A cryptocurrency is a type of digital asset designed to serve as a means of exchange by using cryptography to secure transactions and limit the creation of new currency units. Because of their anonymity, cryptocurrencies like the Bitcoin have made it easier for shadowy illegal activities to flourish. Smart contracts, which serve as a "middle-man" in transactions to ensure that trades are fair, are used by more recent cryptocurrencies like Ethereum to ensure that transactions are fair. Programs created in Turing-complete cryptocurrency programming languages are referred to as smart contracts. Even though these smart contracts result in several beneficial services, there are concerns that they promote criminal activities because of their flexibility. This paper is intended to show how smart contracts of cryptocurrencies affect illegal activity.
Effects of smart contacts
Cryptocurrencies such as Bitcoin have removed the necessity of trusted third parties to facilitate monetary dealings and resulted in pseudonymous transactions. Despite the fact that such virtual currencies are attractive to a broad range of applications, they have a dark side, which has raised concerns. Their anonymous nature has triggered the growth of illicit commerce, money laundering, and ransomware, as shown by the ill-famed Silk Road. It also makes it hard for the authorities to trace perfect crimes like kidnapping (Juels, Kosba and Shi). A fair exchange allows distrustful criminal parties to carry out transactions successfully, removing the need for the current fragile reputation systems or law-enforcement-infiltrated intermediaries. It minimizes interactions between individuals during transactions thus it is hard for law enforcement agencies to track or monitor illegal activities. In some cases, criminals set contracts and walk away, and the contract still executes autonomously without further interaction (Carlisle).
The smart contract systems of cryptocurrencies are pseudonymous and offer more secrecy that enhances criminal activities. The development of new cryptocurrencies that make use of smart contract systems facilitate new underground communities and ecosystems. According to research, the FBI could not locate most of Dread Pirate Roberts’ Bitcoin holdings after they had seized his laptop since it is very hard to deanonymize transactions in various mixes. Furthermore, the “Know-Your-Customer” principle, which is the primary tool that regulators use to combat money laundering is hard to enforce in virtual currencies such as cryptocurrencies. More and more practical plans to use NIZK proofs for secrecy in cryptocurrencies, some designed for commercial purposes, promise to make more anonymous systems available to criminals (Juels, Kosba, and Shi). The anonymity of smart contract systems used in cryptocurrencies has facilitated several criminal activities globally. For example, anonymous criminals have been placing explosives in crowded places such as chains of supermarkets and demanding for massive amounts of bitcoin ransoms for them not to detonate the bombs. Police keep receiving demands for bitcoin ransoms, or else planned attacks would be executed (Juels, Kosba and Shi).
More innovations in virtual currencies have led to the introduction of new cryptocurrencies like Ethereum, which is superior to Bitcoin. It is a fully distributed system, which allows a general fair exchange, known as atomic swaps, and thus makes sure that payments are successfully made for services offered and data delivered. That is because they support smart contracts. Without a doubt, this feature makes the most recent forms of cryptocurrencies stimulate criminal activities. Smart contracts, which encourage criminal activities in distributed smart contract systems are known as criminal smart contracts (CSCs). One of the most common forms of CSC is the smart contract used for theft of private-key. This kind of CSC facilitates the confidential provision of a target key, such as the private digital signature key of a certificate authority (Juels, Kosba and Shi).
Security experts put forward that the use of smart contracts in cryptocurrencies is likely to help terrorist groups to finance terrorist attacks since they are advancing technologically. Smart contracts can be a very useful tool in purchasing illegal explosive materials and firearms on the dark web, processing of travel documents of the individuals supposed to carry out the attacks and facilitate other terrorist operations. They affirm that these contracts are the most promising blockchain innovations and have the capacity to simplify agreements as well as assets transfer among parties taking part in a transaction. Besides, they are self-executing agreements that are based on a blockchain, which helps the concerned participants to agree on particular terms and consequently make payments upon execution of pre-agreed plans. One potential financial crime situation involves drug cartels using smart contracts to make arrangement for payments upon delivery of drugs. Criminal gangs can also use smart contracts to help them arrange for payments after carrying out assassinations. Human trafficking networks can also use these contracts to enhance their human-trafficking activities (Carlisle).
