Crypto Concerns Sending Shivers Down Our Spines

Crypto's Final Chapter

PayPal's Impact on Shifting the Crypto Discussion in Washington D.C.

For some time, the involvement of cryptocurrencies in illicit and ambiguous drug transactions appeared to be overlooked or not given the level of attention it deserved. This situation has both positive and negative implications for an industry that is striving to distance itself from its early connections with the Silk Road online marketplace, which was shut down by the authorities in 2015.

It is beneficial since people often tend to judge drug use morally, and if cryptocurrency is less associated with general criminal activities, the overall industry will suffer less from stigma. However, it could be argued that it would be even better to be transparent about such issues (assuming they exist, as current data suggests), if cryptocurrency ever aims to find a compelling use case or attract a large user base that comprehends the significance of blockchains.

U.S. Senator Elizabeth Warren (D-Mass.) is advocating for an intensified crackdown on cryptocurrencies, citing recent research from blockchain analytic firms Chainalysis and Elliptic. The research reveals that bitcoin and tether (USDT) have become crucial components in the global fentanyl trade. Interestingly, these are the same research companies that regularly publish annual reports demonstrating that only a small fraction of crypto transactions are associated with illicit activities.

“Crypto is helping fund the fentanyl trade, and we have the power to shut that down,” Warren said. “It's time.” The Senator is a long-time critic of crypto, who recently made an incomprehensible “anti-crypto army” campaign part of her re-election bid.

Does the Senator have a point?

I am already aware of the anticipated response from crypto enthusiasts: Chainalysis has estimated that less than 1% of all crypto transactions are connected to illegal activities. Therefore, they argue that it is insignificant even if Chainalysis now presents evidence indicating that at least $37.8 million worth of cryptocurrency has been sent to drug manufacturers in China since 2018.

Let's pause for a moment and revisit that idea later. First, let's attempt to contextualize the alleged utilization of cryptocurrencies for drug sales within the broader scope of the global drug trade.

Initially, assessing the scale of the fentanyl economy proves challenging due to its inherently clandestine nature. However, in order to provide significance to the figures presented by Chainalysis and Ellipse, it is imperative to consider the context. As per Chainalysis' reference to a particular source, China, widely regarded as the primary producer and exporter of illicit drugs in the black and gray markets, recorded chemical exports exceeding $100 billion in 2021 alone.

However, upon examining the webpage, it seems evident that the mentioned figure pertains to the entirety of chemicals exported from China, encompassing not just substances with recreational effects but also those utilized in medical prescriptions, household cleaning, and various other purposes. To avoid sounding overly speculative, it's important to acknowledge that chemistry is inherent in the human body and the natural world as a whole. Thus, it constitutes a broad and diverse category.

More context: In 2022, the U.S. Customs and Border Protection (CBP) reported an unprecedented seizure of 14,700 pounds of fentanyl. Considering its approximate street price of $1,500 per pound (bearing in mind that the actual dosage is measured in milligrams or micrograms, depending on the specific fentanyl analog), this amounts to slightly over $22 million worth of the synthetic opioid that would have otherwise been sold on the market.

However, similar to the instance when the success rate of WWII planes was evaluated solely based on the ones that returned from a bombing campaign, this figure exhibits selection bias. While the U.S. government can account for the pounds of fentanyl it manages to seize, it cannot track the quantity that evades its detection.

In different sources, the estimated value of the global illicit drug trade varies widely, ranging from tens of billions to hundreds of trillions of dollars. However, it is crucial not to fixate solely on these figures but rather to recognize that Chainalysis' estimation is likely influenced by various factors that are always at play when attempting to determine the exact value of something.

The drug industry encompasses a wide range of activities, including the cultivation, manufacturing, distribution, and sale of illicit substances, although the extent of its inclusion depends on one's perspective. The headline figure provided by Chainalysis, which amounts to $37.8 million, has significant limitations in terms of its scope. This value is derived from a predictive model that relies on the presence of four identified establishments in China that sell fentanyl precursors (which are not the actual drugs but can be considered a reasonable proxy).

Put simply, this information provides very little insight into the extent of cryptocurrency's involvement in the worldwide drug trade. It barely scratches the surface when it comes to understanding how crypto is utilized within the fentanyl industry in a single country.

I have previously contended that Chainalysis' frequently cited claim that "less than 1% of crypto transactions are connected to crime" is probably incomplete. This assertion is derived from a subset of addresses that the analytics company is able to identify, or a probabilistic mapping of addresses. Consequently, there is the possibility that alphanumeric public keys, which remain unidentified, are excluded from the calculation. I believe this might be the reason why Chainalysis often revises its reported statistics, as it continuously maps additional crypto addresses, providing a more accurate assessment of the extent of illicit activity.

To the best of my knowledge, the company does not openly disclose the exact percentage of crypto addresses it can connect to known entities. I have personally inquired about this matter, but I did not receive a detailed response. However, it is understandable why the company maintains such discretion. Revealing this information would not align with its corporate interests since Chainalysis primarily sells its analytics technology and expertise to governments and corporations seeking comprehensive insights into the blockchain.

Chainalysis is often met with disdain by many individuals in the cryptocurrency community due to its role in undermining people's privacy. However, what holds greater significance is the fact that Chainalysis has effectively debunked the notion of on-chain privacy. There was a period, as I've come across in my readings, when people genuinely believed that Bitcoin offered a means of conducting private transactions online. This belief, however, could not be further from reality.

Being transparent about the industry and acknowledging the limitations of this technology is crucial for the crypto world. It is important to openly address the role of cryptocurrencies in online drug markets instead of trying to conceal the truth.

On a personal level, it is evident that nearly all mainstream online drug marketplaces now provide the option to make payments using cryptocurrencies. In fact, some even incentivize the use of crypto by offering discounts on purchases made through this method. It's common knowledge that there are individuals whose initial experience with bitcoin involved buying marijuana or counterfeit identification. It is highly likely that the majority of these transactions are not included in the data analyzed by analytics firms. However, as regulations such as know-your-customer (KYC) and other data surveillance and sharing protocols are implemented, this situation may undergo changes.

None of this implies that crypto plays a superior role in the contemporary illicit drug industry, nor does it imply that it should be specifically targeted as Senator Warren suggests. If crypto were not being utilized, another form of payment technology would be adopted. Similarly, some have erroneously claimed that crypto is facilitating a surge in ransomware attacks, but the increase in online drug markets, online crime, and crypto are all indicative of a broader narrative: the escalating usage of the internet.

Remember: Due to the permanent nature of on-chain transactions, it is advisable to refrain from using cryptocurrency for illicit activities, despite its occasional involvement in criminal actions.