Cash, not crypto, remains preferred tool for criminals: report

In the debate over illegal financing, cryptocurrencies are often the focus of criticism, even though cash is the preferred payment method for criminals.

A new report released by Homeland Security Investigations (HSI) Supervisory Special Agent Robert Whitaker and the Crypto ISAC says regulated crypto platforms provide a valuable asset to law enforcement, despite ongoing misunderstandings about their role , leveraging the transparency of blockchain to combat crime and strengthen national security against illegal financing.

Cash, not crypto, remains the criminals’ tool of choice

The proportion of illegal activity in total cryptocurrency transaction volume is remarkably low. According to the report, Merkle Science’s analysis shows that only 0.61% of USDT transactions were flagged as potentially illegal between July 2021 and June 2024, while USDC fared even better at just 0.22% and less than 0.005% are affiliated with sanctioned companies.

Meanwhile, Chainalysis reported that illegal activity accounted for just 0.34% of total on-chain transactions in 2023, down from 0.42% in 2022. These numbers are much lower than the estimated illegal activity in traditional finance, according to the Treasury’s National Money 2024 reveals money laundering risk assessment.

Both cryptocurrency and traditional financial (TradFi) systems are under increasing regulatory scrutiny to combat illicit finance. However, they differ in their transparency. TradFi lacks the public blockchain technology that makes crypto transactions traceable.

In traditional finance, law enforcement must obtain financial records from institutions, often requiring a grand jury subpoena. This process involves a group of people who must collect extensive evidence before tracing funds can begin.

In addition, many illegal activities are still based on cash, which cannot be traced. The 2024 DEA report confirms that cash remains the primary payment method for drug trafficking transactions due to its anonymity and lack of a paper trail.

KYC or KYT?

In the report, Agent Whitaker said that transaction traceability on a blockchain is critical for law enforcement and regulators in the fight against cash-based illegal crimes such as money laundering, terrorist financing and other forms of financial crime. It offers the ability to do so in real time and across borders “follow the money”. This is done through so-called “Know Your Transaction” or “KYT” tools to track down criminals.

While traditional finance is based on know-your-customer (KYC) processes, KYT leverages the transparency of blockchain to provide real-time insights into transactions. This allows crypto companies and authorities to continuously assess risk and adds a layer of security unmatched by traditional systems, ensuring a safer platform for users.

The report highlighted that integrating KYT with traditional compliance tools could potentially help create a more robust risk assessment framework that is continually updated based on new blockchain data to stay ahead of new threats. KYT is also intended to improve sanctions compliance by allowing exchanges to screen and block transactions associated with high-risk addresses identified by organizations such as the Office of Foreign Assets Control (OFAC) and member-led organizations such as Crypto ISAC.