems the ‘first mover advantage’ of Bitcoin makes it difficult to replace now that its adoption in dark markets has become widespread. Put simply, it is not the best cryptocurrency to use for crime, but nevertheless remains the most popular.”
Are cryptocurrencies the best payment option for drug dealers?
Anonymity is a basic characteristic of cryptocurrencies which has been both criticized and celebrated in equivalent amount ever since their creation. But people buying and selling medication using cryptocurrency are not as straightforward as they may wish.
The blockchain records are public and are accessible by anyone who wishes to do so. Blockchains record all transactions made between all addresses. Until the consumer launders the trade by means of a set of intermediary accounts, the destination and origin of the trade can readily be discovered.
According to professor Robinson, the addresses can be traced back to public documents.
“Cryptocurrencies are far less anonymous and less private than many people in the drug trade might hope. The analytical methods that we have developed for the Bitcoin blockchain allow a lot of the illegal activity to be identified and monitored. Continued raids and crackdowns by law enforcement agencies also speak to the ability of authorities to track at least some of the illegal activity in Bitcoin and other cryptocurrencies.”
Even though it might enable trades to have a higher degree of anonymity than traditional wire transfers, cashing out crypto which has been formerly used for prohibited purposes remains a complex and dangerous process.
For all these reasons, cryptocurrency is not likely to fully replace fiat as the choice of cash for prohibited trades anytime soon.
While the opinion that cryptocurrency is only a payment method like any other can be somehow correct, its anonymity making it increasingly appealing to folks seeking to purchase or sell illegal drugs.
However, as technology improvements and anonymous cryptocurrencies become more broadly accepted, cryptocurrencies have the capability to influence the structure and growth of black markets along with the illegal drug trade.