Smart contracts facilitate such unlawful activities since they support money laundering in large scale. Money laundering that involves cryptocurrencies regularly occurs via two primary methods. First, money launderers deliver dirty fiat currency into financial institutions and banks, convert the funds into virtual currency using virtual currency exchange, and take part in different purchases or transfers based on cryptocurrencies to obscure the criminal origin of the funds. The second method involves the selling of illegal services or goods for virtual currencies, converting the funds received to fiat currency, and consequently funding purchases and transactions intended to hide the illegal sources (Carlisle).
Smart contracts on virtual cryptocurrencies enable fraudsters to carry out fraudulent activities during transactions. These criminals usually take advantage of the immutability of the blockchain technology – it is impossible to terminate or reverse a transaction that has been confirmed the way banks or credit companies usually cancel or reverse transactions. The fraudsters may choose not to deliver goods or deliver faulty or counterfeit goods after receiving payments and go scot-free. The pseudonymous/anonymous nature of the cryptocurrencies enables swindlers to operate under unknown identities in the online marketplaces and carry out fraud successfully. Besides, the authorities cannot track such activities.
Smart contracts help perpetrators of cybercrime to launch malicious attacks on the mobile devices, computers, and servers of many organizations such as hospitals, retailers, banks, hotels, and schools globally and demand a large ransom. They launch malicious programs, which encrypt customer or patient data or other sensitive information on these devices and ask their victims to pay ransom for them to decrypt the data. In a recent incident, cybercriminals launched malicious attacks on an Australian hotel’s electronic key system, locked all the doors and demanded a bitcoin ransom of $1,800 to unlock the doors. According to Carbon Black, a security analysis firm, the amount of money that companies paid cybercriminals in ransomware payments increased from $24 million in 2015 to $850 million in 2016 (Carlisle). This kind of criminal activity has been in existence for over two decades and has rapidly grown because the criminals can hide their identities and receive large amounts of money. The features of smart contracts help them to overcome the risks of capture, which accompany the arrangements involved in delivering ransom payments. Therefore, many criminals usually commit cybercrime and get away with it. The FBI reports that the number of unlawful activities has been increasing rapidly due to the anonymous features that smart contracts provide (Carlisle).
Even though blockchain smart contracts have benefited many criminals, the scale of criminal activities enhanced is tiny as compared to the regular, cash-based crimes. That is because using smart contracts in transactions is hard. Indeed, understanding the terms of smart contracts properly and writing a smart contract requires highly specialized programming skills, which many individuals and organizations lack.
Conclusion
While the popularity of the blockchain technology has been gradually increasing due its capacity to transform a broad range of industries, criminals have been able to use its smart contracts to promote criminal activities in cryptocurrency transactions. For example, these criminals take advantage of the anonymous nature of these smart contracts to carry out transactions to facilitate criminal activities such as money laundering, terrorism, cybercrime, human trafficking, drug trafficking, fraud, and assassinations. They can engage in these illegal activities, receive huge payments, and go scot-free. Moreover, the underlying technology has also hindered the authorities from monitoring the activities that involve smart contracts since it allows the parties to carry out transactions successfully and remain anonymous. However, the scale of these crimes is still low because most criminals find it hard to use smart contracts.
Works Cited
Carlisle, David. Virtual Currencies and Financial Crime Challenges and Opportunities . London: Royal United Services Institute for Defence and Security Studies , 2017.
Juels, Ari, Ahmed Kosba and Elaine Shi. "The Ring of Gyges: Investigating the Future of Criminal Smart Contracts." (2012).
