Cryptocurrencies and Fraudulent Transactions-Risks, Practices, and Legislation for Their Prevention in Europe and Spain by David Sanz-Bas, Carlos del Rosal, Sergio Luis Náñez Alonso

1. Introduction
In recent years, there has been a very rapid development of digital currencies or cryptocurrencies,

with different types existing such as Bitcoin, Ethereum, Litecoin, Dogecoin,
Ripple, etc. (Bouri et al. 2019). Currently, different uses of these cryptocurrencies are
common, since they can be used as an investment, deposit, to make transfers and to make
payments. A cryptocurrency is a decentralized digital asset that uses cryptography to
secure transactions between users. One of its advantages is that its value is independent
of the monetary policies of central banks and that it is based on blockchain technology
(Sanz Bas 2020; Echarte Fernández et al. 2021). Governments, for reasons of security, the
control of monetary policy, cash alternatives, etc., are considering the creation of state
digital currencies (Náñez Alonso et al. 2020).
Despite the security offered by this type of digital currencies, we must realize that on
many occasions they are a tool used to commit fraud and are being used for tax evasion
(often due to the ignorance of tax regulations), carrying out illegal transactions or money
laundering (Sanz Bas 2020; Náñez Alonso 2019; Cheah and Fry 2015; Dyntu and Dykyi
2019; Nikolova 2019; Kfir 2020; Wronka 2021).
While there is doubt about its use for fraudulent transactions, there is currently a
debate around it (Dyson et al. 2018; Butler 2019). In this sense, a study was carried out on a
dataset of 4681 accounts of the Ehtereum network and it turned out that 2179 were illicit
(Farrugia et al. 2020). Another study detected 274 cases of fraud within the 1393 Initial
Coin Offerings (ICOs) studied (Hornuf et al. 2021). Other studies point out that Bitcoin
is low risk for money laundering (Navarro Cardoso 2019), or also indicate that out of a
market of USD 500 billion, only USD 10 billion is used in scams and other illegal activities
(2% of the total) (Geography of Cryptocurrency Report 2020).

One case to highlight is the one concerning the Distributed Autonomous Organization
(DAO), which was created on Ethereum in the spring of 2016. The DAO experiment failed
shortly after its creation, as an anonymous hacker stole more than USD 50 million in Ethers
out of the USD 168 million invested (Shier et al. 2019).
Faced with this situation and in the interest of ensuring user protection of these new
means of payment, central banks have reacted. To this end, they are considering the
issuance and implementation of a Central Bank Digital Currency (CBDC), as the Bahamas
has done (Náñez Alonso et al. 2021). It is also worth noting the possible implications and
the great challenge that the emerging system of decentralized finance poses for the current
financial system (Echarte Fernández et al. 2021).
The practice of hiding income from illicit activities dates back to the Middle Ages, with
pirates being pioneers in the sixteenth and eighteenth centuries, through the commercial
ships that sailed the Atlantic. Part of the treasures and wealth accumulated by the pirates
was kept in lairs, thus giving rise to financial safe havens (Tondini 2009). In the traditional
banking system, there is an intermediary, the bank, and supervision by state authorities;
in cryptocurrencies, these actors disappear. There is no central authority to regulate it,
functioning as a community, with the users themselves validating the decisions through
a system of blocks, called blockchain, which are formed by deciphering mathematical
algorithms (Porxas Roig and Conejero 2018).
Money laundering constitutes one of the problems of our society, due to its economic,
political, and social consequences (Martínez 2017; Albrecht et al. 2019; Chowdhury 2019).
Technological development is fundamental in the emergence of cryptocurrencies, surfacing
to avoid dependence on traditional financial systems. According to Law 10/2010, of 28
April 2010, on the prevention of money laundering and the financing of terrorism1
, money
laundering can be defined as “the set of mechanisms or procedures aimed at giving the
appearance of legitimacy or legality to goods or assets of criminal origin”. With cryptocurrencies,

tools and services have been developed that can be used for illegal purposes. The
anonymity or pseudo-anonymity (depending on the Blockchain used) in the ownership
of the cryptocurrency, using different methods such as “mixers” and “exchanges”, hinder,
in some cases, the investigation and traceability of operations, becoming a facilitating
agent for money laundering. The main characteristics of cryptocurrencies are security,
speed, based on cryptography, pseudo-anonymous, decentralized, the elimination of

intermediaries, and the facilitation of international transactions (Barroilhet Díez 2019). All
these characteristics make cryptocurrencies an attractive and useful product for money
laundering.
In our article, however, we do not try to prove whether a lot or little fraud is committed
through the use of cryptocurrencies, nor do we try to stigmatize their use, purchase, and
sale. We approach this question from a double point of view: first, we analyze which are the
most common cases of fraud and money laundering through the use of cryptocurrencies,
and second, what response is currently given by Spanish regulations (both criminal and
related to the prevention of fraud). For this purpose, our article is structured as follows:
First, an approach to cryptocurrencies is outlined. Second, we address the legislation
applicable to cryptocurrencies in Spain and in Europe, both domestic and from international
organizations. Third, we analyze the figure of money laundering; ending with an analysis
of the methodologies used to carry out money laundering with cryptocurrencies.
2. Approach to Cryptocurrencies
“Cryptocurrencies are offspring of the digital revolution that has taken place over the
last few decades” (Sanz Bas 2020, p. 15). Cryptocurrencies are digital or virtual currencies
that use cryptography for their security and are not issued by any central authority (López
Domínguez and Melón 2020). “They could be defined as a type of digital currency that

Cryptocurrencies and Fraudulent Transactions-Risks, Practices, and Legislation for Their Prevention in Europe and Spain by David Sanz-Bas, Carlos del Rosal, Sergio Luis Náñez Alonso