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“Okay, money laundering 101. Say you come across a suitcase with 5 million bucks in it. What would you buy?”
Mixing It Up
The 17th century painting "Two Laughing Boys with a Mug of Beer" by the Dutch master Frans Hals was stolen from museums in 1988, 2011 and 2020.
Something that gets stolen three times is clearly worth stealing.
But how much can a recognizably famous painting that’s gone missing from a museum possibly be worth?
Sotheby's won’t sell it for you, so you’re not getting top dollar.
But thieves with an appreciation of high art have a number of ways to monetize their efforts:
That’s a pretty small audience of potential buyers, however, which is why stolen art is thought to be worth only about 10% of its auction house value.
Bored Stolen Ape Yacht Club
So a famous painting will have one value when acquired legitimately and another, much lower value when acquired illegitimately.
There are a number of analog situations developing in crypto, each with its own wrinkles.
What would you pay for, say, a Bored Ape Yacht Club NFT if you couldn’t acknowledge owning it?
You can’t use it as a profile picture, so there’s no clout to be had. It won’t get you into any BAYC yacht parties. It won’t even get you into the Discord.
And you can’t sell it for anything close to full value: Just as a stolen painting cannot be sold at Sotheby's, a hacked BAYC cannot be sold on OpenSea.
So, what’s the value of a stolen NFT?
I’d guess significantly higher than stolen paintings, as you have a better chance of selling to either someone that doesn’t know it’s stolen or someone who doesn’t care (the code-is-law cohort).
So, maybe 20% to 40% of full value?
That’s a wide range, but things get even trickier with fungible tokens.
Fungible, But Not Sellable
If I could put one question to the couple arrested for their role in the Bitfinex hack, it would be “how much did you pay?”
They don’t appear to have executed the hack themselves, which means they likely acquired the 120,000 bitcoin in an OTC transaction.
So I’d love to know what discount they applied to stolen crypto.
I’m sure it was large. Maybe 90%, like stolen art? But not large enough.
Because despite all the mixers, private wallets and darknet exchanges, it turns out laundering bitcoin is really hard.
Even Marty Byrde, the master money launderer of Ozark, would have trouble moving large amounts of crypto without blazing a digital trail that would lead the FBI right to him.
Before making the larger transactions that led to their arrest, the couple in the Bitfinex case had only managed to launder 4% of the hacked 120,000 BTC.
Some of it was turned into $500 Walmart gift cards, which is probably all you need to know about the glamorous life of money laundering.
Bitcoin that is known to have been stolen is close to worthless. Maybe even more so than stolen paintings.
KYC: Know Your Customer Crypto
Chasing down every hacked bitcoin is going to strain the FBI’s resources, so there will always be illicitly acquired crypto in circulation — which means hackers will continue to be incentivized to hack.
Could the market self-regulate by applying a discount to any crypto that had been acquired illicitly?
Crypto is weirdly able to accommodate this.
It’s already the norm that the same crypto can simultaneously trade at one price on exchange X and a very different price on exchange Y.
And, unlike in TradFi, crypto exchanges do their own clearing, so they have the ability to screen both their customers and the crypto their customers are trading.
So why not establish an exchange that would KYC the crypto it trades in the same way exchanges KYC their customers?
Using the same methods as the FBI, an exchange could trace the provenance of the crypto on its platform and block trading in any that have been through a mixer, private wallet or darknet exchange.
That would, of course, go against the permissionless spirit of crypto.
But nothing would stop illicitly gained crypto from trading elsewhere: It would just be like Sotheby’s refusing to sell a stolen painting.
The upside to KYC’d crypto is that it would 1) discourage hacking, 2) attract more institutional investors into digital assets, and 3) eliminate the persistent misperception that crypto is for criminals.
Institutions would surely appreciate the ability to tell both regulators and investors that none of the digital assets they hold are in any way related to nefarious activities.
And we’d have a little less FUD to deal with.
Sustainable KYC
You may be the type who believes in second chances and, as such, asks no questions of the crypto you buy. And that is admirable.
But what if you could buy bitcoin that was certifiably mined with renewable energy?
Just as the FBI tracked the bitcoin hacked from Bitfinex, an exchange could track all bitcoin back to the miners that mined it and only allow transactions in those that were mined by renewable energy.
The bitcoin traded on an exchange KYC’d for sustainability would presumably trade at a premium to bitcoin traded elsewhere.
That would incentivize miners to mine with renewable energy, by enabling them to sell into the exchange with the higher prices.
This is not likely to ever happen. (I have a lot of amazing ideas that inexplicably never seem to happen.)
And there’s perhaps a better alternative in the works that I’ll mention in tomorrow’s mailbag.
But, as a thought experiment, it at least shows that — in ways not possible in traditional finance — crypto allows us to get creative with money.
Just like Marty Byrde. Find this newsletter helpful?
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Written by @bgilliam1982 and @aaronhasapen.
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