What is crypto money laundering?
Crypto money laundering involves concealing illegally obtained funds by funneling them through cryptocurrency transactions to obscure their origin. Criminals may operate offchain but move funds onchain to facilitate laundering.
Traditionally, illicit money was moved using couriers or informal networks like Hawala. However, with the rise of digital assets, bad actors now exploit blockchain technology to transfer large amounts of money. With evolving techniques and increasing regulation, authorities continue working to track and mitigate the misuse of cryptocurrencies for money laundering.
Thanks to sophisticated technologies like cryptocurrencies, criminals find moving large amounts of money simpler. As cryptocurrency adoption has grown, so has illicit activity within the space. In 2023, crypto wallets linked to unlawful activities transferred $22.2 billion, while in 2022, this figure stood at $31.5 billion.
Stages of crypto money laundering
Crypto money laundering follows a structured process designed to hide the source of illicit funds. Criminals use sophisticated methods to bypass regulatory oversight and Anti-Money Laundering (AML) measures. The process unfolds in several stages:
- Step 1 — Gathering funds: The first step involves gathering funds obtained illegally, often from organized crime or fraudulent activities. These illicit earnings need to be moved discreetly to avoid detection by regulatory authorities.
- Step 2 — Moving funds into the crypto ecosystem: Criminals now move illicit funds into the financial system by purchasing cryptocurrencies. The modus operandi is to buy cryptocurrencies through multiple transactions across crypto exchanges, particularly those with weak AML compliance. To make tracking more complex, they may convert funds into different digital assets like Ether (ETH), Polkadot (DOT) or Tether’s USDt (USDT).
- Step 3 — Juggling of funds: At this stage, the criminals hide the funds’ ownership. For this purpose, they move their crypto assets through a series of transactions across different platforms, exchanging one cryptocurrency for another. Often, funds are transferred between offshore and onshore accounts to further complicate tracing.
- Step 4 — Reintroducing cleaned money into the system: The final step involves reintroducing the cleaned money into the economy, which they do through a network of brokers and dealers. They now invest the money in businesses, real estate or luxury assets without raising suspicion.
Did you know? Taiwan’s Financial Supervisory Commission has mandated that all local virtual asset service providers (VASPs) must adhere to new AML regulations by 2025.
Various methods criminals use to launder cryptocurrencies
Criminals employ several methods to launder illicitly obtained digital assets. From non-compliant exchanges to online gambling platforms, they use various techniques to conceal the transaction trail.
Below is some brief information about the methods criminals use.
Non-compliant centralized exchanges
Criminals use non-compliant centralized exchanges or peer-to-peer (P2P) platforms to convert cryptocurrency to cash. Before being converted into fiat, the cryptocurrency is processed through intermediary services like mixers, bridges or decentralized finance (DeFi) protocols to obscure its origins.
Despite compliance measures, centralized exchanges (CEXs) handled almost half of these funds. In 2022, nearly $23.8 billion in illicit cryptocurrency was exchanged, a 68% surge from 2021.
Decentralized exchanges (DEXs)
DEXs operate on a decentralized, peer-to-peer basis, meaning transactions occur directly between users using smart contracts rather than through a CEX. These exchanges are currently largely unregulated, which criminals use for swapping cryptocurrencies and making investigations harder.
The absence of traditional Know Your Customer (KYC) and AML procedures on many DEXs allows for anonymous transactions.
Mixing services
Cryptocurrency mixers, also called tumblers, enhance anonymity by pooling digital assets from numerous sources and redistributing them to new addresses randomly. They obscure the funds’ origins before they are sent to legitimate channels.
A well-known example of criminals using crypto mixers is Tornado Cash, which was used to launder over $7 billion from 2019 until 2022. The developer of the mixer was arrested by Dutch authorities.
Bridge protocols
Crosschain bridges, designed to transfer assets between blockchains, are exploited for money laundering. Criminals use these bridges to obscure the origin of illicit funds by moving them across multiple blockchains, making it harder for authorities to track transactions.
By converting assets from transparent…
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