Seize and Desist podcast

S&D E9 - The secret life of digital money

Author
Lo Furneaux
Marketing - Associate

Build confidence in managing virtual assets

“As long as you have these continued gaps in the global regulatory framework around crypto, it’s…too easy for criminals to launder funds.”

In this episode, recorded on April 30th, Aidan and David discuss everything from his early encounters with crypto and his journey into the space to the insights on the evolution of crypto crime shared in his book, ‘The Crypto Launderers’.

Together, they explore the different regulatory approaches to digital money laundering, shed light on why crypto transactions get so much attention from regulators and speculate on the exciting future of cryptocurrency investigations, including the impact of emerging technologies like the metaverse and artificial intelligence.

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Timestamps

03:30 - An Accidental Journey into Cryptocurrency Compliance

05:00 - Understanding Anti-Money Laundering Measures in Finance

09:30 - Cryptocurrency Regulation in an Evolving Industry

12:00 - Regulatory Compliance as a Competitive Advantage

15:00 - Balancing Compliance Costs with Anti-Money Laundering

20:00 - Global Disparities in Cryptocurrency Regulation

21:00 - The Complex Evolution of Cryptocurrency in Illicit Finance

25:00 - Blockchain: The Immutable Ledger of Cryptocurrency Transactions

30:00 - Evolving Tactics in Cryptocurrency Crime and Law Enforcement

35:00 - The Future of Global Money Laundering Prevention

37:00 - Evolving Challenges in International Law Enforcement

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Resources Mentioned

About our Guest‍

David Carlisle wears many hats: he's the Vice President of Policy and Regulatory Affairs at Elliptic, an Associate Fellow at the Royal United Services Institute (RUSI)'s Centre for Financial Crime and Security Studies (CFS) and the Author of “The Crypto Launderers: Crime and Cryptocurrencies from the Dark Web to DeFi and Beyond”.

As a former Policy Advisor to the US Treasury’s Office of Terrorist Financing and Financial Crimes, David is a respected authority on the intersection of cryptocurrency crime, technology and public policy. He regularly shares his expertise on digital money laundering, regulatory compliance frameworks and sanctions compliance with major media outlets to help shed light on this intricate subject.

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Disclaimer

Our podcasts are for informational purposes only.  They are not intended to provide legal, tax, financial, and/or investment advice. Listeners must consult their own advisors before making decisions on the topics discussed.  

Asset Reality has no responsibility or liability for any decision made or any other acts or omissions in connection with your use of this material.

The views expressed by guests are their own and their appearance on the program does not imply an endorsement of them or any entity they represent. Views and opinions expressed by Asset Reality employees are those of the employees and do not necessarily reflect the views of the company.

Asset Reality does not guarantee or warrant the accuracy, completeness, timeliness, suitability or validity of the information in any particular podcast and will not be responsible for any claim attributable to errors, omissions, or other inaccuracies of any part of such material.

Unless stated otherwise, reference to any specific product or entity does not constitute an endorsement or recommendation by Asset Reality.

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Transcription

Speaker: Aidan Larkin

With RUSI, we talked about the recent US billion dollar seizures. Now we've got billion time seizures. When you strip them all back, they're money laundering cases. They're not crypto cases. They're people just looking for a gap that as we shut things down, people just go to new methodologies.

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Speaker: David Carlisle

The priority for the international community in particular really needs to be closing that gap where you still have a lot of jurisdictions around the world that are either not regulating crypto assets at all or doing in a way that's insufficient or are not enforcing those regulatory frameworks effectively because criminals will always tend to race to the lowest common denominator. They'll always set up shop in those places where they can get away with the most. As long as you have these continued gaps in the global regulatory framework around crypto, it's just going to make it too easy for criminals to launder funds even if we are seeing lots of progress in a lot of parts of the world. I think that really needs to be kind of the most basic bread and butter thing is to raise that standard.

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Speaker: Julia Bradbury

Welcome to Seize and Desist. I'm Julia Bradbury, corporate paralegal here at Asset Reality. In this episode recorded on April 30th, Aidan is joined by David Carlisle, the vice president of policy and regulatory affairs at the blockchain analytics firm, Elliptic, associate fellow for Ruzi's center for financial crime and security studies, and author of the book, The Crypto Launderers, Crime and Cryptocurrencies from the Dark Web to DeFi and Beyond. A former policy advisor to the US Treasury's Office of Harris Financing and Financial Crimes, he is a prominent figure in cryptocurrency crime and public policy and frequently appears in major media outlets to educate the public on anti money laundering and counter terrorist financing efforts worldwide. In this episode, David and Aidan will explore David's background in the sector and his initial experiences with crypto differences in global regulatory approaches and evolving methods for criminal uses in cryptocurrency. They also discussed David's book, the crypto launderers and the possible future for cryptocurrency investigations. Thank you for listening.

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Speaker: Aidan Larkin

David, warm welcome to the Seize and Desist podcast. Thank you very much for joining us today.

