Decentralised exchanges are coming in as a potent addition to privacy coins.
Cryptocurrency is still not as widely used by criminals as fiat is, Europol notes in its 2018 Internet Organised Crime Threat Assessment (IOCTA) report, but it's becoming increasingly popular. At the same time, bitcoin retains its prominence as the cryptocurrency of choice among criminals, but its supremacy is also quickly giving way to the field of privacy coins.
Privacy coins will quickly make tumblers and mixers obsolete, Europol says, and points out that cryptocurrency know-how will have to be a core skill for any cybercrime investigator who wants to get anywhere.
Tumblers and mixers are both a type of vessel used in the creation of cocktails.
They're also a way of laundering bitcoin and similar easily traceable cryptocurrencies. Both are the same thing, and as the name suggests, they're a way of mixing up bitcoin from different sources, and redistributing them to help cover their tracks.
Generally, they involve multiple rounds of trading bitcoin for an equal or slightly lesser amount of bitcoin from somewhere else, and just mixing them all up.
"Previous reports indicated that criminals increasingly abuse cryptocurrencies to fund criminal activities. While Bitcoin has lost its majority of the overall cryptocurrency market share, it still remains the primary cryptocurrency encountered by law enforcement," Europol said. "Money launderers have evolved to use cryptocurrencies in their operations and are increasingly facilitated by new developments such as decentralised exchanges... It is likely that high-privacy cryptocurrencies will make the current mixing services and tumblers obsolete."
It's pretty clear that cryptocurrencies for criminal purposes are here to stay, and that the combination of decentralised exchanges and privacy coins will be an extremely challenging new frontier for law enforcement.
What's less clear is what to do about it.
The US Secret Service has previously described privacy coins as one of the greatest national security threats facing the US.
Japanese regulators have gone a step further and formalised their complete opposition to all privacy cryptocurrencies, and Japan's exchanges have dutifully pulled privacy coins from their shelves. But this naturally doesn't mean they can't be acquired.
For now, the question might be why, if they're so great/awful, are privacy coins not being more widely used by criminals? This question matters a great deal because it lets authorities look at the exact levers they can pull if they want to affect criminal use of privacy coins, while also letting speculators glimpse a potential time line for broader adoption.
In this case, the answer might largely come down to the relative unpopularity of decentralised exchanges. As they emerge and grow, it might be reasonable to expect privacy coins to grow alongside them.
Why aren't privacy coins more popular?
A crook wants the same thing in money as everyone. It should be spendable, valuable and reliable – and ideally anonymous. So given a choice, most criminals would probably still prefer cash in hand. This means most of the cryptocurrency activity is relegated to the dark web and other more international criminal stuff.
But as researchers have noticed, the dark web is mainly filled with Russian and Eastern European users, most of whom aren't anywhere near as worried about the authorities as its US users. This can be seen in polls where dark web markets will ask users about their preferred currency, where the answer is largely dependent on the respondent's nationality. For many market participants, the need for reliably valuable and spendable currency still far outweighs the need for additional privacy.
Plus, as any exchange will tell you, integrating different cryptocurrency payment systems is a lot of work. Bitcoin is generally the quickest and easiest, while the more exotic currencies can be slower and more difficult.
And as the IOCTA report notes, dark web marketplaces tend to have a very short lifespan, even without police intervention. Law enforcement shut down three major dark web marketplaces in 2017, but in the same time, nine others closed their doors "either spontaneously or as a result of their administrators absconding with the market's stored funds. The almost inevitable closure of large, global Darknet marketplaces has led to an increase in the number of smaller vendor shops and secondary markets..."
Dark web marketplaces flit in and out of existence quite quickly, and the default payment system is almost always bitcoin. This is self-reinforcing because it means bitcoin is also more reliably spendable. The idea is that whatever else happens, there's always going to be someone who takes bitcoin.
This is one of the reasons decentralised exchanges are such a significant accoutrement to privacy coins. They introduce the ability for people to quickly, easily, safely and anonymously convert other cryptocurrencies to and from bitcoin, even in relatively large amounts.
Decentralised exchanges are a key ingredient in the impending obsolescence of tumblers and mixers. They essentially let other coins seamlessly interface with the bitcoin-centric dark web economy, giving both buyers and sellers a reason to more readily use and accept privacy coins.
With the relatively recent addition of reliable decentralised exchanges, privacy coins are on track to roll in to the dark web markets like any other product angling for a market share.
Fortunately, even though dark web users seem to be working towards privacy coins, Europol found that terrorists tend to remain hopelessly non-technical and still favour conventional banking and remittance services.
"None of the attacks carried out on European soil appear to have been funded via cryptocurrencies," the report said. "The use of cryptocurrencies by terrorist groups has only involved low-level transactions. Their main funding still stems from conventional banking and money remittance services."
What happens next?
Interpol recommends an approach to educate legitimate consumers about cryptocurrency because although most of the attention is focused on the dark web elements of cryptocurrency, there's still an ongoing uptick in crimes against cryptocurrency users. As a source of criminal revenue, these are just as worth halting as any other profitable crime.
The same kinds of electronic attacks which used to target banks and institutions can now end up focused on a single ill-prepared individual, Europol says, so "prevention and awareness campaigns should be tailored to include advice on how users of cryptocurrencies can protect their data and wallets."
Investigators should also start educating themselves and building relationships with local cryptocurrency related businesses.
"Investigators should identify and build trust relationships with any cryptocurrency related businesses operating in their jurisdiction, such as exchangers, mining pools or wallet operators. Member States should increasingly invest or participate in appropriate specialist training and investigative tools in order to grow their capacity to effectively tackle issues raised by cryptocurrencies during investigations.
"Investigating cryptocurrencies must become a core skill for cybercrime investigators."