How Crypto Helps Make Small – Time Drug Traffickers Become Millionaires

This piece was first published at ICO Ranker. It was edited by Alissa Fleck.

By all outward appearances, Aaron Shamo was a typical, if not upstanding, teenager. He earned his Eagle Scout badge by crocheting blankets for a hospital, and never experimented with anything harder than marijuana. By 2016, Shamo, then 26, was bouncing between jobs, working as a tech support executive for the local offices of Apple and Google. He’d also begun reading self-help books. Shamo had decided he wanted to become rich, and surround himself with beautiful women. 

Like many 20-somethings of his generation, Shamo also mined Bitcoin in his spare time. The access to crypto was a boon for his side hustle, as Shamo had recently begun selling home-pressed opioids online. 

Crypto has been used in the commission of hacks, scams, abductions and thefts, but one of the deadliest use cases for digital currency is the purchase and sale of opioid drugs. According to the U.S. Department of Health and Human Services, more than 130 people die every day from opioid drug overdoses, and 11.4 million people in the United States have misused prescription opioids at some point. 

Crypto has become an important conduit in transnational rings that enables drug lords in distant countries to avoid detection, while broadening the reach of their operations. Shamo had quickly established himself as a cog in a multinational operation that originated in China and put deadly drugs on the streets of small-town America.

Needless to say, the rise of the crypto “wild west,” and the internet’s capacity to blur both jurisdiction and identity, have had fatal consequences. Officials found that at least one customer died after purchasing fentanyl, which he believed to be the less-powerful drug oxycodone, from Shamo. They estimate that Shamo’s international drug ring may have also been responsible for an additional 28 deaths.  

The use of crypto in the ballooning opioid drug crisis has become significant enough for the White House to issue critical advisories about crypto use, to both payment firms and financial institutions.

 The Rise of Crypto in Illegal Drug Rings 

There are several characteristics of cryptocurrencies that make them a favorable medium for transactions. Crypto can operate as electronic money on the internet, meaning users can quickly and easily transfer value without being subject to the various regulatory controls associated with other payment mechanisms.      

Cryptocurrencies are also based on trustless technology. Trust — between individuals and groups of people — is an important component of most informal money-laundering systems, used to process payments for drug transactions. For example, the hawala system relies on an informal network of people who trust each other with large sums to make payments. A trustless system removes the hard work required to establish trusted connections and replaces it with a digital and decentralized equivalent. Thus, it is easier to set up and manage in comparison to a system that relies on a network of individuals to verify each step of the process.

Most cryptocurrencies are also pseudonymous or completely anonymous, allowing drug cartels to escape detection for payments that cannot be traced back to a single individual or company. CVC mixers, or sites that obfuscate the origin and destination addresses of a blockchain transaction by scrambling multiple payments together in one transaction, are especially popular with cartels. The White House advisory singled out CVC mixers and four cryptocurrencies in particular — Bitcoin, Bitcoin Cash, Monero and Ether — as favored mediums for drug-related transactions. 

Perverse as it may sound, cryptocurrency transactions also drive down the overall cost of illegal drugs. This is primarily because drug vendors pass on savings from low transaction fees on blockchains to customers. While working undercover in sting operations, federal officials reported receiving emails from fentanyl dealers offering ten percent discounts, and unlimited orders, for Bitcoin payments.

There is also the prospect of vast wealth that crypto seems to promise some. Since early 2017, the price of Bitcoin has skyrocketed by approximately 847 percent. Towards the end of 2017, it touched $20,000, an appreciation of 100,548 percent from January 2017. Shamo became a millionaire, while in jail, after the run up in crypto prices at the end of 2017. Following Shamo’s arrest, the government auctioned off his crypto stash.  

A Barebones Operation Makes Millionaires  

The United States is an important staging ground for the collision of drug crime and cryptocurrencies. Despite an adverse regulatory climate, the country is home to a thriving crypto ecosystem. Awareness about the possibilities of crypto is high thanks to sustained media coverage of the topic. 

The U.S. is also the world’s largest market for drugs. The U.S. government has scrambled to put restrictions in place to curb drug use, from sanctions on countries that produce drugs, to strict checks at ports of entry to the United States. 

But those physical restrictions have proved insufficient to curtail drug purchases from online stores. The dark web provides especially fertile ground for illicit drug markets. E-commerce platforms on the dark web list a wide variety of available drugs from multiple vendors, and offer services similar in quality and convenience to e-commerce behemoth and Wall Street darling, Amazon.

Empire, one of the dark web’s largest marketplaces, has a roster of 26,000 drugs and chemicals on its platform. Two-thousand of those listings were for opioids, as of June 2019. Vendors on the market deliver drugs to customers’ doorsteps using the United States Postal Service. 

Shamo’s operation was scrappy — just him and a friend. Using fentanyl sourced from China, they cut the powdered drug, added fillers and pressed them into pills, affixing a fake stamp to masquerade the final product as an authentic medication. Their primary sales channel was a site called Pharma-Master on the dark web. Their customers included individuals, and other dealers who resold the drugs for a profit.

Payments made in Bitcoin were eligible for a discount on Pharma-Master. Even without crypto, the operation was profitable. According to court documents, each pill had a manufacturing cost of less than a penny, and its final price could be in excess of $20. When federal officials raided Shamo’s home in 2018, they found gold bars, $1 million in cash and 500 Bitcoin.

U.S. District Courts recently convicted five other individuals for charges similar to those leveled against Shamo. Wyatt Pasek, 22, from California, pleaded guilty to manufacturing and selling counterfeit pharmaceuticals, and was sentenced to 17.5 years in prison. His operational strategy was similar to the one used by Shamo; he imported fentanyl from China and used a pill press to make tablets that appeared real. Pasek sold the tablets online and, based on his flashyInstagram account, did well for himself.  

Picture from Wyatt Pasek’s instagram page

When Pasek was arrested in April 2018, officials seized $21,000 in cash, a gold and diamond necklace and thousands of dollars in cryptocurrencies and Bitcoin from his blockchain wallet. Four more Arizona-based dealers were also sentenced to prison terms ranging from five to 20 years for participating in international drug rings and selling fake opioids to customers.  

A Crackdown by Law Enforcement Officials

A rise in the number of crypto-related drug cases has spurred officials into action. The FBI has intensified its crackdown on international drug rings responsible for importing and selling counterfeit drugs. The FBI even formed the Joint Criminal Opioid and Darknet Enforcement (J-CODE) team, an international effort aimed at stopping drug trafficking rings. 

The J-CODE team has conducted two coordinated actions targeting international drug trafficking organizations in the last two years. The most recent  was called Operation SaboTor and was conducted between January 11 and March 12. The operation resulted in 65 search warrants and agents seizing 299.5 kilograms of drugs and cryptocurrencies worth $4.5 million. 

Federal agencies are simultaneously coordinating with each other to track payment mechanisms used to process such transactions. Thanks to its anonymous nature, cryptocurrency usage can be especially difficult to track and the onus for identifying such transactions lies with financial institutions and online payment processors.

In its advisories, FinCEN outlined information that will help it identify illicit drug transactions. Among FinCEN’s identifiers for crypto are: virtual currency wallet addresses, account information, IP addresses and International Mobile Equipment Identifiers (IMEI), a number used to identify mobile equipment. But the agency might have a Sisyphean task ahead of it. Even after enforcement officials took down two of the biggest markets operating on the dark web, a New York Times report estimated that there were still 30 illegal online markets operating there.