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Speaker: David Carlisle

Oh, thank you for having me. Good to be here.

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Speaker: Aidan Larkin

It's my pleasure. You and I have in crypto years, which is like dog years, I think you and I, you know, satisfactory go back long enough now that we've been sort of involved with RUSI. We've been sort of involved in the space, and we've had the pleasure of sharing panels and different sessions in the past. What I'm keen to dive into today and the theme of of seize and desist, it's exploring the asset recovery landscape and the big things within it and looking at the challenges globally as to why we don't seize more assets, invest more in law enforcement, better policy and processes, and why is it just little green shoots around the world as opposed to sweeping reforms? And we'll talk a bit about the different actors in the space, but the real theme is to break things down, keep it simple, and a lot of people are afraid to ask sometimes the seemingly simple questions that, not simple, if you know how. And I thought I would love to have you on as a guest because you've brought all of this together in one of my favorite books in this space. Could you tell us a little bit about your background and also about the book?

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Speaker: David Carlisle

Yeah. Well, I mean, as you say, I've been in and around the crypto space for quite some time now, actually, just over a decade, which kind of incredible when I think about it. Especially, you know, you consider that's about three quarters of the time that cryptocurrencies have even existed.

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Speaker: Aidan Larkin

That's like OG status in crypto terms. Yeah.

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Speaker: David Carlisle

Yeah. And it was, frankly, quite accidental. I mean, I very much did stumble my way into the crypto space. I mean, my own background, a number of years ago, I just started my career in the anti money laundering space at the US Treasury. So I worked within the US Treasury's Office of Terrorism and Financial Intelligence in a number of roles related to setting US anti money laundering policy, US sanctions policies, so dealing on the design of things like sanctions involving North Korea, a topic that's very relevant to me now, but it was different at those times and certainly didn't involve crypto. I left the US government in 2012 before cryptocurrencies were even really an issue at all on the US Treasury's radar. But after I left the public sector and went into the private sector, I was working as a consultant. Around 2014 or so, I started getting pulled into some projects. We're starting to hear from regulators about the need to comply with AML laws. So I started getting involved in projects helping them do things like write anti money laundering policies and figure out how to comply with those regulations. And as you can imagine, at that time, I think a lot of the cryptocurrency industry was of the view that this technology was designed to circumvent regulation or at least make us less reliant upon it. What are all these laws about? So it's very different from how it is now, which is maybe a topic we'll get back to you.

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Speaker: Aidan Larkin

But that isn't and, again, I'll always be the one that stops everybody because I'm always thinking about the person that knows the least about this. Set that compare and contrast for us just briefly in the sense of there's a reason that banks have existing money laundering controls and it's like cartels, it's all the historical

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Speaker: David Carlisle

Sure.

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Speaker: Aidan Larkin

People abusing the existing financial system. Could you just give us what is the normal world and then this new sort of new asset class?

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Speaker: David Carlisle

Yeah. Sure. Absolutely. So, I mean, really, you know, for the past five decades or so, there's been a global effort to create a robust anti money laundering regime kind of around the perimeter of the financial sector and to make the financial sector more impervious to money laundering and other illicit activity that might occur. And a lot of this has been spearheaded by and concentrated under the remit of the financial action task Force, the global standard setting body that sets the bar for what countries must do to prevent money laundering. And over the past three decades or so, the FATF, as it's known, has been setting rules that determine how banks and other financial institutions need to comply with anti money laundering regulations around the world. There's a fairly well defined standard at this point, well defined set of norms for what good anti money laundering should look like. The question of whether it's always done effectively is a totally another debate. Suffice to say that, you know, there are long standing rules in place that suggest that participants in the financial sector need to comply with anti money laundering laws. So doing things like performing customer checks on your users and reporting suspicious transactions.

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Speaker: Aidan Larkin

You mean that when I lodge twenty thousand pounds in the bank and they start to ask me, did you win this on the horses of the casino? They're not just interested. They know if I've had a lucky day. Like, that's a very purposeful methodology of understanding where your money comes from.

