As Tether’s market cap tops $100 billion, the stablecoin’s reputation as the go-to currency for criminal gangs is being burnished by a new academic study and media reports.
On March 2, the Wall Street Journal reported on the growing use of digital assets by Chinese crime syndicates looking to launder billions of dollars worth of criminal proceeds. Their crimes include manufacturing and shipping fentanyl precursors to Mexican cartels, illegal gambling sites, and investment scams like ‘pig butchering,’ in which scammers slowly build trust with their victims to get them to hand over their life’s savings.
Tether’s USDT stablecoin looms large in a new academic paper titled How Do Crypto Flows Finance Slavery? The Economics of Pig Butchering. The paper is co-authored by John Griffin, a finance professor at the University of Texas at Austin’s McCombs School of Business. Griffin previously co-authored the widely cited 2018 report detailing Tether-based wash trading on the Bitfinex exchange that was largely responsible for the 2017 spike (and ensuing crash) of the BTC token’s fiat price.
The new report by Griffin and graduate student Kevin Mei made waves last week with its claim that pig butchering—primarily romance or friendship-related confidence tricks—has claimed over $75.3 billion (with a ‘b’) from its victims as of February 2024. The report notes that this estimate of scammers’ proceeds “is likely a conservative lower-bound estimate and the total size may be considerably larger.”
The report claims the scammers’ ill-gotten gains “exit the crypto network in large quantities, mostly in Tether, through less transparent but large exchanges—Binance,
Huobi [now HTX], and OKX.” Of the nearly $1.2 trillion in volume handled by scammers’ digital wallets, 84% is conducted via USDT.
The report claims that the lax ‘know your customer’ (KYC) and anti-money laundering (AML) policies at the above exchanges make them “preferential potential exit points that can further finance extremely large amounts of criminal activities.” Notably, the authors add that this activity “has continued as of February 16, 2024, despite recent crackdowns” (including Binance’s $4.3 billion settlement with U.S. authorities last November).
Following China’s mid-2021 targeting of all things ‘crypto,’ the pig butcherers appear to have transferred their focus to potential victims in Western markets, particularly the U.S. The report cites five Western exchanges—Coinbase (NASDAQ: COIN), Crypto.com, FTX,
Gemini, and Kraken—accounting for $15.2 billion in funds being sent to scammers’ wallets from victims over the past four years.
These Western exchanges serve—or served, in the case of the defunct FTX—as the critical on-ramps through which victims send their funds to scammers. As such, the authors note that the “large players in the crypto space are likely not sufficiently protecting their customers from scams.”
Ethereum ‘reduces barriers for transnational organized crime’
Using data from pig butchering victim reports, Griffin and Mei first identify the digital wallets to which victims were told to transfer their funds. Most of these wallets were used more than 10 times, while 28% were used over 100 times.
The report notes that “the fact that addresses are used so frequently suggests that the monitoring process is not robust and that scammers are not too concerned about the exchange prohibiting such activity.”
Most of the scammers’ wallets—representing 88% of the total funds tracked—were on the Ethereum blockchain, with BTC a distant second and Tron third. The authors concluded that Ethereum “appears to drastically reduce barriers for illicit financial flows of transnational organized crime,” partly due to its hosting of many decentralized exchanges (DEX).
The experience of a 60-year-old male U.S. victim who lost around $465,000 to a pig butcherer was said to be “strikingly similar” to other victims’ transaction patterns. The victim sent ETH, Circle’s USDC stablecoin and BTC from his exchange wallet to a different address, which then forwarded the tokens on a roundabout journey to a Singapore-based DEX called Tokenlon. The report claims that as much as 58% of Tokenlon transactions since 2022 have originated from scammers.
Before and after arriving at Tokenlon, the ill-gotten tokens take multiple hops to obfuscate their origin. For example, tokens sent to OKX usually take three hops or fewer, while those sent to Binance can take five or more hops. Scammers also utilize ‘dusting’ transactions—spraying small amounts to multiple addresses—to help throw investigators off the scent.
Once in Tokenlon, the assets are swapped for other tokens, primarily USDT. This USDT is then sent to the aforementioned centralized exchanges that share the “common feature” of having “loose KYC procedures and are perceived to be outside of U.S. jurisdiction.”
