By Aaron Lane and Lisanne Adam. In the past decade, a range of civil and criminal cases have come before the courts around the world where cryptocurrencies such as Bitcoin have been used as payment to traffic drugs, weapons, and solicit other illegal goods and services (as extreme as murder for hire). This post provides the latest breakdown of the Australian cases, updating our presentation at the 2019 Australian and New Zealand Society of Criminology Conference.
“Bitcoin doesn’t commit crime, people do.”
The truth or otherwise of this sentiment — adapted from the NRA slogan — is one that moral philosophers have tackled for some time. That is, is technology neutral? For example, is the use of bitcoin and other cryptocurrencies, for good or for evil, ordered by human values? Or does the pseudonymous and decentralised nature of cryptocurrencies mean that it will be surely used to conceal criminal activity?
These are interesting philosophical questions for criminologists and lawyers that study the nature of crime and punishment. But there is also a cogent law and economics approach to studying these questions using the tools of institutional cryptoeconomics (a theoretical approach developed by RMIT Blockchain Innovation Hub studying blockchain and cryptocurrencies as an institutional technology).
There is a high degree of trust involved in committing criminal activity. The economic reality from criminal enterprises does not have the benefit of institutions like property rights and contractual enforcement. Simply put, if someone doesn’t make a delivery, you can’t exactly sue them for breach of contract. If someone’s product is of poor quality, you’re not about to go off and complain to the consumer protection authority. Enforcement takes the form of other — and often violent — methods. What’s more, every criminal exchange occurs with the risk that the counterparty might expose your activity to law enforcement (whether inadvertently or deliberately).
Economists have shown that criminal enterprises exist in hierarchies. This reduces the “cost of trust”. Instead of every criminal exchange occurring on the black market, criminals form firms (cartels, gangs, rings, syndicates, among other descriptors) to govern their activities. Controlling firm membership to other trusted individuals helps enforce deals and avoid detection.
Criminal enterprises also require a payment network to store and manage ill-gotten gains. Money laundering, as often portrayed in popular films and television shows, is a sophisticated and costly process. Asides from the cost of conducting laundering operations, it often requires a network of trusted professionals — accountants, bank employees, real estate agents, lawyers, and even government officials — taking “facilitation payments” to look the other way. In addition, a complex web of international transfers and loans are often made to hide the true origin the funds.
The invention of cryptocurrency provided a new way to govern the payments side of criminal transactions. This lowered the transaction costs of payment (direct payments, across international borders) and reduced opportunism (immutable records, identity shielded by pseudonymity). To return to the philosopher’s question — criminal entrepreneurs had to discover this cryptocurrency use case.
Australian reported cases
So what evidence is there for bitcoin and cryptocurrencies being used for illicit purposes in Australia?
To obtain this we conducted a search of the Australasian Legal Information Institute (AustLII) case database for all Australian state, territory, and federal jurisdictions between January 2009 (the first recorded bitcoin transaction) and December 2019 using various search terms — “Bitcoin”, “Blockchain”, “Cryptocurrenc*”, “Crypto-currenc*”, “Crypto Currenc*”, “Ethereum”, “Distributed Ledger”. The search was supplemented through a secondary search of the Thomson Reuters Westlaw database.
The results showed that:
The first Australian case occurred in 2014 — with a total of 51 cases within the search period. All cases referred to bitcoin or cryptocurrency as part of the factual matrix. There were no cases directly considering evidence from a blockchain- or DLT-enabled database or platform.
The majority of cases (68.6%) where criminal law matters, followed by civil and commercial law (17.6%), administrative law (7.8%), and family law (5.9%).
Focusing further on the criminal matters:
In breaking down the criminal matters, the overwhelming majority of reported decisions were sentencing remarks following a plea of guilty. The typical case was one where drugs were purchased using cryptocurrency over the dark net. The facts suggest that the typical offender is lower down the drug supply chain hierarchy rather than being a leader of a criminal enterprise.
An analysis of the criminal cases shows that the use of cryptocurrency has been accepted by trial and appellant courts to be an aggregating factor in sentencing (that is, something that will lead the court to impose a harsher sentence). The legal rationale appears to be that the use of cryptocurrency shows a level of sophistication and planning, combined with an intention to mask the offending.
Cryptocurrency has also been considered in the context of pre-trial applications for bail and seizure of property orders.
The key limitation of these statistics is that the case database only returns reported cases. For example, cases brought in the Magistrates’ Court are not ordinarily reported — yet this is where the bulk of criminal litigation occurs. This means that the true case numbers are likely to be far higher. Similarly, cases that are dismissed may not be reported — perhaps explaining why there is a high proportion of criminal cases with guilty pleas. Nevertheless, the summary statistics presented above do capture the more serious cases to date and provide a good platform to develop legal insights.
The key takeaway is that there is a growing number of cases featuring blockchain and cryptocurrency coming before Australian trial and appellant courts, and administrative tribunals.
The first decade saw predominately criminal matters — evidencing that criminal entrepreneurs were among the first to find a use case for cryptocurrencies (although ultimately were still caught). Criminal lawyers are likely to have to deal with the Bitcoin stereotype — possession of cryptocurrency, without more, should not imply criminal intentions. The second decade of cases is likely to see an increase in civil matters as the launch of blockchain-enabled digital platforms become a feature of the digital infrastructure. Lawyers will need to be blockchain literate in order to seek appropriate court orders, review expert witness reports, and understand the commercial and legal significance of transactions.
Aaron M. Lane is a Lecturer in Law in the Graduate School of Business and Law at RMIT University and a Research Fellow in the RMIT Blockchain Innovation Hub — the world’s first social science research centre into the economics, politics, sociology, and law of blockchain technology.
Lisanne Adam is a PhD candidate in the Graduate School of Business and Law at RMIT University and an Honorary Associate in the School of Psychology at the University of Sydney.