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Speaker: David Carlisle

Exactly. And the notion that there should always be, knowledge of who you're dealing with in financial transactions and understanding of the purpose of the business of your customers and the ability to detect if you think your customers might be doing something illicit. And when Bitcoin was created in 2009, Bitcoin was very much born when it was launched by Satoshi Nakamoto, its pseudonymous creator or creators. We don't know who they are. And it was born of a movement known as the cypherpunk movement, which is sort of this libertarian minded movement that sought to create effectively a form of digital cash that would allow individuals to transact outside the regulated banking sector. So prior to the invention of Bitcoin, if you wanted to engage in cross border digital transfers, you've had to do it through a bank. If I was based in the US and wanted to send funds to someone in the UK, you'd have to do that online through your bank. It wasn't really possible to have peer to peer, as it were, transactions between individuals that were digital and that could operate outside the banking sector. And that's what Bitcoin enabled. That was really kind of the fundamental innovation of Bitcoin is that you could have peer to peer cross border transfers outside the incumbent financial system. And, presumably, at least, people thought totally outside and impervious to the regulatory framework. And that was sort of the underlying notion was that Bitcoin will kind of liberate us from oversight by banks, by regulators, because individuals just will be able to transact with one another. And so inherent in the a lot of the early cryptocurrency space was this notion that cryptocurrency could be free of regulation, that it didn't need to abide by the old rules. But once you started getting some of the early cases, and maybe we'll talk about them, of criminals using this new technology, criminals, unsurprisingly, were very interested in this notion that you could have this technology that might operate outside the purview of regulators and banks and other powers that be. And regulatory authorities quickly determined that this wasn't gonna be tolerable. They wanted to find ways to bring this new technology within this set of rules, within this set of standards that govern how other types of financial products and services are governed. And so around 2013, the US Treasury, my old employer shortly after I left, began issuing sets of guidance indicating that certain participants in the cryptocurrency industry needed to start complying with anti money laundering laws. And in particular, cryptocurrency exchanges or services where you swap cryptocurrencies for fiat currencies need to start doing those things we're talking about. So identifying their customers, monitoring transactions because, presumably, if you're an illicit actor who's got their hands on some Bitcoin, for example, maybe you sold some drugs on the dark web and you you received Bitcoin in return for selling drugs, you would want to cash those out, convert them into, say, dollars or euros or something a bit more practically useful for you. And so the US Treasury, around 2013, started saying these types of services need to be regulated for anti money laundering purposes. And so that began what's now a ten year process of increasing regulatory oversight around certain components of the cryptocurrency ecosystem. But back in 2014, when I kind of first got into this space, it was very much a completely new notion and one that I think, a lot of the cryptocurrency industry were not entirely prepared for at that point because they've sort of assumed that they wouldn't need to comply with this regulation, but regulators have made sure that they have to.

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Speaker: Aidan Larkin

And it's one of those things that I find almost bizarre. When you speak to people who aren't in the crypto space, it's easy for those in the crypto space to think this all seems, like, quite straightforward. But am I right in saying it is a sort of a slightly absurd argument to take place that someone thinks that you can transact billions of dollars without oversight. Whereas someone who collects a state pension and then tries to lodge cash into their bank has to answer lots of questions. You can't put a deposit down on a house in cash, whereas parts of the sector for so long find it absurd that people should think that they should be subject to oversight. But, again, you would create this shock horror that criminals would then try and sort of jump in. And it sounds to me that there was an idealistic sort of technology that presented all of these wonderful opportunities. And, again, if you're not part of the unbanked and if you're not in a country that suffers hyperinflation, you maybe don't don't see what's the big need. I'm a big fan of the technology, big fan of the requirements, and I fully agree it should be utilized. But I've always find it a bit strange that the sector in some parts, particularly the sort of Maxis, and I risk their wrath if they even listen to the show, but sort of think that they would sit outside. I often think of the example of it's like me creating a new type of car that can go two hundred and fifty miles an hour, but I don't expect it to come under any of the laws because it's a kit car and you shouldn't have to have seat belts and airbags and speed limits and I should be allowed to drive when I'm drunk. Do you sort of feel that there's still that within the sector or do you feel that the sector has now fully accepted if we wanna walk and talk and act like a billion dollar company and have employees and health care plans and all of those things.

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Speaker: David Carlisle

Yeah. I do think it's largely fair. Certainly, the picture has changed substantially. I mean, I think you're right. The view of regulators was absolutely and remains to this day - we don't really care what the underlying technology is that's facilitating financial transactions or financial services. If it's presenting risks, risks of money laundering, sanctions evasion, other types of risk, we're going to act against those, and we're gonna expect that participants play by the same rules as those who are operating in other components of the financial sector. You know, there's this kind of mantra in the regulatory world, you know, same risk, same rules. If you're providing similar types of services to a bank, it doesn't matter if your underlying technology is different. You need to abide by the same rules. And so I think regulators have made very, very clear at this point that they're not going to make exceptions for a new technology purely because it's different. I think the industry has evolved tremendously in its response to regulation over the past decade. No question about it. You know, there's increasing recognition amongst major players in the crypto space for the most part that if you want to be successful, if you want to be perceived as a legitimate business, if you want investors to back you, if you want the public to see you as reputable, you need to be following these laws because they're things that society considers to be extremely important. And, obviously, there can be major and very severe consequences for failing to follow those laws as the US has made clear recently through a number of enforcement actions where companies in the crypto space have been fined, where individuals involved have been sentenced to prison term if they're not complying with the law. And so I think there is a recognition now within the industry that, ultimately, it's a competitive advantage over the long term to be compliant because it's just not going to pay to try to operate outside the regulatory framework. And I suppose looping back a little bit to my career trajectory, that's something we very much see now in my current employer, which is Elliptic. We're a blockchain analytics company. We provide services that enable cryptocurrency exchanges and other regulated businesses to comply with AML laws by enabling them to detect illicit activity in cryptocurrencies, which is maybe a process we'll talk about. But certainly something in my six years that I've been in Elliptic that we've seen is a recognition within the industry that it pays to be proactive about regulatory compliance, and you need to see the cost associated with it as a fundamental part of making your business successful and not just as a compliance burden as it were.

