On Darknet Marketplaces, Cryptocurrencies, and the Flow of Funds

Darknet marketplaces have been around for years, but they have been problematic for both those who run them, and the law-enforcement agencies who look to stamp them out. However, with sophisticated use of cryptocurrencies, these platforms are about to enter a period of rapid expansion. 

First Published 3rd May 2022

Just how easy is it to extract profits from online criminal activity?

5 min read  |  Reflare Research Team

Let's go shopping!

Earlier this year, the German authorities announced that they had shut down the Hydra Market platform in what they considered was the biggest illegal Darknet marketplace, seizing 543 Bitcoin worth €23 Million.

According to Bloomberg, the Russian-language Hydra Market platform – whose servers were located in Germany – made around €1.2 Billion in the year 2020 facilitating drug trafficking and money laundering. It had about 17 million buyer accounts and over 19,000 seller accounts.

This is the second time in less than a year the German police have made headlines for taking down illegal marketplaces. In 2021, DarkMarket – what was then the biggest illegal marketplace on the dark web – was raided after its operator was arrested near the German-Danish border. The platform was reported to have almost 500,000 users, more than 2,400 sellers, and over 320,000 transactions involving more than 4,650 Bitcoin and 1,800 Monero cryptocurrencies.

These platforms were neither the first, nor will they be the last to come and go. Every couple of years, we see authorities raiding and shutting down one illegal marketplace platform just for another one to pop up and take its place. The dynamics of supply, demand, and competition hold true in the dark economy, just as they do in the physical world.

However, there is one key difference between doing illegal businesses online today versus in the early 2000s – and that, as most of you might have guessed, is cryptocurrency.

Back when I was a kid...

Years ago, starting a marketplace like Hydra would require a huge amount of planning, a network of trusted connections, and an incredibly high appetite for risk. One needed to be willing and able to set up all the servers themselves, and if they were not technical, they then had to find someone sufficiently capable (and trustworthy) enough to help. And even then, once you got it all up and running, accepting payments would be a real challenge, let alone withdrawing them.

The arrival of cryptocurrencies has since made things so much easier. In fact, it is not uncommon today for cybercriminals to advertise job opportunities to strangers on the internet without subjecting them to a traditional vetting process. All they have to do now is meet the job requirements, complete the project, and agree to be paid in cryptocurrencies. The whole business can be done without the employees or partners knowing who they are actually dealing. If you are willing to engage with faceless individuals who can deliver what precisely you are after, this newfound ignorance in talent acquisition can indeed be bliss.

Show me the money

Converting a cryptocurrency into fiat money would still be challenging (we will talk more about this later).  However, with crypto-mixing services and questionable exchanges widely available on the dark web – it is still less of a hurdle compared to the alternative payment methods.

The aspiring operators also have the option to never convert their gains into fiat money. We know from many years of playing online games such as World of Warcraft and Eve Online that there are people out there who lived their second life as virtual world tycoons. These people were well-paid enough in the real world that they did not need to cash in their virtual world exploits and were doing it for self-gratification, and we have no doubt such people would also exist in the world of cyber-crimes.

According to Chainalysis, cybercriminals laundered around US$8.6 billion worth of cryptocurrency in 2021. This is an increase of 30% from the year before, and about US$33 billion in total since they began tracking in 2017. It is still a far cry from the estimated US$800 billion to US$2 trillion of fiat money laundered every year but an increase nevertheless.

It is possible that the increase is due to cybercriminals becoming more confident in the anonymity provided by cryptocurrencies but it is also possible that the rise is nothing more than just cybercriminals diversifying their payment methods – we would never know for sure.

Follow the yellow brick road

However, it is hard for one not to wonder how exactly companies like Chainalysis tracked all these transactions and derived the numbers.

Well, here is the thing – anyone can track every single transaction that uses Bitcoin or other cryptocurrencies similar to it. That is the whole point.

They were designed so that anyone could view the transactions, and they were designed to be anonymous – as in, you don’t need to give away your identity to create a Bitcoin address. But they were not designed to be private – people can observe how the coins flow from one address to another.

This is comparable to doing something embarrassing while wearing a Spiderman costume – people don’t know who you are, but they can witness your antics. However, at some point, you're gonna need to remove the costume, and this is when the problem arises – if they follow you everywhere, then your identity ought to be known.

Can't pay the rent with hopes or dreams

So how could cybercriminals convert their cryptocurrency to fiat currency without getting caught?

Some of the options that are currently being used are:

1)   Sending the money to exchanges or cryptocurrency mixer services located in countries that are less likely to hunt down cyber criminals and work with foreign authorities that want to bring them to justice.

2)   Using cryptocurrencies like Monero that promise not just anonymity but also privacy.

In short, irrespective of law-enforcement best efforts, online marketplaces will not cease to exist any time soon. Yes, their operators will continue to be arrested. Yes, their platforms will continue to be shut down. But new platforms will be created and step forward to fill in the void. Like supply and demand itself, this cycle will continue on and on and on.

What cryptocurrencies have done is reduce the 'high-risk appetite' and 'scarcity of anonymised talent' barriers to entry, creating the 'Goldilocks Conditions' for the market to now enter a cycle of rapid growth.

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