Reported by Michael del Castillo
Though less than one percent of cryptocurrency transactions last year were considered illicit, according to blockchain data firm Chainalysis, that was still a record $20 billion, most of which is marked as dirty by a cottage industry of blockchain-data startups managing independent and unofficial blacklists. Crypto sitting on a blacklist is difficult to use and many crypto exchanges like Coinbase and Kraken refuse to accept it. Instead of selling those assets at an auction the way the U.S. Justice Department has done for 185,000 bitcoins it has seized over the last nine years, Jana Ringwald, 41, a senior prosecutor for the attorney general of Frankfurt, partnered with Frankfurt-based Bankhaus Scheich, which has a fledgling side business in cleaning the blacklisted cryptocurrencies. So far it has cleaned and sold some €150 million worth of dirty digital assets for the state of Hesse.
To clean the funds, Ringwald first had to make sure her colleagues and bosses at the state government were okay with writing an official letter in English for international companies on German state letterhead, something that’s normally frowned upon. In a form letter she sent to Scheich, then forwarded to Chainalysis, CoinFirm, Elliptic and other cryptocurrency blacklist creators, Ringwald confirmed her cybercrime center has the legal authority to “collect the respective purchase price” of digital currencies seized during legal proceedings, according to a copy of the letter provided to Forbes, confirms the office’s contractual relationship with Bankhaus Scheich and gives permission for the tokens to be sold to the bank.
Instead of dealing directly with exchanges that might disappear overnight, the state sells the assets directly to the bank at a discount. “We only have direct contact to Bankhaus Scheich,” says Ringwald. “Never to the market itself.” Other clients looking to trade crypto place orders directly with the bank, which fulfills the orders from its own crypto reserves. To keep the total crypto it holds below a one million euro limit that it set after witnessing cryptobank Silvergate’s demise, the bank periodically nets the transactions with its other crypto buy and sell orders, selling them at market prices on 20 exchanges, liquidity pools and via over-the-counter (OTC) brokers that use the same security firms to check for blacklisted money. After the buy and sell trades are netted, the position is closed out on cryptocurrency exchanges. “We don’t want to be long,” says von Schoenaich-Carolath. “We don’t want to be short.”
“This white-listing process was then done for the first time in December 2021,” says Ringwald. “And then we had 100 million euros after that.” Ironically, much of laundering process for tainted bitcoin and other dirty digital assets is accomplished manually via emails and phone calls. The whole process of cleaning tainted crypto takes about two weeks.
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