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Speaker: Aidan Larkin

But what is the cost to a business for getting this wrong? Then we'll zoom out and look out from a country level. What is the cost of getting this wrong?

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Speaker: David Carlisle

Yeah. Sure. Absolutely. So, you know, anytime you have a new industry or new technology, uneven regulation, you know, I've I've described before that the US has had a regulatory framework in place for cryptocurrencies for pretty much a decade now, a bit more. But many other countries around the world have been much slower to adopt regulatory frameworks. So that creates a lot of room for regulatory arbitrage. Companies can set up operations in those parts of the world that don't have regulatory frameworks in place. They can take advantage of that lack of oversight as they're in the process of trying to scale their business. And, you know, it's something that's not unique to the crypto industry necessarily, but we've seen it be quite pervasive in the crypto industry. And I think there have been, over the years, lots of participants in this space who have sometimes calculated that we can grow our business by taking advantage of some of these regulatory loopholes. Now what authorities in the US have made very clear is that they're not gonna have any tolerance for anyone accessing or providing services into the US market even if they're operating from overseas and providing services to the US from jurisdictions where their services might be unregulated. So for example, you operated a cryptocurrency exchange from somewhere in Asia, Africa, or wherever, where cryptocurrency services are effectively unregulated but offer your services into the US, US still expects that you abide by US regulatory requirements. We've seen a number of cases over the years where US regulators and law enforcement agencies have taken action against the services that are doing just that and trying to access the US market from abroad and provide services into it covertly. And that's involved massive, massive fines for some of the companies involved and also, in some cases, seeing prison terms for individuals involved in running those companies. There's a message that consequences for doing so are potentially extremely severe. The aim of US regulators is to try to communicate that while you may think that you are saving your company money by not having to comply with the law, ultimately, you're going to pay. Because, you know, there are practical costs that come with complying with the law. You have to set up new rules that creates a certain amount of friction if you're having to ask their customers who they are and where they're getting their money from. You know, that slows down the customer experience, no doubt, to some extent. You might need to use certain automated compliance solutions, like the kind we provided, Elliptic, to comply with the law. So there's actual and real cost to complying. What increasingly regulators around the world are trying to do is to make clear that the cost of noncompliance will ultimately prove more substantial for your business than those costs that come with following the law.

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Speaker: Aidan Larkin

And what is that complaint around the cost of compliance? But banks don't have an option. Banks have to pay for compliance. My understanding is that the difference is, you know, banks are operating on a nine to five basis on an established century old ecosystem effectively that has been constantly layered and upgraded and has a lot of maturity. Whereas I could open a legitimate crypto exchange tomorrow, but I could have hundreds of thousands, if not millions of transactions. And if you have regulatory uncertainty around the world, it can lead to a lot of, we don't even know if we're breaking the law or not and to over leverage to fix everything. That's something I often hear in the industry is that the cost of trying to do this properly is almost so prohibitively expensive. You just wouldn't set up the business as all. And this is this fight between innovation and enforcement and trying to, you know, get the right culture so the technologies can be developed in a responsible way, but also making sure that it's not abused by bad actors. Like, how do you think the two things compare? People in the US, let's pick the US as a large entity, use offshore banking all the time deliberately to circumvent. Now people in the UK create offshore structures through legitimate companies that avoid tax, not a fiat. Isn't crypto just another, you know, iteration of the technology? Why do you think that crypto and you touch on this in your book, the scale of when crypto goes bad. Why is it that crypto is coming under such an examination versus, say, offshore banking?

