Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed Through Cryptocurrencies?

58 Pages Posted: 17 Jan 2018 Last revised: 30 Jan 2018

Sean Foley

University of Sydney Business School

Jonathan R. Karlsen

University of Technology Sydney (UTS), UTS Business School

Tālis J. Putniņš

University of Technology Sydney (UTS) - Faculty of Business; Stockholm School of Economics, Riga; Financial Research Network (FIRN)

Date Written: January 15, 2018

Abstract

Cryptocurrencies are among the largest unregulated markets in the world. We find that approximately one-quarter of bitcoin users and one-half of bitcoin transactions are associated with illegal activity. Around $72 billion of illegal activity per year involves bitcoin, which is close to the scale of the US and European markets for illegal drugs. The illegal share of bitcoin activity declines with mainstream interest in bitcoin and with the emergence of more opaque cryptocurrencies. The techniques developed in this paper have applications in cryptocurrency surveillance. Our findings suggest that cryptocurrencies are transforming the way black markets operate by enabling “black e-commerce.”

Keywords: blockchain, bitcoin, detection controlled estimation, illegal trade

JEL Classification: G18, O31, O32, O33

Suggested Citation

Foley, Sean and Karlsen, Jonathan R. and Putniņš, Tālis J., Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed Through Cryptocurrencies? (January 15, 2018). Available at SSRN: https://ssrn.com/abstract=3102645 or http://dx.doi.org/10.2139/ssrn.3102645

Sean Foley

University of Sydney Business School ( email )

Sydney
Australia

Jonathan R. Karlsen

University of Technology Sydney (UTS), UTS Business School ( email )

Sydney
Australia

Talis J. Putnins (Contact Author)

University of Technology Sydney (UTS) - Faculty of Business ( email )

PO Box 123
Broadway
Sydney
Australia
+61 2 9514 3088 (Phone)

Stockholm School of Economics, Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
Latvia
+371 67015841 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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