Understanding Crypto Money Laundering

Crypto money laundering involves the process of converting ill-gotten digital assets into cash while intentionally obscuring their origins. Various mechanisms play a role in this covert financial maneuvering:

1. Intermediary Services: These act as bridges between cryptocurrencies and traditional fiat currencies. They facilitate the movement of funds from the digital realm to tangible cash.
2. Personal Digital Wallets: These individual wallets allow users to store and manage their crypto holdings. In the context of money laundering, they serve as conduits for converting digital wealth into spendable currency.
3. Crypto Mixers: These services intentionally mix and shuffle cryptocurrency transactions, making it challenging to trace the flow of funds. They create a tangled web that confounds investigators.
4. Decentralized Finance (DeFi) Protocols: DeFi platforms provide decentralized financial services, including lending, borrowing, and trading. Some of these protocols can be exploited for money laundering purposes.
5. Fiat Off-Ramping Services: These include centralized exchanges and crypto ATMs where users can convert their digital assets into traditional money.

In a significant turn of events, cryptocurrency transactions associated with illicit activities experienced a notable decrease in 2023. According to a recent report by Chainalysis, approximately $22.2 billion was laundered through crypto, marking a 29.5% decline from the $31.5 billion reported the previous year.

Factors Behind the Decline of Crypto money laundering

Several factors contributed to the drop in illicit crypto activity:

1. Reduced Crypto Trading Volume: Lower overall trading volume in the crypto market played a role. As trading activity decreased, so did the opportunities for illicit transactions.
2. Heightened Regulatory Scrutiny: Regulators worldwide intensified their focus on crypto-related services. The United States, in particular, cracked down on platforms that had previously facilitated money laundering. Notably, the U.S. Treasury Department took action against Tornado Cash, a popular crypto mixing service, for its alleged involvement in laundering virtual currency stolen by North Korean hackers. Similarly, Sinbad, another mixer, faced sanctions and closure due to suspected links to North Korea’s hacking group.

The Road Ahead

As the crypto landscape continues to evolve, regulatory vigilance remains crucial. Striking a balance between innovation and security is paramount. While the decline in illicit crypto activity is a positive sign, ongoing efforts are necessary to ensure the integrity of digital financial systems.

How Crypto Criminals Are Evading Detection by Using Mixers, Bridges, and DeFi

Crypto criminals are constantly looking for new ways to hide their illicit activities from law enforcement and regulators. According to a report by Chainalysis, a blockchain analysis company, one of the methods they use is to transfer funds from tainted addresses to mixers, which are services that pool and mix crypto transactions to obscure their origin and destination.

However, mixers have become less popular among crypto criminals in recent years, as authorities have cracked down on some of the most widely used ones, such as BestMixer and Helix. The report reveals that the amount of funds sent to mixers from illicit addresses dropped by almost 50% in 2023, from $1.0B in 2022 to $504.3M.

This does not mean that crypto criminals have given up on mixing their funds. Instead, they have switched to other types of obfuscation services, such as YoMix and cross-chain bridges. YoMix is a mixer that operates on the Binance Smart Chain (BSC), a blockchain network that supports smart contracts and decentralized applications (DApps). Cross-chain bridges are platforms that allow users to move crypto assets between different blockchains, such as Ethereum and BSC.

The report states that YoMix and cross-chain bridges have been adopted by the Lazarus Group, a notorious group of North Korean hackers who are behind some of the biggest crypto heists in history. The Lazarus Group has been using YoMix and cross-chain bridges to launder their stolen funds and avoid detection by authorities. The report notes that YoMix’s activity increased by 500% in 2023, indicating its growing popularity among crypto criminals.

Another trend that the report highlights is the rise of decentralized finance (DeFi) protocols as a destination for illicit funds. DeFi is a term that refers to a range of DApps that offer financial services such as lending, borrowing, trading, and investing, without intermediaries or centralized control. DeFi protocols are built on transparent and immutable blockchains, which would seem to make them unsuitable for money laundering.

However, the report argues that some crypto criminals may use DeFi protocols to diversify their portfolio, hedge their risk, or earn passive income from their illicit funds. The report shows that the share of funds going to DeFi protocols from illicit addresses increased in 2023, while the share going to centralized exchanges decreased. The report cautions that DeFi protocols may face more regulatory scrutiny in the future, as authorities seek to prevent their misuse by crypto criminals.

The report concludes by saying that crypto criminals are always adapting their money laundering strategies and exploiting new kinds of crypto services. The report warns that crypto service providers, regulators, and law enforcement agencies need to keep up with the evolving tactics of crypto criminals and collaborate to ensure the safety and integrity of the crypto ecosystem.