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Speaker: David Carlisle

So, yeah, I guess, to the first part of your question around cost of compliance and the implications of that, there is a much larger debate that extends beyond what we're having around the appropriateness of the design of the anti money laundering regime and whether the things that financial institutions have to do to be compliant, whether banks or cryptocurrency exchanges or others, are really the most cost effective solutions. So, you know, there's a lot of sense in a lot of the financial services industry that there are lots of things that regulators ask of financial institutions to do as part of their anti money laundering programs that are effectively no more than a box ticking. Certain things you have to do to be compliant, collecting information about your customers, scrutinizing certain types of transactions, filing suspicious activity reports. And a lot of people have observed sometimes this becomes labor for us even if it's not always very effective. And so, you know, I think there are some general frustrations out there in the compliance industry about the sensible effectiveness of anti money laundering ledgers, that is certainly legitimate. And there's some well warranted criticism of aspects of the design of the anti money laundering regime. Having said that, there are certain basic standards that regulators expect businesses to have in place, even the notion of just undertaking even the most simplistic checks to understand who your customers are or to understand their purpose of business that are really fundamental components of the anti money laundering regime and where there is this long standing expectation that I don't think any new industry can expect to avoid and need to understand are gonna be part of the cost of doing business. Now you alluded to something there as well that I think is a significant and pervasive problem in the crypto space, which is the unevenness of rules around the world. So we still very much have this landscape where there is a significant difference in the scope and maturity of regulatory frameworks around crypto. So you have the US, for example, which has had regulation around crypto for over a decade now and has, I think, quite a well established, if perhaps frequently unclear, but fairly well established regulatory framework for crypto, at least around anti money laundering. And you have other jurisdictions that are newer to it. The European Union, the United Kingdom, a number of other jurisdictions like Singapore brought anti money laundering rules for crypto online about four years ago, so they're newer to it. And we're also seeing jurisdictions like South Africa and others that are starting to get those rules in place now. That's all very important, but those rules are at very different stages. And that can make it a challenge for firms that are operating in a global context, as you say, to understand what passes for good. I think increasingly, we have seen the cryptocurrency industry some instances to know what good looks like if we're having to deal with very different types and very incomplete regulatory regimes in different parts of the world all of the time. We are starting to see growing alignment, but that definitely does create a lot of challenges from a compliance perspective, especially for those firms that want to get it right. And I think, you know, some of them have been pointing out that we need more clarity faster from regulators so that we can get our own compliance arrangements in place in a way that doesn't punish those of us who want to be compliant and increases the burden upon us. To your second question about why is crypto getting so much scrutiny, maybe we'll come back to this point a little bit. One of the reasons that there's been a lot of scrutiny around crypto is the very novel, complex technology. There are also a lot of myths about crypto, like the myth that crypto is completely anonymous. Again, a topic we might come back to a bit, which tends to attract a lot of attention around it. I think some of the myths and misconceptions tend to create, you know, quite a bit of hype sometimes in the debate around the illicit use of crypto.

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Speaker: Aidan Larkin

Never let the truth get in the way of a good story.

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Speaker: David Carlisle

Yeah. But having said that, over the past decade, and I think one of the motivations for me writing my book is we have seen a really significant change in the way that illicit actors have been utilizing the technology. Illicit landscape around crypto and the manner in which money laundering is conducted in the crypto space has been becoming substantially more complex over the past decade as the technology has grown, as the technology has evolved, as more and more people have started using it, as more and more people start using crypto, it becomes almost inevitable that it's going to be used, at least in absolute terms, on a larger scale. Over the past decade, we've seen certain illicit actors like North Korean cybercriminals start to exploit the technology to do things like evade sanctions and potentially fund North Korea's weapons programs. We've seen crimes like ransomware, criminals infect computer systems of critical infrastructure and demand Bitcoin usually as ransom payments to store access to the systems. We've seen that become a billion dollar business. I think the vast majority of illicit activity around the world continues to occur through the formal banking sector, through methods, like you said, offshore banking, there are still serious crimes that are committed using cryptocurrencies. Policymakers around the world take that extremely seriously. Because it is a new technology and it is quite complex, policymakers around the world, regulators around the world have really been racing and working very hard to try to understand this technology. And I think they're sometimes driven by an anxiety to some extent that this is a technology that's moving and evolving so rapidly that if we don't give it a lot of attention, it could achieve a scale of illicit activity that's truly much more concerning. So there's real concern there that motivates some of the attention that it's getting that may seem disproportionate at times. But, you know, obviously, policymakers take some of those underlying illicit activities very seriously, and they're going to act against them where they see them happening.

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Speaker: Aidan Larkin

I think the book does an excellent job at that tracking the evolution of crypto being used in laundering. And we saw in the early days, it's almost like, boom, it's the sophistication of anything. Back in the Wild West frontier days, feeling gold was just running up alongside a train, taking out the conductor, and grabbing the gold, and then distributing it to your friends. Whereas, nowadays, a gold heist will involve hat and garden style planning. It will involve money laundering and fencing. It will involve how you layer and get that back into the ecosystem in a wide network of enablers. If we can stick with that evolution theme, people that are tracking crypto and asset recovery see the big headlines around things like the use of mixers. They keep hearing, like, North Korea. Give us the 101 just on mixers on the illicit use case and the argument for the legitimate use case. And what is the sort of scary version in your eyes? Like, the cost of doing nothing. Some people see these big nation state actors and that. And what can that look like if we, as a global community, don't take this threat seriously enough? I'm just interested to hear your thoughts on the evolution of things.

