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At Least 95 Percent of Crypto Crimes Involve Bitcoin, Chainalysis Executive Says

Bitcoin “is by far the favorite” for hackers and criminals, according to the blockchain intelligence firm’s co-founder and COO.

At least 95% of cryptocurrency crimes investigated by law enforcement involve bitcoin (BTC,) the co-founder and COO of Chainalysis told Fortune on April 24.

Jonathan Levin, whose company offers investigation software for law enforcement to pursue bad actors, said BTC is “by far the favorite” for hackers and criminals.

He revealed that law enforcement needs to take more sophisticated approaches to tackle darknets — and warned that the crypto industry was starting to see the beginnings of terrorism financing.

Levin said the records left behind by crypto transactions has led to many arrests, as officials in the United States tackle the deadly opioid crisis and try to stem the flow of illegal drugs into the country, often from China. He told Fortune:

“What we’ve seen is that there is the ability to tie some of those cryptocurrency transactions either to the pharmacies in China or actually to the services that people are using to distribute fentanyl.”

According to Levin, the transparency of cryptocurrencies is helping law enforcement to build cases against suspects quicker than in traditional finance, namely because investigators no longer need to rely on obtaining records from foreign banks.

Even though bitcoin is overwhelmingly used by crypto criminals, Levin noted that Chainalysis has launched real-time transaction monitoring for 10 cryptocurrencies, as well as a basket of stablecoins, because law enforcement agencies are trying to investigate hacks on crypto exchanges where other tokens are stolen.

Levin also said he has been investigating the case of QuadrigaCX, the major Canadian crypto exchange that was officially declared bankrupt earlier this month. The company lost access to cold wallets and corresponding keys following the CEO’s death in December last year, and reportedly owes more than $195 million to 115,000 customers.

In the interview, the Chainalysis executive suggested Quadriga “was operating on fractional reserve and in deep trouble”:

“We were looking at the bitcoin holdings and also tether holdings of Quadriga and what we found very quickly was that Quadriga as an exchange actually didn’t have those customer funds that were reported in the media to be lost. Those funds actually never existed.”

Levin also repeated claims made in a Chainalysis report earlier this year that two hacker groups have been responsible for stealing $1 billion in cryptocurrency, representing the majority of the funds lost in scams.

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US: Two Men Plead Guilty to Selling Drugs for Crypto and Laundering $2.8 Million

Two men plead guilty for illicitly selling steroids and controlled substances and laundering millions of dollars in crypto.

Manhattan District Attorney Cyrus R. Vance announced on April 23 that two men plead guilty for illicitly selling steroids and controlled substances and laundering millions of dollars in cryptocurrencies and Western Union payments.

Callaway Crain, 35, and Mark Sanchez, also 35, were allegedly behind the darknet website “NextDayGear,” and also manufactured some of the substances they sold. Among their products were reportedly injectable and oral steroids, as well as medication to counteract the adverse effects of their use, including Xanax, Valium and Viagra.

Per the announcement, the defendants shipped over 10,000 packages across the United States, generating over $2.3 million in revenue between 2013 and 2018. They purportedly used Western Union and cryptocurrency transactions, which were laundered and converted to cash.

The two men reportedly purchased steroids, precursor chemicals and other products from China and other countries, which they then marketed and sold, often under brand names they created. Among their customers were reportedly an NFL football player, a college football player, a professional volleyball player, fitness trainers, police officers and members of the armed services deployed overseas.

Crain and Sanchez pleaded guilty to money laundering and criminal sale of a controlled substance, with the promises of prison sentences ranging from two and a half to seven and a half years. They are expected to be sentenced on July 12 this year. Attorney Vance commented:

“Online drug sellers who do business in New York should take note: whether you’re operating in plain sight or in hidden corners of the dark web, my Office has the skills and resources to follow the money, shut down your business, and hold you accountable.”

The announcement claims that this was the first conviction for money laundering involving cryptocurrency that took place in New York. The announcement also points out that on April 16, New York state prosecutors also indicted three men for the sale of illicit drugs on the dark web and laundering $2.3 million in cryptocurrency.

As Cointelegraph reported in January, the value of bitcoin (BTC) sent to darknet markets increased by 70 percent during the last year.

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Is Darknet Done With Bitcoin?

A new study by Recorded Future has found that Bitcoin is losing its position as the number one currency on the Darknet markets. The Internet tech company analyzed 150 of the most active message boards, marketplaces, and illicit service providers and noticed that the Darknet communities sentiments toward Bitcoin have taken a turn.

