There are major shifts underway in the ecosystem of illicit actors using cryptocurrencies. According to a 2023 report by TRM Labs, Bitcoin is no longer the asset of choice for criminals.
The report stated: “The era of multi-chain has had a sweeping impact on the volume distribution of illicit cryptocurrencies as a whole, with Bitcoin's share falling from 97% in 2016 to 19% in 2022. In 2016, two-thirds of the volume of cryptocurrency hacking was on Bitcoin; In 2022, it represented just under 3%, with Ethereum (68%) and Binance Smart Chain (19%) dominating the field. While Bitcoin was the exclusive currency for terrorist financing in 2016, by 2022 it had been replaced by assets on the TRON blockchain, by 92%.“.
Implications of transformation
This clearly turns the adage that Bitcoin is synonymous with criminal activity on its head.
From the beginning, Bitcoin has served as a Schilling point due to its network influence, market dominance and liquidity, making it a natural choice in the crypto finance space.
(In the language of game theory, the Schelling point is a natural solution in situations where multiple parties have to make decisions without direct communication. These points are intuitively obvious, and are often based on shared expectations or common knowledge.)
However, there now appears to be a continuing disconnect from the balance as bad actors choose a different meeting point.
Fast food politics
This move offers some key lessons from a policy perspective.
It highlights the need for policymakers to closely examine the specific assets and blockchains currently favored by illicit actors and take appropriate action. Most importantly, it provides an opportune moment to replace the current general perspective on digital assets with a more nuanced perspective, while shaping the policy narrative on criminal use.
For example, in the current discussion about the use of crypto assets to finance terrorism, we often forget that Hamas actually stopped accepting Bitcoin donations, to protect its sponsors from detection.
But more importantly, this shift of illicit finance away from Bitcoin is the first ever documented case of major crime migrating into the world of crypto assets. It highlights the changing nature of financial crime as it adapts to the path of least resistance.
Perspectives from game theory
Thus, a game theoretic lens (with players – product developers, regulators, good and bad actors) enables a comprehensive and nuanced view of the space. We can see that in such a situation, the interplay of independent actions and viewpoints generates countless scenarios, where the system is so intertwined that no group of players can control the outcomes alone.
A game-theoretic view of illicit finance highlights the need to get into the criminal mind to predict next steps and prepare accordingly. Policy making to combat illicit money flows is usually retrospective, with bad actors making the first few moves, which are then studied as emerging risks according to the letter regulations. However, with the digital asset space evolving at an exponential pace, we do not have the luxury of taking this hard-line approach (which happens to be the norm in traditional finance regulation design).
The continuing wave of crime moving away from Bitcoin highlights the need to arm policymakers with predictive systems that predict future patterns of illicit money flows. This approach would significantly reduce response time to new threats.
Anti-crime initiatives
Lessons learned from the changing use of Bitcoin could also help crime-fighting professionals understand the distinguishing features of organized crime syndicates. An example of this is that crime syndicates that still rely on Bitcoin would indicate a lack of flexibility in leadership. Additionally, location in the Flexibility Range can help infer more actionable insights about any guild, such as their level of resourcefulness and technical expertise. This can also help law enforcement determine the amount of unique effort required to combat each criminal gang. Case in point, criminal gangs that have pioneered the shift away from Bitcoin, and are (therefore) ahead of the curve, will operate at a relatively higher level of dexterity, while constantly adapting to slip through the cracks.
Concluding thoughts
The shift of financial crimes away from Bitcoin highlights the need for a more nuanced approach to regulating appropriate and dynamic regulatory and policy frameworks for digital assets and blockchains. It also highlights the risks of applying broad limits across the entire spectrum of crypto-finance, when it comes to political debates about criminal use.
This is a guest post by Debanjan Chatterjee. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