(On March 1, Tokenlon tweeted a statement aimed at “clarifying some inaccuracies and reaffirming our unwavering commitment to security and integrity in our operations.” The statement added that Tokenlon was “preparing a detailed response to correct the misconceptions presented.” Said report has yet to surface.)
A small amount of the tokens emerging from Tokenlon were sent back to Coinbase and Crypto.com, which the report claims “fit the characteristics of inducement payments” to the victims. These payments are intended to give victims the sense that their ‘investments’ are actually paying off the way the scammers predicted, in the hope of stealing even larger ‘investments’ from the victims.
Noting the frequent re-use of scammer addresses to Coinbase—as few as 60 addresses responsible for nearly 7,200 suspected inducement payments—the authors concluded there was “relatively little rigorous monitoring” being conducted by the exchange.
21st century slavers
The ‘slavery’ aspect of Griffin and Mei’s report is based on the number of individuals forced to perpetrate pig butchering scams against their will. Lured by promises of high-paying jobs, they are held in walled compounds, their passports confiscated. Estimates of the number of detained individuals range from 220,000 in Cambodia and Myanmar to as much as half a million across Southeast Asia.
Zeke Faux, author of the recent Number Go Up crypto exposé, previously detailed the experiences of some unwilling participants in a Cambodian pig butchering operation who’d managed to escape their captors. In all cases, these individuals were told to insist that their victims pay in USDT.
On February 29, German broadcaster Deutsche Welle (DW) reported on over 1,000 human trafficking victims being freed from KK Park, a ‘scam factory’ on Myanmar’s border with Thailand. The rescue followed the publishing of an investigative report on the plight of the imprisoned workers. KK Park reportedly has ties to Hong Kong’s 14k triad criminal organization.
A recent Financial Times and Chainalysis report revealed that the Chinese operators behind a single KK Park-based pig butchering operation earned over $100 million worth of USDT in less than two years. Some of this sum came from the families of individuals forced to work at KK Park, paying steep ransoms—also in USDT—to secure their loved ones’ freedom.
Not our problem
Tether’s CEO Paolo Ardoino told Bloomberg that the report was false and misleading without (as usual) specifying exactly what Griffin and Mei had gotten wrong. Ardoino also hyped Tether’s new cozy ties with U.S. federal agencies that weren’t at all forced by circumstance and in no way intended to act as a mitigating factor when the indictments eventually drop.
Tether’s market cap briefly topped the $100 billion mark on March 4, following a nearly $10 billion rise in just the past three months. This money printing—backed or unbacked—has fueled the recent fiat value bubble in BTC, ETH, and a flurry of so-called ‘meme coins’ that don’t even offer the pretense of serving any practical purpose beyond enriching their issuers.
Tether and its supporters love to claim how USDT empowers the great number of individuals around the globe who lack bank accounts or can’t afford transfer fees. That may be true—Tether rarely provides statistical evidence of these claims—but it cuts both ways.
Griffin/Mei’s report cites multiple studies estimating the cost of cross-border fiat-based money laundering commissions at anywhere from 4-20%, whereas USDT-based laundering costs a mere 0.87%. In other words, Tether is a key part of the system, “facilitating the cheap and easy flow of funds that is the lifeblood enabling both pig butchering and modern-day slavery.”
Tether backers love to whatabout USDT’s crime connections by pointing out that the majority of criminals still transact in good old-fashioned fiat currency. But as a deputy district attorney recently observed, when it comes to pig butchering, “It’s always, always, always Tether. I’ve never heard of pig butchering that isn’t Tether.” So sure, Tether didn’t invent pig butchering; it just makes it possible.
Eventually, Tether fans will have to accept that while the arguments in favor of greater USDT adoption are largely theoretical, the hundreds of thousands of people whose lives have been ruined by scammers relying on USDT’s evasion of oversight are all too real.
The study’s authors note that “if a given crypto user chooses to swap with Tokenlon, their trading helps the scammers to obfuscate the flow of funds.” Tether supporters need to take a similar look in the mirror and decide whether or not they wish to continue to support these abuses.
Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple, Ethereum,
FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.
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