The Darknet economy

The Darknet is an Internet that uses non-standard communication protocols and ports to make it a bit more difficult for the digital identities of users to be revealed. The Darknet requires users to run a special software,  the most popular being TOR. to connect to the Internet. One of the main purposes of using the Darknet is to make the information provider and the person accessing the information difficult to trace. Because of this privacy feature, the Darknet has become famous for its Darknet markets like Silk Road that allowed users to effectively exchange anything,  legal or illegal over an Amazon-like marketplace. The anonymous Internet is said to attract criminals and those interested in black market activities as well.

A backlogged network

In mid-2016, Recorded Future noticed that the 150 entities they were analyzing were all expressing concerns regarding the functionality, usability and security of Bitcoin in the Darknet economy. Although it was a relatively mild increase compared to the increase in interest in Bitcoin in the latter half of 2017, the Bitcoin network was beginning to become overloaded with traffic which resulted in higher transaction fees for those using the Darknet markets. On Dec. 23, 2017 transaction fees were $52.18.

Recorded Future found that the average transaction size on the Darknet is $50-$300. If an individual tried to transact on Dec. 23, 2017 – it could have been the case that the transaction fee was more costly than the amount being transacted. One member of a Darknet message board posted this on the forum he uses:

“What’s happening at the moment is incomprehensible. Despite that I’ve used the recommended commission fees, my transactions have remained pending for the past three days, and my work has been paralyzed. Dear vendors, please implement alternative payment options; otherwise, I will miss out on this Christmas season.”

A Christmas miracle

The backlogged queue on the Bitcoin network was making it difficult for some individuals in the underworld to conduct their business. This users transaction was logged so far back in the queue that it took several days for it to become verified. To combat double-spending attacks, most vendors on the Darknet adopted a rule requiring three confirmations before treating transactions as complete. Because a transaction cannot be complete until the payment has been confirmed, this user was effectively frozen out of conducting his “business.”

Although he was worried he would “miss out on this Christmas season,” his Christmas miracle was about to occur. To combat, the exuberant transaction fees that were increasing daily, vendors began accepting alternative payment options. The study found that Litecoin was the second most popular currency with 30 percent of all vendors accepting LTC, and Dash the third most popular currency, with 20 percent of all vendors accepting DASH.

Other Darknet studies

Back in 2016, economist Tuur Demeester was in the process of researching the Darknet markets. Demeester turned to r/DarkNetMarkets to see if the community could provide him with the statistics he was looking for: what percentage of trades on the Darknet was conducted with BTC?  Was DarkCoin used and how often? How many Bitcoins were spent on the Darknet on a daily/monthly/yearly basis? But Demeester was not met with any useful answers from the community.

Darknet Markets research?

Prior to Demeester’s endeavor, The Digital Citizens Alliance released a table with statistics about the number of drug listings on the Darknet markets in August 2014, but this table provided no information regarded prices, trade volumes and preferred payment methods.

Furthermore, Nicolas Cristin, an associate research professor in the School of Computer Science and in Engineering and Public Policy at Carnegie Mellon University (CMU) together with Kyle Soska, a Ph.D. candidate in CMU’s school of electrical and computer engineering back in 2013, conducted a study from 2013-2015 to get a handle on the Darknet market economy.

When the Silk Road was shut down in October 2013, Cristin and Soska noticed that the take-down spawned the development of anonymous online marketplaces, which continue to evolve to this day. Cristin and Soska used long-term measurement analysis on 16 different marketplaces for over two years (2013– 2015) to calculate the growth of the online anonymous marketplace ecosystem. Their research documented the types of goods being sold, the effect – or lack – of adversarial events, such as law enforcement operations and large-scale frauds, on the overall size of the economy. The two also gained insights into how vendors are diversifying and replicating across marketplaces, and how vendor security practices (e.g., PGP adoption) are evolving.

Payment methods are evolving

Recorded Futures study concluded by stating that the efforts that vendors are taking to diversify acceptable payment methods on the Darknet markets will continue. Although payment methods like Litecoin and Dash are becoming more popular, Recorded Future still expects Bitcoin to have a place in the Darknet economy- just a much smaller market share than it currently has. Recorded future also warns that with increased popularity in digital currencies will come an increase in malicious tools like ransomware that will try to take advantage of the mainstream trends in cryptocurrency.