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Speaker: David Carlisle

Yeah. Maybe practically, it helps to kind of go back in time a little over a decade ago to what was really the first really significant case involving Bitcoin and illicit activity, which was the case of the Silk Road. I think it case probably familiar even to some people who are newer this topic. And the Silk Road was a dark web market that was established so that a market that operates on hidden as it were components of the Internet where it's possible to obscure your identities. And it was established in 2011 by an individual named Ross Ulbricht, who's a guy based in the US, who wanted to establish a marketplace where individuals could buy and sell drugs. To make that possible without being caught by police, you need some sort of payment mechanism that would allow you to receive funds outside of the banking sector. Don't want banks seeing transactions that you're facilitating related to selling illicit items, so you need some way to do that more anonymously. The Silk Road, having been launched as marketplace for buying and selling drugs, was just two years after the launch of Bitcoin. And Ross Ulbricht, its founder, decided to try to employ Bitcoin, this new technology that was ostensibly created to allow individuals to transact outside of the banking sector as a way of facilitating and growing his marketplace. Another feature that Ross Ulbricht looked to about Bitcoin in addition to it allowing to allow us peer to peer transactions outside the banking sector, was its supposed anonymity. Bitcoin was touted as, at least upon its creation, is providing a private way of transaction digitally because users of Bitcoin transact using pseudonymous addresses. If you've ever used Bitcoin before, you'll know that you're given a you create a Bitcoin wallet and you transact through addresses that are just alphanumeric strings, sort of a, b, c, d, e, f, g. You're represented by just your wallet address, which, at least to the naked eye, just looks like a string of letters and numbers. So at least theoretically, the notion that was that Bitcoin would sort of work like numbered Swiss bank accounts, that you're getting that benefit of anonymity when you transact. And at least initially, when Ross Ulbricht launched the Silk Road, it seemed to be working very, very well for him. The Silk Road almost overnight became a massive marketplace for selling and buying drugs online, earning, you know, hundreds of millions of dollars, what would be the equivalent now of over a billion dollars worth of sales related to narcotics prohibited in the US. US law enforcement ultimately found out about this because a lot of the drugs were being sent through the post, and they were able to use some old fashioned law enforcement methods to track down the actual drugs that were being sent related to this website. And as they started investigating it, they saw that Bitcoin was the primary method of payment. And so law enforcement agents started buying and selling drugs using Bitcoin as part of their investigations. And what they soon discovered was that the supposed anonymity of Bitcoin that Ross Ulbricht thought he was getting wasn't really what it was caught up to be. And that's because transactions in Bitcoin and other crypto assets are recorded on what's known as blockchains or public ledgers where all transactions are recorded. Very technically complex at least in terms of how this all works. But, essentially, to have a kind of decentralized open peer to peer payment system, you need some sort of centralized truth where everyone can be certain of what's happening. In Bitcoin and other cryptocurrencies, you have these blockchains where all transactions are ported and where it's very, very difficult, or some might say next to impossible, to actually change the record so that everyone can operate from a single record of truth about what's been going on in the network. And as I mentioned, these ledgers, the blockchains are public, so anyone can view them. But when you view them with the naked eye, all that you're seeing are these alphanumeric addresses transact with one another. It doesn't really look like anything to the naked eye except funds being sent between unmarked accounts, anonymous accounts as it were. But what law enforcement agents in the US realized is that they could look to the pattern of transactions of the block chain as they were making their own sales and purchases to essentially build a picture of the transactions that the Silk Road was undertaking. And when they combined that intelligence with other intelligence through the comports of their investigations, they were able to track down Ross Ulbricht and then piece together a history, effectively, of all of the transactions the Silk Road had been undertaking to bring money laundering charges against him. And he was eventually sentenced to life imprisonment, charged with money laundering and other crimes, and the Silk Road was shut down. And so that case was quite an interesting one and really a landmark one because it showed that Bitcoin could indeed facilitate the growth of new environments for conducting illicit activity, but it also showed that criminals didn't get all the benefits of anonymity that they thought they would because there's this blockchains, these public ledgers where all transactional information being recorded and where intelligence from it can be used to support the prosecution of individuals conducting crimes that use crypto assets. It was sort of a really myth busting case in the sense that it busted the notion that Bitcoin is this perfect tool for criminals, this anonymous tool that anyone could use to hide, showed that the intelligence from the blockchain could be used to end successful prosecution. And the work we do at Elliptic, the company where I work now, is really about harnessing intelligence and data from blockchains to effectively build a map of when bad guys are utilizing this technology. So now it's quite routine that law enforcement agencies around the world will harness the sort of blockchain analytic solutions that we provide and companies like us provide to investigate illicit activity in crypto asset. Now criminals have become very aware that it's possible to conduct these investigations and that there are solutions out there that can enable the kind of routine investigation into money laundering and other crimes involving crypto and that the blockchain is actually quite transparent in terms of the public nature of transactions on the blockchain. Illicit actors, when they use crypto, have been taking a number of steps to try to make it harder to identify what they do. One of the techniques they've looked to to do that is using what are known as crypto asset mixers. Typically, on the blockchain, you have people transacting via pseudonymous addresses. But when you can link a particular individual to their address, for example, as I was describing, once law enforcement have accumulated other intelligence, can identify who's behind a particular Bitcoin address or set of Bitcoin addresses, you can then get a lot of information that clue you into their money laundering activity. And that's now fairly routine to do in a lot of ways just looking at the public blockchain. Cryptocurrency mixers try to make it harder to undertake that process by, well, effectively doing as they advertise. They take crypto assets from a lot of different users, they jumble them up, and they redistribute them so that the trail of activity on the blockchain is obfuscated. What we saw in the years after the Silk Road case is that as new dark web markets were created, as new markets for selling drugs were created, as you had crimes like ransomware springing up, there was a real demand in the crypto ecosystem for these services that would help you to launder your cryptocurrencies by essentially jumbling up your activity on the blockchain and making it harder to detect. And so what we saw were the rise of really industrial scale mixing services that would allow criminals to launder, in some cases, hundreds of millions of dollars or billions of dollars worth of funds. Law enforcement agents quickly became concerned about this. And what we've seen over the past, I'd say, five or six years especially, is a real campaign by law enforcement agencies in the US, Europe, and other jurisdictions to crack down on these mixing services. And so what we've seen increasingly is law enforcement agencies trying to identify the people who are creating these mixing capabilities that enable money laundering and cryptocurrencies and essentially dismantling them and arresting their operators. Actually, within the past week or so, there was a action, we're here in late April, against a service known as samurai wallet, which is a sort of mixing and privacy enhancing service that US authorities alleged was involved in laundering about two billion dollars worth of cryptocurrencies. US authorities did not shut that service down and arrested its two operators. So, you know, it is a bit of a cat and mouse game to some degree. One of the real stories, and I, you know, I hope this is something that comes through in my book, is that we've come a long way in a very short amount of time. It was less than two decades ago that Bitcoin was created. We've seen this kind of novel technology emerge and all these attempts by criminals to find ways to obfuscate what they're doing. But the fact that within a very short time of the Silk Road being created, you know, the first large scale marketplace where Bitcoin was being used, the illicit marketplace, at least law enforcement agencies were able to act against it and take it down, and we see them able to successfully take action against services like mixers. And obviously, that takes a lot of resource. It takes a lot of training. It presents real challenges for law enforcement agencies. But I do think it's important to understand that and recognize there are a lot of means at our disposal to act against illicit activity in this space. So even as we've seen actors coming into this space, like, say, North Korean cyber criminals who the relative degree of real sophistication relative to maybe sort of a lone actor like Ross Ulbricht when he set up the Silk Road. We do see a lot of successes as well. You know, I think there are challenges there, definitely, anytime you're dealing, especially with a new and rapidly evolving technology. But I have to say, ultimately, I remain quite optimistic that we can continue to evolve responses to the most significant risks in this space.

