Exclusive: Criminals prefer cash over cryptocurrencies, according to a new report

Crypto has long been viewed as a shady industry that funds drug trafficking, terrorism and other illegal activities, a view reinforced by the demise of FTX and Silk Road. However, new data collected by CryptoISAC and Merkle Science suggests that this conclusion may be unfair and that it is traditional financial systems that could be facilitating criminal activity.

The report, titled “Blockchain’s Role in Mitigating Illicit Finance,” was released in collaboration with Robert Whitaker, director of law enforcement affairs at Merkle Science and a former supervisory special agent for the Department of Homeland Security. “Cash will always be king because of its true anonymity,” Whitaker said.

He added that crypto exchanges in the US are required to follow a strict compliance regime – including “Know Your Customer” and anti-money laundering rules – that make it easier to “deanonymize” transactions take place on the blockchain, which serves as a deterrent.

“It is pro-police in the sense that it has an immutable, public record behind it,” he said. Cash, on the other hand, is much more difficult – sometimes even impossible – to trace.

An estimated 2% to 5% of global GDP is laundered through traditional financial systems each year, equivalent to between $800 and $2 trillion, according to a figure from the United Nations Office on Drugs and Crime cited in the report.

In contrast, only 0.34% of total on-chain crypto transaction volume was flagged as potentially illegal in 2023, down from 0.42% in 2022, according to data from Chainalysis, a blockchain analytics firm.

Even stablecoins, used by some crypto criminals to protect their ill-gotten gains from volatility, are rarely used for illegal transactions. According to data collected by Merkle Science, between July 2021 and June 2024, only 0.61% of transactions involving Tether’s USDT and 0.22% of transactions involving Circle’s USDC were flagged as potentially illegal.

The US Treasury Department came to the same conclusion in its 2024 Money Laundering Risk Assessment, stating: “…the use of virtual assets for money laundering is far below that of fiat currencies.”

CryptoISAC was founded in May by industry leaders such as Circle, Coinbase, Kraken, Evertas and the Solana Foundation.

The CryptoISAC report also calls for international cooperation to address national security concerns, as much illegal crypto activity occurs on offshore exchanges that are not subject to the same restrictions as those in the United States. The report urges the Justice Department to prosecute these cases and tailor legislative solutions that target the uniqueness of cryptocurrencies. “…Stop cramming crypto, a round peg in a square hole called fiat currency regulation,” Whitaker said.

The former special agent for regulators hopes his analysis will educate crypto skeptics on the issue and encourage policymakers to set clear and comprehensive regulations.

“We have already seen national security issues emerge, such as financing terrorist groups, financing illegal governments, or financing sanctions evasion. You know, crypto can be used for these things, and it is,” Whitaker said. “So the longer we wait and ignore the problem, the more we enable illegal actors to profit from this space.”