Non-KYC entities are gateway for illicit activities – Research

The British National Bureau of Economic Research released its newest ‘Blockchain analysis of the Bitcoin Market’ with detailed analysis of the Bitcoin network and its main participants such as KYC and non-KYC entities.

According to the report, approximately 90% of transaction volume on the Bitcoin blockchain is not tied to economically meaningful activities but is the byproduct of the Bitcoin protocol design as well as the preference of many participants for anonymity.

“Because the Bitcoin blockchain is a public ledger, all payment flows between addresses are perfectly observable.

“Therefore, many Bitcoin users adopt strategies designed to impede the tracing of Bitcoin flows by moving their funds over long chains of multiple addresses and splitting payments among them resulting in a large amount of spurious volume,” the analysis said.

The research took a due diligence audit of the darknet market places explaining the highest volume entities interacting directly with darknet users are non-KYC exchanges, including Binance and Huobi which are two of the largest exchanges worldwide.

“Once the flows arrive at these exchanges, they get mixed with other flows and become virtually untraceable, and so can be sent anywhere afterward, even to exchanges that enforce KYC norms.” It added.

In contrast, the direct interaction of KYC exchanges, such as Coinbase or Gemini, with the darknet marketplace such as Russian Hydra Market users, is modest.

Hydra, or example, has developed uniquely sophisticated operations, such as an Uber-like system for assigning drug deliveries to anonymous couriers, who drop off their packages in out-of-the-way, hidden public locations, commonly referred to as ‘drops,’ which are then shared with the buyers.

That way, no physical exchange is made, and unlike with traditional darknet markets, vendors don’t need to risk using the postal system.

BTC susceptible to risk when not following strict KYC norms

“But, their indirect interaction with flows originating from Hydra market is significantly larger since these flows are channeled through a network of short-lived clusters, solely created for the purpose of obfuscating the origin of these funds,” the research shows.

Furthermore, the analysis suggested that despite the significant attention that Bitcoin has received over the last few years, the Bitcoin eco-system is still dominated by large and concentrated players, be it large miners, Bitcoin holders or exchanges.

“This inherent concentration makes Bitcoin susceptible to systemic risk and also implies that the majority of the gains from further adoption are likely to fall disproportionately to a small set of participants.”

Researchers Igor Makarov and Antoinette Schoar stated that these results highlight that non-KYC entities serve as a gateway for money laundering and other gray activities.

They claim that the decentralised nature of the Bitcoin protocol makes it easy for these entities to operate – they only need to have their servers in a country where the authorities are willing to tolerate their existence.

“If KYC entities, are allowed to accept flows from entities that are not following strict KYC norms (the current state), then the digital footprint has a very limited effect on preventing tainted flows from entering into wide circulation,” they concluded.