Exploring the use of Zcash cryptocurrency for illicit or criminal purposes Erik Silfversten, Marina Favaro, Linda Slapakova, Sascha Ishikawa, James Liu, Adrian Salas For more information on this publication, visit www.rand.org/t/RR4418 Published by the RAND Corporation, Santa Monica, Calif., and Cambridge, UK © Copyright 2020 RAND Corporation R® is a registered trademark. RAND Europe is a not-for-profit research organisation that helps to improve policy and decision making through research and analysis. RAND’s publications do not necessarily reflect the opinions of its research clients and sponsors. Limited Print and Electronic Distribution Rights This document and trademark(s) contained herein are protected by law. This representation of RAND intellectual property is provided for noncommercial use only. Unauthorized posting of this publication online is prohibited. Permission is given to duplicate this document for personal use only, as long as it is unaltered and complete. Permission is required from RAND to reproduce, or reuse in another form, any of its research documents for commercial use. For information on reprint and linking permissions, please visit www.rand.org/pubs/permissions. Support RAND Make a tax-deductible charitable contribution at www.rand.org/giving/contribute www.rand.org www.randeurope.org III Preface Cryptocurrencies are currencies that only exist decision making through objective research digitally, usually have no central issuing or and analysis. RAND’s evidence-based regulating authority, and rely on cryptography publications do not reflect the opinions of its to prevent counterfeiting and fraudulent research clients and sponsors. transactions. While today they are increasingly This report should be of interest to used for legitimate purposes, cryptocurrencies criminologists, law enforcement professionals, have also attracted the attention of individuals policymakers, regulators and others with an and organisations that are engaged in criminal interest in cryptocurrencies. or illicit activities both on and off the dark web. To inform public debate, this report explores For more information on the study, or RAND, the illicit or criminal use of cryptocurrencies, please contact: with a particular focus on Zcash. Erik Silfversten This independent research study was Senior Analyst sponsored by the Electric Coin Company RAND Europe (ECC)—the creator of Zcash. It was conducted Westbrook Centre, Milton Road by the not-for-profit research institute Cambridge CB4 1YG RAND – comprising both RAND Europe and United Kingdom the US-based RAND Corporation. RAND [email protected] is an independent, non-partisan research www.rand.org organisation that helps to improve policy and V Summary This measured and evidence-based study proportional and evidence-based response evaluates the potential risks and benefits is required to balance the potential risks and of new and existing cryptocurrencies. A benefits of novel cryptocurrencies. cryptocurrency is a form of currency that Within this context, the Electric Coin Company only exists digitally, usually without a central (ECC) commissioned not-for-profit research issuing or regulating authority, and which relies institute RAND – comprising both RAND Europe on cryptography to prevent counterfeiting and the US-based RAND Corporation – to and fraudulent transactions. The creation undertake a study exploring the use of its Zcash of cryptocurrencies has been recognised cryptocurrency for illicit or criminal purposes. as a promising financial innovation and a Zcash is a digital currency invented and built potential new vehicle for increased economic with the stated aim to ‘empower everyone freedom and opportunities, including with economic freedom and opportunity’. facilitating global remittances and payments, Since its launch in 2016, Zcash has become preventing unlawful seizures of wealth, and supported by several regulated exchanges and helping to hedge against hyperinflation of providers, including New York State Department local currencies.1 However, cryptocurrencies of Financial Services-regulated Gemini, have also been subject to criticism and Coinbase and Bitgo.3 The study focused on two recognised as a potential vehicle for fraud, overarching aspects to examine the evidence organised crime and other illicit activities base on: if the underlying technologies are not appropriately implemented and managed.2 • How cryptocurrencies may be used for While there are widespread suspicions of the illicit or criminal purposes, and how this use of cryptocurrencies for illicit purposes, the use materialises. specific nature and scale of the connections • To what extent Zcash is used for illicit or between cryptocurrencies and criminal or illicit criminal purposes, and how such usage use remain poorly understood both in research compares with other cryptocurrencies such and the wider public awareness. As such, a as Bitcoin, Ethereum, Litecoin and Monero. 