Crypto is becoming more mainstream and integrated with traditional markets, but it also attracts more attention from criminals who want to profit from it. The report cites several examples of crypto laundering cases that occurred globally in 2022. In February 2022, the U.S. Justice Department arrested a couple who allegedly conspired to launder $4.5B of crypto stolen during the 2016 hack of crypto exchange Bitfinex. Later that year, a gang of 63 people were arrested by Chinese police for allegedly laundering as much as $1.7B using crypto.

Some countries have already implemented new rules for money transfers to prevent the use of crypto exchanges for money laundering, such as Japan. In 2021, the Biden administration reportedly planned to crack down on crimes committed by virtual currency exchanges, mixing and tumbling services, and bad actors who facilitate money laundering.

Bitcoin (BTC-USD) and ether (ETH-USD) are the two largest digital tokens by market cap, accounting for roughly 70% of the broader $1.95T crypto market. BTC, in particular, has soared over 120% from a year ago, thanks to the regulatory approval of the first U.S. spot bitcoin exchange-traded funds as well as speculation around interest-rate cuts. SA analysts weighed in on what could be next for BTC.

Is cryptocurrency a red flag for money laundering?

Cryptocurrency is a digital currency that operates on a decentralized system, without the need for a central authority or intermediary. While this offers many benefits, such as lower transaction costs, faster payments, and greater accessibility, it also poses a significant challenge for regulators and law enforcement agencies who are concerned about the potential use of cryptocurrency for money laundering and other criminal activities. Cryptocurrency transactions are often anonymous, as the users do not have to reveal their real identities or provide any verification documents.

Moreover, cryptocurrency transactions are difficult to trace, as they are recorded on a public ledger that is distributed across thousands of computers, making it hard to link them to a specific person or entity. Furthermore, cryptocurrency transactions can be easily transferred across borders, without any restrictions or controls, making it possible for criminals to move their illicit funds to jurisdictions with weak or no anti-money laundering (AML) regulations. Therefore, cryptocurrency can be seen as a red flag for money laundering, as it provides an attractive and convenient way for criminals to conceal the source and destination of their illegal income.

Crypto money laundering: How much money has been laundered through crypto?

According to a report by Chainalysis, a blockchain data company, criminals laundered $8.6 billion worth of cryptocurrency in 2021, up by 30% from the previous year. This amount represents about 0.34% of the total cryptocurrency market value, which was estimated at $2.5 trillion at the end of 2021. The report also identified the most common methods and services used by criminals to launder their cryptocurrency, such as mixers, tumblers, peer-to-peer networks, over-the-counter brokers, and dark web markets.

These methods and services aim to obscure the origin and destination of the cryptocurrency transactions, by breaking the links between them or by adding layers of complexity and anonymity. The report also provided several examples of money laundering cases involving cryptocurrency, such as ransomware attacks, malware operations, scams, human trafficking, and terrorist financing. These cases demonstrate how cryptocurrency has been abused for money laundering purposes, and how challenging it is for law enforcement agencies to detect and prevent such activities.

Crypto money laundering: What is the AML risk with cryptocurrency?

The AML risk with cryptocurrency refers to the possibility that cryptocurrency transactions may be used for money laundering or other illicit purposes, and that such transactions may evade the detection and prevention measures of the AML authorities and regulations. The AML risk with cryptocurrency is high, due to the inherent characteristics of cryptocurrency, such as anonymity, decentralization, cross-border mobility, and volatility. These characteristics make it easier for criminals to hide their identity, location, and transaction history, and to move their funds quickly and discreetly across different jurisdictions and platforms.

The AML risk with cryptocurrency is also influenced by the lack of clarity and consistency regarding the legal status, definition, and regulation of cryptocurrency across different countries and regions. Some countries have embraced cryptocurrency and have adopted a supportive and flexible regulatory framework, while others have banned or restricted cryptocurrency and have imposed strict and punitive measures. This creates a gap and a discrepancy in the AML standards and requirements for cryptocurrency, and creates opportunities for regulatory arbitrage and evasion. Therefore, the AML risk with cryptocurrency is a serious and growing concern, and requires a coordinated and comprehensive response from the AML authorities and stakeholders.

Conclusive statement : Crypto money laundering

Crypto money laundering is a serious threat to the global financial system, as it enables criminals to evade detection and regulation by using decentralized and anonymous digital currencies. Crypto money laundering can facilitate various illicit activities, such as terrorism financing, drug trafficking, tax evasion, and cybercrime. Therefore, it is imperative that governments, regulators, and law enforcement agencies work together to combat crypto money laundering and ensure the security and stability of the digital economy. Crypto money laundering is not only a challenge, but also an opportunity to develop innovative and effective solutions for the future of finance.