Cryptocurrency Inexorably Linked to the Fentanyl Trade

Cryptocurrency has established itself as the preferred method of payment for transnational organized crime groups involved in the fentanyl trade, particularly those operating from China-based chemical precursor manufacturers.

According to a report OCCRP by the blockchain analysis firm Chainanalysis, actors in the transnational fentanyl trade are attracted to crypto due to its multiple conveniences.

These include its ability to be instantly transferred anywhere in the world, often under a pseudonym, making it more challenging for law enforcement agencies to trace the money and build cases against local traffickers.

Since 1999, the U.S. has witnessed nearly one million drug overdose-related deaths, with 82% involving synthetic substances like fentanyl, as per the Center for Disease Control and Prevention. The drug is over 50 times more potent than heroin and is listed by the U.S. Department of Justice (DOJ) as the leading cause of death among adults aged 18 to 49. Between 2019 and 2021, an estimated 196 Americans fatally overdosed on fentanyl every day.

Mixing fentanyl with other narcotics such as heroin, cocaine, or methamphetamine is also incredibly easy, leading unsuspecting victims to ingest it unknowingly.

In recent years, China has become a principal supplier of precursor chemicals required to manufacture synthetic opioids. Chinese suppliers have established networks with transnational drug traffickers, ensuring that their precursors are used in clandestine labs, particularly those belonging to Latin American cartels.

China has been a global leader in chemical exports since 2011, with total sales exceeding US$1.5 trillion in 2017 alone, according to McKinsey & Company, a global management consulting firm.

As the chemicals flow in one direction, payment flows back. In its investigation, Chainanalysis identified cryptocurrency addresses associated with alleged Chinese suppliers and discovered over $37.8 million worth of crypto assets received since 2018.

The blockchain analysis firm highlighted a case where the U.S. Department of the Treasury blacklisted several Dutch and U.K. nationals in November 2022 foselling illicit synthetic substances to American markets through darknet markets and shell companies.

According to Chainanalysis, Alex Adrianus Martinus Peijnenburg and Matthew Simon Grimm utilized bitcoin, bitcoin cash, and ethereum addresses to receive over $30 million in digital payments.

Turning the focus to China, the investigation revealed that Wuhan Shuokang Biological Technology (WSBT) and Suzhou Xiaoli Pharmatech (SXPC) chemical companies had sold fentanyl precursors to Latin American middlemen, who in turn sold them to Mexican cartels.

The synthetic drugs manufactured from these precursor chemicals eventually found their way into lucrative U.S. markets. Both WSBT and SXPC were compensated for their services with bitcoin, most of which was electronically sent from the now-sanctioned darknet market Hydra, as per Chainanalysis.

In response to these concerns, both the Treasury and DOJ took action last month against several fentanyl traffickers from Mexico’s Sinaloa Cartel, including some of El Chapo’s children, as well as their China-based chemical suppliers.

Sanctions were imposed on China’s Wuhan Shuokang Biological Technology Co. Ltd. and its sole owner, Yao Huatao, as well as Suzhou Xiaoli Pharmatech Co. Ltd. for knowingly shipping fentanyl precursor chemicals to Mexico that ended up in cartel hands.

The Treasury stated that both companies accepted bitcoin in exchange for their products.

Deputy Attorney General Lisa O. Monaco emphasized that no transnational criminal organization is self-reliant, regardless of its location. She highlighted how chemical companies based in China have sourced the necessary precursors for fentanyl production in the Sinaloa Cartel’s clandestine labs before the drugs are shipped to the United States.

According to Chainanalysis, most darknet marketplaces explicitly prohibit the sale of fentanyl products on their platforms to avoid encounters with U.S. law enforcement.

For instance, the blockchain analysis firm mentioned Incognito Market, which explicitly states its prohibition of «any sale of fentanyl or its analogues and related chemicals.» The market emphasizes that any vendor found selling products containing fentanyl or carfentanyl under different names to evade this rule will face immediate banning.

However, Chainanalysis revealed that many vendors present themselves as compliant while finding ways to bypass these restrictions. They achieve this by advertising their narcotics using pseudonyms that are recognizable to their customers.

In the case of Incognito Market, an anonymous vendor listed their product as «China White,» which Chainanalysis suggested was likely a reference to fentanyl.