The criminal and political risks of digital currencies

Digital currencies have attracted the attention of everyone from government regulators and major businesses through to organised crime syndicates and rogue states, bringing criminal and political risks.

Executive summary

  • One of the most prominent technologies in the past year has been the digital currency market and its accompanying technology known as blockchain.
  • Its exponential growth has attracted global attention, from government regulators and major businesses to organised criminal syndicates and lone hackers.
  • While its high investment risks are well-documented, this report seeks to analyse the political and criminal risks that lurk within this new system of digital transactions.


Bitcoin, the first decentralised cryptocurrency, began operating in January 2009 and remains the dominant and largest cryptocurrency in terms of market capitalisation. Apart from Bitcoin, more than a thousand other cryptocurrencies have emerged, such as Ethereum and LiteCoin. At the heart of these cryptocurrencies is blockchain, a type of public distributed ledger that allows participants in a specific network to transfer digital files and verify the integrity of the database without relying on a central authority. Each participant can independently audit the database at a specific moment. Proponents of blockchain extol its benefits as a crime-fighting tool. Its key innovation is the creation of a transparent, auditable log of transaction records. Several benefits associated with this include the elimination of unauthorised transfers and fraudulent activities as participants can immediately identify and reject data irregularities. Though the users of blockchain are anonymous, all transactions are traceable, thanks to their unique digital footprint. Any updates to the database must receive consensus approval from participants. This can improve transparency and accountability in supply chains to streamline business processes.   New developments have largely separated the currency from the technology. In the art and diamonds markets, blockchain is already being used to secure provenance. This has reduced the trade in conflict diamonds and created a process to track the transfer of ownership of artworks. U.S. retail corporate Wal-Mart Stores and U.S. financial services company Visa are testing blockchain to streamline their supply chains, speed up payments and store records. U.S. technology firm IBM was one of the first big companies to move into the sector, seeing opportunities for supply chain security in sectors from shipping to food safety. Meanwhile, cryptocurrency is experiencing huge volatility in 'exchanges', where they are bought, sold and traded. However, digital currencies are also being used for a number of illegal activities, both by nation states and criminal groups. This carries political and reputational risks for legitimate entities seeking to harness the new technology and payment methods.

Dark markets


While governments recognise the potential positive applications of blockchain technology, national regulators tend to view the combination of using blockchain with digital currencies with suspicion. This is because the anonymity given by the blockchain could allow money-launderers to hide their transactions or to access cash. However, the European Commission found that the threat of money-laundering through virtual currencies is currently overstated: to launder money in this way requires a high level of technological expertise. It appears that criminal groups within the E.U. still lack the ability to master the technology. Nonetheless, this will not remain the case, as organised criminal groups are generally highly innovative; a recent police operation revealed that a family within the Italian 'Ndr'ngheta had been encrypting spoken and written communications. Encrypting transactions is a likely evolution.

Illicit goods

Digital currencies can be used for simpler criminal means. Australia blames virtual currencies for a rise in organised crime, claiming that criminal syndicates use Bitcoin and its rivals as tender for illicit goods. Silk Road, the world's first darknet market, ran on Bitcoin. This is currently the key crime risk associated with using cryptocurrency. Businesses could face mounting reputational risk merely through their association with virtual currencies that are being used to purchase illegal goods such as weapons and narcotics.

Pyramid schemes

Virtual currencies have also become the focus of a number of Ponzi schemes targeting unsuspecting customers. Fraudulent cryptocurrency exchange platforms generate returns for older investors from the funds contributed by the newest investors. The U.S. Securities and Exchange Commission (SEC) issued an alert warning investors of unregulated trading platforms in which potential investors are promised high returns in a virtual currency after buying into the scheme with a conventional currency. In 2016, an American man was found guilty of running a USD4.5 million Ponzi scheme, in the first ever SEC cryptocurrency prosecution. Law enforcement agencies are particularly concerned by initial coin offerings (ICOs). An ICO typically involves selling units of a digital platform, rather than stakes in a company, to raise funds for a project. Though in itself an ICO is not a pyramid or Ponzi scheme, it is a highly unregulated process and carries with it a high financial and crime risk. Many unsuspecting would-be investors are vulnerable to investing in a cryptocurrency with a much lower value than the broker claims. To some, including the central bank governors of Russia and Kenya, virtual currencies themselves are pyramid schemes, due to their unregulated nature. This suspicious attitude is likely to prevail over the long term, and regulation will likely lag far behind the development and usage of cryptocurrencies.

State-backed efforts

Proponents of digital currencies commonly praise its anonymity, transparency and efficiency. Apart from using it as a payment mode, governments and individuals in politically isolated countries also recognise that they could capitalise on these benefits in other ways.


During Zimbabwe's military coup, which ousted long-time dictator Robert Mugabe on 14 November 2017, the country's primary Bitcoin exchange Golix traded at 50 per cent higher that week than the preceding week. In the past year, locals had turned to digital currencies as a way of hedging against the country's currency volatility, since acute shortages of U.S. dollars began in late 2016. Zimbabwe abandoned its currency in 2009 in favour of U.S. dollars, after hyperinflation rendered the Zimbabwean dollar worthless a year earlier. Close to a decade later, public and international confidence in the country's currency system remains weak, and many locals continue to worry that the central bank does not have sufficient reserves of gold, given that it does not publish its currency reserves. In this case, cryptocurrencies play a similar role to gold, which has been the traditional asset of choice to hedge against inflation. While cryptocurrencies tend to be more volatile than fiat currencies, many still regard them as safer than traditional options as they are not subjected to arbitrary government price regulations. As cryptocurrencies can be bought almost instantly, they can be stored and accessed more easily than gold. It is therefore likely that populations in other politically and economically unstable countries could adopt similar strategies by increasing their demand for cryptocurrencies to hedge against political turmoil.

Sanctions evasion

Other countries recognise the decentralised nature of crypto-transactions and seek to utilise them as a way to bypass economic embargoes imposed by foreign powers. In crisis-hit Venezuela, U.S. sanctions introduced last year against its oil sector have severely limited its ability to trade in the global market. To circumvent the sanctions, the Venezuelan government now plans to issue a new oil-backed 'petro' cryptocurrency. Meanwhile, the internationally isolated regime of North Korea reportedly amassed cryptocurrency to earn foreign cash in the second half of last year, as the international community increases sanctions against its nuclear and missile programmes. Its actions have ranged from outright stealing to mining cryptocurrency, the process by which transactions are verified and added to the public ledger.


The efficiency of blockchain transactions also means that a large sum of money can be raised in a short period of time. The government of the Georgian breakaway territory of Abkhazia is currently working with a consulting firm to raise the ambitious sum of USD1 billion in an ICO. As an isolated and largely unrecognised state with little recourse to financial or economic support, Abkhazia sees more benefits than costs in a risky ICO. These projects are still in their infancy, and therefore, it is still too early to tell the limitations or successes of such efforts. They are, however, unlikely to resolve the fundamental issues facing these economies, or replace hard cash or central banks anytime soon.