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Speaker: Aidan Larkin

And I think the both of us share that optimism, David, because that was precisely the reason I want to to talk to you and talk about sort of the crypto launderers in the book. I couldn't agree more. If we assess the traditional financial landscape and the progress it has made in the fight against global money laundering, I think that there's an argument that crypto has done better in a shorter period of time, and I think the technology enables that. Let's be clear. We're not all patting ourselves in the back in the private sector, for example. The technology that enables money laundering at scale, as you've sort of hinted at, blockchain analytic tools and blockchain intelligence. And combined with OSINT, I think a lot of people forget that ross.ulbricht@gmail.com written on an Internet forum was one of the key pieces of the puzzle that demystified the operator of Silk Road. You know, it was OSINT plus intelligence plus analytics. So I share your enthusiasm and optimism that the technology that can cause all of this pain and problems also within it contains the solutions to that. And I think that's why we're seeing in the asset recovery ecosystem, we're seeing these billion dollar seizures regularly. The last time you and I were on stage together with RUSI, we talked about the recent US billion dollar seizures. Now we've got billion time seizures in the UK as well. But again, when you strip them all back, they're money laundering cases involving digital assets. They're not crypto cases. They're people just looking for a gap. And if the gap in five years time is land and property again, they'll launder and land. But it's almost like we're playing that international whack a mole that as we shut things down, people just go to new methodologies. What do you think in terms of if you're updating the book in two or three years time, let's future gaze to sort of wrap things up. What do you think is coming down the line? Because we can guess that there was the evolution of mixers. Do you think that FATF and the new global standards is going to be the panacea? As much as I want you to write another new book in a couple of years' time, I seriously hope that it's not filled with even more tales of money laundering, because I hope that we actually set a bit of a blueprint as to how we tackle this. Where do you think it's all going ahead?

