A new report by Homeland Security Investigations (HSI) dispels the misconception that cryptocurrency is the primary tool for illicit activities, highlighting instead that cash remains the preferred method for criminals.
Authored by HSI Supervisory Special Agent Robert Whitaker in collaboration with Crypto ISAC, the report emphasizes the role of regulated cryptocurrency platforms in supporting law enforcement. These platforms, leveraging blockchain technology’s transparency, are proving invaluable in preventing illegal transactions, even as myths about the misuse of digital currencies persist.
Cash Dominates Illicit Transactions
The report highlights that the proportion of criminal activity within cryptocurrency transactions is much smaller than often assumed. Data from Merkle Science shows that only 0.61% of Tether (USDT) transactions between July 2021 and June 2024 were marked as potentially illegal. For USD Coin (USDC), the numbers were even lower—just 0.22% flagged, with under 0.005% tied to sanctioned entities.
Similarly, a Chainalysis study revealed that only 0.34% of total on-chain crypto transactions in 2023 were related to illegal activity, down from 0.42% in 2022. These figures are far lower than the estimated level of illicit transactions in traditional financial systems, as detailed in the U.S. Treasury’s 2024 National Money Laundering Risk Assessment.
Blockchain Transparency: Crypto’s Advantage
One key difference between cryptocurrency and traditional finance is the level of transparency. Unlike traditional financial systems, where authorities often need subpoenas to obtain transaction records, blockchain technology makes cryptocurrency transactions publicly traceable in real-time.
This transparency gives law enforcement agencies an edge in tracking and halting financial crimes, such as money laundering and terrorist funding, which often thrive on the anonymity that cash provides. The 2024 DEA report further emphasizes this point, showing that cash remains the primary method for drug trade transactions due to its lack of traceability and paper trail.
Despite increasing scrutiny of both crypto and traditional financial systems, cash continues to dominate in illicit activity, particularly in high-risk areas like the drug trade.
Know Your Transaction (KYT): Enhancing Crime Prevention
The report also emphasizes the growing importance of Know Your Transaction (KYT) tools, which leverage blockchain’s transparency to provide real-time insights into financial activities. Unlike the Know-Your-Customer (KYC) processes used in traditional banking—focused on verifying customer identities—KYT allows for continuous monitoring of transaction risks.
KYT tools enable cryptocurrency platforms and law enforcement to identify and address suspicious transactions as they happen. This real-time oversight significantly improves security and regulatory compliance, making it a powerful tool for preventing illegal financial activity. According to the report, integrating KYT into traditional financial systems could strengthen risk management strategies by continuously updating them with new blockchain data, keeping regulators ahead of emerging threats.
Furthermore, KYT improves sanctions enforcement by allowing exchanges to screen and block transactions associated with high-risk or sanctioned entities. Combined with blockchain’s traceability, this gives law enforcement a highly effective means of tracking and disrupting illicit activity.
Conclusion
While cryptocurrencies have often been the subject of scrutiny in the debate over illicit finance, the data suggests that cash remains the primary tool for criminals. Blockchain technology, with its inherent transparency, is becoming a valuable resource for law enforcement in the fight against illegal financial activity. Far from being a haven for criminals, regulated cryptocurrency platforms are proving to be crucial in ensuring a safer financial system and enhancing national security.
