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Republican Senator Highlights Bitcoin's Battle in Shedding Criminal Baggage

Sen. Chuck Grassley is using "deeply flawed" estimates of illicit bitcoin activity to call for closer scrutiny of the industry, according to multiple crypto intelligence firms.

Jul 15, 2021 at 8:54 p.m. UTC
Updated Sep 14, 2021 at 1:26 p.m. UTC

A senior Republican U.S. senator’s characterization of bitcoin in illicit transactions highlights the uphill battle crypto faces in breaking the seedier assumptions of its Silk Road past.

Last Thursday, Sen. Chuck Grassley (R-Iowa), the Senate Judiciary Committee’s top Republican, warned the Biden administration’s acting drug czar that bitcoin is fueling $76 billion in “illegal transactions” every year. He cited researchers who used 2017 data to determine that nearly half of all bitcoin activity is illicit. 

“What makes cryptocurrency dangerous is that users have the ability to remain anonymous,” Grassley said in an open letter to the Office of National Drug Control Policy Acting Director Regina LaBelle. He warned this feature “makes it difficult” for investigators to “detect and catch” narcos. 

However, Bitcoin is far from an anonymous system. Indeed, as former Justice Department honcho Katie Haun argued recently in the New York Times, Bitcoin’s pseudonymous and public ledger may have made it easier for federal authorities to track down ransom paid to the hacking group that ground the Colonial Pipeline to a halt. 

Beyond baseline misassumptions, there’s a problem with Grassley’s conclusions, four cryptocurrency tracing companies told CoinDesk: They don’t align with the facts. 

“Those figures are based on outdated and deeply flawed analysis,” said Tom Robinson, the chief scientist for Virginia-based investigations company Elliptic, which has counted the several U.S. agencies, including the Drug Enforcement Agency, Internal Revenue Service, Immigration and Customs Enforcement and FBI as clients. Their agents know first hand that bitcoin is “highly traceable,” he said.

“Researchers disagree regularly,” George Hartmann, Grassley’s deputy communications director, told CoinDesk when asked for comment. “Senator Grassley cited a figure from academic research.”

Bitcoin’s brand baggage

The incident points to the image challenges bitcoin faces in Washington, D.C., where policymakers eager for soundbites are quick to float sketchy data that demonizes a technology they might not understand. 

Researchers at Chainalysis and Merkle Science shared similar estimates with CoinDesk. Percentage-wise, only a sliver of the multibillion-dollar bitcoin market is flowing through drugs, ransomware, trafficking and other nefarious deeds, they said. 

Chainalysis, the largest blockchain analysis company, has estimated crypto crime was a $10 billion industry in 2020 when it comprised 1% of all transactions. That’s a sizable jump from its 2017 estimates – around $7 billion and 0.7% of transactions – but well below Grassley’s number, which he attributed to a 2019 policy memo on freepolicybriefs.org.

That memo summarizes a 2018 academic paper titled “Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed Through Cryptocurrencies?” It divined Grassley’s quoted answer – $76 billion annually – by extrapolating on darkweb address data, wallet explorers and news reports, according to a source within the crypto research community.

But the researchers' attempt to trawl crypto’s darker corners cast perhaps too wide a net, the source said after reviewing the author’s methodology. Just one hint of illicit activity in a wallet would taint the entire wallet under the researchers’ methods. This has the primary effect of pumping up the amount of bitcoin flagged as being suspicious, the source said.

“I think it's safe to say these numbers should not be seriously used to inform policy,” the source said.

Mary Beth Buchanan, the chief legal officer for Merkle Science, said the Grassley press release may be dabbling in “confirmation bias.” 

“One tends to look for data that confirms one’s beliefs,” she said.

The reality of it

Grassley’s stated belief is that cryptographic technologies make law enforcement’s job more difficult by keeping bad actors anonymous. This makes them dangerous, he said in his open letter.

Jesse Spiro, chief of government affairs for Chainalysis, said cryptocurrencies are “more transparent” than most other payment rails because they operate on public ledgers. 

"It's a common misconception that cryptocurrencies are anonymous, untraceable, unregulated, and primarily used for illicit purposes,” he said.

In reality, federal investigators readily exploit the transparent nature of blockchains to “follow the money” and bust criminals, he said. This is especially true of online drug markets, a frequent target of investigations and raids.

This was on display last September when agents bagged a massive drug ring in California, in part by tracing bitcoin transactions. It is increasingly difficult to maintain the cryptocurrency’s pseudonymity through cash-out, as HSI Special Agent Christopher Hicks said in an FBI news story on a multimillion-dollar bust:

“People think cryptocurrency is this anonymous platform, but there are things we can exploit to find out who people are. It’s not truly anonymous,” he told the FBI.

Agents already know the “true scale of the issue,” Neeraj Agrawal of Washington, D.C.-based crypto think tank CoinCenter said. But policymakers who get their data from three-year-old datasets might not, making good intel even more important when crafting legislation (and perhaps fueling a recent boom in crypto-tracking funding rounds).

Ari Redbord, head of government affairs for TRM Labs and a former federal prosecutor, said policymakers need to understand that blockchain technology serves to help investigators. 

“Crypto actually enables great financial crime investigators to stop illicit activity in ways previously unimagined,” he said. “That needs to be acknowledged in any discussion like this."

Robinson, the Elliptic executive, also pushed back on Grassley’s assertion that cryptocurrency is largely unregulated. To the contrary, he said, it's closely monitored by officials – especially in the U.S.

"Like any payment system, cryptocurrencies are used by criminals – but policy should be based on an accurate picture of the scale and severity of the issue," Robinson said.

DISCLOSURE

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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