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Speaker: David Carlisle

The priority for the international community in particular really needs to be closing that gap we talked about earlier, where you still have a lot of jurisdictions around the world that are either not regulating crypto assets at all, are doing in a way that's insufficient, or are not enforcing those regulatory frameworks effectively because criminals will always tend to race to the lowest common denominator. They'll always set up shop in those places where they can get away with the most. As long as you have these continued gaps in the global regulatory framework around crypto, it's just going to make it too easy for criminals to launder funds even if we are seeing lots of progress in a lot of parts of the world. I think that really needs to be kind of the most basic bread and butter thing is to raise that standard. And there is a lot of debate and work going on at the FATF to try to encourage that process. It's very hard. I know at RUSI, in particular, the topic, how you get global organization like the FATF to actually raise standards globally and operating and having rules operating effectively around the world is a big topic of debate, one we can't solve here. But I do think that most basic thing is just really what needs to happen because as long as you have those gaps, it's just it's too easy for criminals to get away with what they're doing. In terms of what the picture of money laundering will look like, I think a lot of what we'll see over the coming years is changes to the money laundering landscape around crypto that are influenced by pretty novel technological changes that are operating both in and around the crypto space and alongside it. For example, kind of one of the most interesting developments around the crypto space is around the emergence of the metaverse, the notion that you could have these kind of self contained digital worlds that often involve virtual reality experiences. So, like, online gaming experiences, other kind of immersive digital experiences, where there's a possibility for cryptocurrencies to operate as kind of the primary means of payment. These new sort of digital environments present a lot of really challenging questions for regulators and policy makers. For example, what regulators or which law enforcement agencies have jurisdiction over or in a virtual reality world? How do you police that? How do you enter into it? You know, how do you identify the people who are operating within it? So those types of technologies, I think, certainly are gonna present some real challenges in terms of we see illicit actors increasingly interacting and operating in those types of environments. I think it's gonna present a lot of practical challenges for law enforcement agencies, but also for policy makers around the world and just how they'll deal with the emergence of these kind of novel new ecosystems. Additionally, we're starting to see the fusion and convergence of crypto and blockchain related technology with enhancements in artificial intelligence. And a lot of that potentially has, you know, legitimate uses. There's a lot of kind of exciting innovation that's going on in terms of how innovators in the AI space are looking to combine their innovations with things going on in crypto for a wide variety of use cases. But we all are just starting to see instances of illicit actors exploiting, say, artificial intelligence to perpetrate crimes in the crypto space. So for example, like ransomware attackers using artificial intelligence as a way of scaling their operations and making them more efficient. We also see criminals doing things like using AI to make more realistic false identification documents. So criminals are early adopters of new technologies, crypto AI, no matter what it is. And increasingly we're seeing them use these new technologies in tandem. So I think we will start to see over the coming years regulators and law enforcement agencies start to shed increasing light on where we see crypto intersecting with new technological developments like those in AI in particular. And needless to say, the rapidly evolving nature of those changes and those technologies is gonna present real challenges. But, you know, on the whole, I think I am optimistic that we can continue to find ways to fight back against this. Because I think as you noted, you know, the fact that less than two decades into the emergence of this new technology, we're already seeing multiple, multibillion dollar pound seizures of crypto assets is really quite remarkable. I think we have come a long way in a relatively short time. So it's important not to lose sight of that even as we counter inevitable challenges that the future will throw up to us.

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Speaker: Aidan Larkin

That's a perfect summary point for us to end on. We saw digital assets being abused in a transparent way. We reacted as a global law enforcement community that drove it into, say, more mix related activity. We started shutting that down. It's moved now into things like metaverse and AI. But as you say, dial back ten, twenty, thirty years every time there is an ecosystem that hasn't quite caught up yet, this is just the international law enforcement cat and mouse that will always take place. But I share your optimism that the tools and technology that exist on our track record to date show that if we're realistic about it, we'll just constantly keep picking up new threats, learning about them, shutting them down. New things will pop up, and it's a rinse and repeat cycle. So big shout out for me is to go and read. And this show is not affiliated or sponsored in any way by Crypto Lovers. This is purely just an academic shout out because I do like the fact that you very succinctly just summarized all the big cases that have sat behind the big seizures as well. So kudos for that, and we'll put the link into the show notes. And just left for me, David, to say thank you so much for your time in walking through this. You have an incredible background at being sitting in that public sector, now in the private sector, with the academic viewpoint. I look forward to getting the updated version in a year or so's time and coming back and revisiting all of our predictions we made.

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Speaker: David Carlisle

Thanks so much for having me. I really enjoyed the conversation.

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Speaker: Julia Bradbury

We're grateful to have David for sharing his time and insights For more information on the evolution of cryptocurrency policies. If you enjoyed for more information on the evolution of cryptocurrency policies. If you enjoyed today's conversation, please like and subscribe to Seize and Desist podcast on your preferred platform. Leave a comment and any suggestions for topics you'd like to hear in the near future. Join us next time for a special episode with Aidan from CoinDesk Consensus in Austin, Texas. Seize and Desist is brought to you by Asset Reality.

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Speaker: Lo Furneaux

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