A major piece from the Wall Street Journal, September 28:
A North Korean agent, a stolen-credit-card peddler and the mastermind
of an $80 million Ponzi scheme had a common problem. They needed to
launder their dirty money.
They found a common solution in ShapeShift AG, an online exchange
backed by established American venture-capital firms that lets people
anonymously trade bitcoin, which police can track, for other digital
currencies that can’t be followed.
Since bitcoin was introduced nearly 10 years ago, law-enforcement
authorities have worried the technology could ease money laundering. Now
a new breed of cryptocurrency intermediary is giving fresh urgency to
those fears, operating in plain view with scant policing and often
allowing users to engage in anonymous transactions.
A Wall Street Journal investigation identified nearly $90 million in
suspected criminal proceeds that flowed through such intermediaries over
two years.
Most operate beyond the reach of U.S. authorities, with unidentified
owners and addresses in places such as Eastern Europe and China.
Not ShapeShift, the largest recipient of the funds with a U.S.
presence. The company is officially registered in loosely regulated
Switzerland, but it is run out of a 1980s-era office building in a
Denver neighborhood packed with tech companies and marijuana
entrepreneurs. ShapeShift’s founder and chief executive, Erik Voorhees,
along with its chief operating officer and its marketing chief, all live
in the Denver area.
The company’s financial backers include Pantera Capital and
FundersClub in California and Access Venture Partners in Colorado.
Partners with Pantera and Access said their legal reviews satisfied them
that ShapeShift is operating within the law. FundersClub and its
partners didn’t respond to messages seeking comment.
A parade of suspected criminals has taken advantage of ShapeShift’s
services since the exchange began in 2014, according to law-enforcement
officials, independent researchers and the Journal’s investigation.
After hackers believed to be from North Korea extorted
millions of dollars in the so-called WannaCry ransomware attack on
businesses and governments, the criminals used ShapeShift to convert
bitcoin into an untraceable cryptocurrency called Monero, security
researchers found. For the next year, ShapeShift made no changes to its
policy of not identifying its customers, and continued to process
millions of dollars in criminal proceeds, according to the Journal
investigation.
Many cryptocurrency exchanges say they follow federal rules intended
to combat money laundering, even though the question of whether they are
subject to them hasn’t been tested. They keep records of their
customers’ identity and monitor transactions to root out and report
suspicious activity.
Mr. Voorhees has long scoffed at such constraints. “I don’t think
people should have their identity recorded to catch an occasional
criminal,” he said in a May interview.
Bitcoin and other cryptocurrencies are based on software that acts as
a digital ledger maintained across thousands of computers. The ledgers,
or blockchains, for most cryptocoins are publicly viewable, and allow
people to track the movements of coins from one anonymous online account
or wallet to the next. That anonymity can be broken, though, when a
criminal trades bitcoin for dollars. Bad actors must therefore figure
out a way to erase traces of their crimes from their currency’s digital
trail.
To examine the scope of crypto money laundering, the Journal built
computer programs that tracked funds from more than 2,500 suspected
investment frauds, hacks, blackmail schemes and other alleged crimes
that used bitcoin and Ethereum by analyzing the currencies’ underlying
software.
The Journal’s analysis—which encompassed only a narrow slice of
suspected criminal behavior involving cryptocurrencies—identified $88.6
million laundered through 46 exchanges. Many alleged perpetrators are
unknown or on the run. Some were arrested. A small portion of the money,
less than $2 million that the Journal identified, may have been seized
by law enforcement in a few cases, though court filings don’t list
precise amounts.
The Journal found that ShapeShift processed nearly $9 million of the
suspect funds, more than any other exchange with U.S. offices.
The Journal provided ShapeShift with a list of the suspicious
addresses it found using the exchange. In response, Veronica McGregor,
who joined ShapeShift last month as its chief legal officer, said the
company reviewed those addresses and banned them from using the
exchange.
Ms. McGregor also said ShapeShift plans to start requiring users to
provide identification starting Oct. 1. She said the company is doing
that to “de-risk” itself in the face of potential new regulations and
abuse by criminals, “not in response to any regulatory enforcement
action.” She said the company plans to start monitoring for and
reporting potential money laundering....
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MUCH MORE
