Unveiling Money Laundering Techniques! China's Supreme Court Exposes New Method of Laundering Money with Virtual Currency: Buying Miners' Private Keys and Transferring Funds Overseas

On March 19, 2021, the Supreme People's Procuratorate and the People's Bank of China jointly issued typical cases of combating money laundering crimes involving virtual currencies. The case shows that Chen, from Hangzhou, knowingly transferred funds derived from financial fraud crimes through bank transfers and exchanging Bitcoin to transfer the fraudulent funds abroad. His actions constituted money laundering and he was sentenced to two years in prison and fined 200,000 yuan.

(This article is authorized to be reprinted from PeckShield, with the original title "The Supreme People's Procuratorate releases classic cases of virtual currency money laundering: purchasing Bitcoin miner private keys for overseas transfer." Original article here)

According to the Chinese Judicial Documents Network, Chen Haibo, without obtaining approval from relevant national departments, publicly promoted through the internet, promised fixed returns or fictitious high expected returns, attracting the general public to invest in the "Malacca Bitcoin Fund" and "Gamer Network," and allegedly illegally obtained investment funds through fictitious transactions, data tampering, and restrictions on withdrawals and withdrawals.

In late October 2018 to early November of the same year, the defendant Chen knowingly transferred RMB 3 million of suspected criminal proceeds to Chen Haibo, who was being investigated by the public security organs for suspected fundraising fraud and had fled to Hong Kong. Chen then sold a vehicle purchased by Chen Haibo with the illicit proceeds for over RMB 900,000, transferred all of it to a Bitcoin "miner" in exchange for Bitcoin private keys, and sent the private keys to Chen Haibo for overseas exchange and use.

According to observations by PeckShield's anti-fraud situational awareness system CoinHolmes, this case reveals a new method of money laundering by purchasing Bitcoin miner private keys.

Bitcoin mining is the process of bookkeeping, confirming transactions that occur in the Bitcoin system over a period of time and recording them on the blockchain. Miners, the people who mine, need a significant amount of computing power. As a reward, miners who successfully secure the right to record transactions in a block receive Bitcoin rewards.

Miners receive two types of rewards: the block reward, which is specified in the Bitcoin protocol, where for each new Bitcoin block generated, the Bitcoin network creates N Bitcoins as a reward for the miner who created that block. Initially, N was 50 when Bitcoin was created, and it halves approximately every four years, currently at 6.25. Bitcoin's total supply is controlled by this halving process. The block reward is the first transaction recorded in each block.

The other part is transaction fees, the total sum of all transaction fees in the current block.

In the mining reward, the output address of the block reward transaction is the miner's direct receiving address, commonly referred to as the miner's wallet. To increase their computing power and block rewards, multiple miners can join mining pools. Mining pools distribute rewards to miners.

When mining pools distribute rewards, they first transfer all received mining rewards to a consolidating wallet address in a certain quantity or according to other rules, and then distribute rewards through various consolidating wallets. As shown in the following diagram:

According to CoinHolmes' observations, with the effectiveness of "anti-money laundering laws" and "cut-off card actions," traditional money laundering channels have been severely disrupted, and virtual currencies, which are anonymous, cross-border, and difficult to trace, have become important channels for money laundering. Under pressure from law enforcement agencies worldwide, virtual currency exchanges have upgraded their anti-money laundering risk control strategies to comply with the requirements of relevant law enforcement agencies.

According to CoinHolmes' anti-fraud experts, previously, the anti-money laundering risk control systems of many virtual currency exchanges were relatively loose. For example, they might only know that the other party was a real-name account in Beijing, linked to an Alipay account, connected to an Industrial and Commercial Bank of China card, but did not know that it was used for gray industries like gaming or money laundering. The purpose of sellers selling virtual currencies is to launder funds, but for buyers, they just see it as speculation. Therefore, the key point of rectification lies in virtual currency exchanges strengthening their anti-money laundering efforts.

The strengthening of regulatory efforts has led money launderers to shift to over-the-counter (OTC) trading of virtual currencies. In general, the seller provides a virtual currency receiving address, and after the transfer is confirmed, the payment can be verified face-to-face. Compared to on-exchange trading, OTC merchants generally do not inquire about the buyer's source of funds or identity information, and there are no limits on the amount.

However, this peer-to-peer trading between strangers also brings potential risks. CoinHolmes discovered several recent cases of virtual currency OTC trading robberies in Hong Kong and incidents of money laundering platforms in mainland China absconding with funds.

"Purchasing Bitcoin private keys from miners is a relatively new money laundering method in the market. Generally, the block rewards obtained by miners through mining have a clean background, and few people would think that these block rewards, once transferred, would be used for money laundering. This transaction appears on the surface just like a regular transaction. Furthermore, if this block was not mined by a mining pool but by an individual miner who may be overseas, it would pose significant difficulties for the relevant law enforcement agencies to investigate," explained CoinHolmes' anti-fraud expert.

It is worth noting that in the money laundering case of Chen, the Shanghai People's Procuratorate alerted the Shanghai headquarter of the People's Bank of China to the money laundering crime risks in the virtual currency field and recommended enhancing anti-money laundering supervision and financial intelligence analysis in new areas. This case has reference significance for China to share its experience in virtual currency money laundering with the international community, indicating that whether through traditional or new methods like virtual currencies, once the upstream criminal verification is confirmed, even if not yet tried in accordance with the law or not criminally prosecuted, it does not affect the determination and prosecution of money laundering offenses.