1 Leonard & Treiblmaier (2019), Dorofeyev et al. (2018). 2 Foley et al (2019), Aldridge & Décary-Hétu (2016). 3 See https://z.cash/ VI Exploring the use of Zcash cryptocurrency for illicit or criminal purposes The research included an extensive literature While the majority of transactions made with review of academic sources and news reports virtual coins are legitimate, this study has on cryptocurrencies and their illicit uses, as shown that cryptocurrencies are also used well as key informant interviews with a range for a wide range of illicit or criminal purposes of academic and industry cryptocurrency by a diverse group of malicious actors. Most experts. In addition, the research team also commonly this includes: collected and examined primary data on dark 1. Money laundering: Though national web4 marketplaces and forums in order to currencies and other digital technologies identify ways in which cryptocurrencies are present equal if not greater money used for or in support of illicit activities, as well laundering challenges, cryptocurrencies as to identify the nature and estimated scope are often perceived to represent attractive of the illicit use of Zcash compared to other opportunities for money laundering. This cryptocurrencies. Finally, factors that may is due to their decentralised and (pseudo-) influence future illicit use of Zcash were also anonymous characteristics. In contrast identified and examined. to conventional mechanisms, the benefit of cryptocurrency money laundering, or Research into the use of ‘cryptolaundering’, is that it circumvents cryptocurrencies for illicit or geographic constraints and exploits the criminal purposes highlights its gaps or overlaps between heterogeneous suitability for money laundering, regulatory frameworks. trade in illicit goods and services, 2. Trade in illicit goods and services: The and terrorism financing advent of dark web marketplaces has offered sellers of illicit goods and services Research into the illicit or criminal use new distribution channels that enable of cryptocurrencies is fundamentally them to transact with customers globally challenged by the intrinsic characteristics of online. These marketplaces have been cryptocurrencies, and the concealed nature of found to offer a wide range of goods and the dark web in general and of many criminal services in exchange for cryptocurrencies, activities in particular. Data are oftentimes including drugs and controlled substances, difficult to access or insufficient, marketplaces explosives and weapons, ivory and wildlife may be taken offline due to law enforcement trafficking, antiquities, and child sexual action, and privacy-preserving technologies abuse material. Dark web marketplaces may render users, transactions or other additionally offer opportunities to purchase activities anonymous. By definition, too, the a wide range of online ‘crime-as-a-service’ most successful illicit or criminal uses of and cyber products such as exploit kits, cryptocurrencies or any other technology will Distributed Denial of Service (DDoS) be those that escape detection altogether by services, or phishing tools. victims, law enforcement and the research 3. Terrorism financing: The use of community. cryptocurrencies in terrorism financing 4 The dark web is a part of the Internet that is not indexed by search engines. Specific browsers like Tor are required to access dark web sites, which contain anonymous message boards, online marketplaces for the purchase of illicit goods and services, exchanges for stolen financial and private data, and other illegal content. VII has been a growing concern for regulators due to their purported anonymity-preserving and for wider counterterrorism efforts. features, there has been little research or A number of terrorist organisations have evidence to substantiate this claim. been reported to have increased their This study explored how and the extent to interest in cryptocurrencies and to have which Zcash is used for illicit or criminal used cryptocurrencies for soliciting funds purposes (i.e. the scope, scale and nature of from sponsors and supporters. Partly, this phenomenon). In doing so, a number of the use of cryptocurrencies represents a key findings emerged: new method of moving funds in a faster, more anonymous and global way that may • Zcash is relatively unknown in the be less constrained by international and academic research community and national Anti-Money Laundering (AML) the links between Zcash and illicit or and Countering the Financing of Terrorism criminal activities