The rapid rise of cryptocurrencies has ushered in a new era of financial innovation, but it has also created new challenges in fighting financial crime. A recent comprehensive report by Chainalysis sheds light on the complex world of cryptocurrency-related money laundering.
Extensive research We cover both crypto-native and non-crypto-native techniques, as well as prevention strategies. Today, we’ll take a closer look at our key findings, highlighting the most important trends and data points to help you gain a thorough understanding of this complex issue.
The scale of cryptocurrency money laundering
The scale of cryptocurrency-related money laundering is staggering: approximately $100 billion has been transferred from known illicit wallets to exchange services since 2019.
It peaked in 2022 with a staggering $30 billion identified, driven mainly by transactions involving sanctioned services such as the Russian exchange Garantex.
In contrast to the non-cryptocurrency sector, the Hong Kong Monetary Authority (HKMA) fined Hong Kong subsidiary DBS Bank (Hong Kong) Limited. DBS, Fine for violations is HK$10 million of the Money Laundering and Terrorist Financing Ordinance (AMLO).
The Hong Kong Monetary Authority concluded that the bank failed to continually monitor business relationships over a period of time, conduct enhanced due diligence in high-risk situations, and keep adequate records for some customers.
These figures highlight the enormous challenge facing regulators and law enforcement agencies trying to stem illicit financial flows in the cryptocurrency sector.
Crypto-native money laundering methods
Intermediate wallets: Over 80% of the value of the money laundering channel
One of the primary methods used in crypto-native money laundering is the use of intermediary wallets. This “layering” process is designed to obscure the connection between illicit funds and their eventual integration into the legitimate financial system.
of Chainalysis Report Intermediate wallets often account for more than 80% of the total amount flowing through money laundering channels, highlighting their crucial role in these illicit operations.
The proliferation of intermediary wallets has been remarkable: in 2023, there were more than 1.4 million intermediary wallets moving known illicit funds, up from approximately 800,000 in 2022.
This increase indicates that criminals are becoming increasingly sophisticated in their tactics to evade detection, utilizing more complex wallet networks to hide the trail of their illicit funds.
Crypto Obfuscation Services: Mixer, Privacy Coin, Bridge
Mixers (also known as tumblers) have fluctuated in popularity as a tool for money laundering: These services mix the cryptocurrencies of many users together, making it difficult to trace the origin of the funds.
Mixer usage peaked in 2022, with over $1.5 billion worth of mixers being received in April alone. Usage has declined in the wake of regulatory action, but some mixers, such as Tornado Cash, have seen a resurgence in 2024, suggesting that criminals are adapting to regulatory pressures.
Privacy coins, especially MoneroIt has seen increased adoption among those looking to evade surveillance. Monero trading has been steadily increasing, with a notable spike in March 2024 due to a spam event known as the Black Marble.
The enhanced anonymity features of privacy coins make them particularly attractive to illegal actors, posing a major challenge for law enforcement and compliance professionals.
Crypto bridges, which facilitate the transfer of assets between different blockchain networks, are becoming increasingly popular as a means of money laundering: In January 2024, approximately $234 million in illicit inflows through bridges were recorded, the highest amount to date.
This trend highlights how criminals are taking advantage of the interoperability of different blockchain networks to further hide the trail of their illicit funds.
Destination of illicit funds
According to the report, over 50% of illicit funds end up directly or indirectly on centralized exchanges, which are likely favored due to their high liquidity and the ease with which cryptocurrencies can be converted into fiat.
However, the trading volumes received by centralized exchanges has declined significantly, from a peak of around £2 billion per month to around £780 million.
This decline suggests that centralized exchanges’ anti-money laundering (AML) programs are becoming more effective at detecting and mitigating money laundering activity.
Non-cryptocurrency native money laundering methods
As traditional money launderers adapt to the digital age, they are beginning to incorporate cryptocurrencies into their operations. Chainalysis The report identifies several on-chain activity patterns that may be indicative of non-cryptocurrency-native money laundering, providing valuable insights for compliance professionals and law enforcement agencies.
Transfers slightly below reporting threshold
The report highlighted a spike in transfers just below the $1,000, $3,000 and $10,000 thresholds, which coincide with various regulatory reporting requirements and suggest that some parties may be structuring payments to avoid further scrutiny.
This practice, known as “smurfing” in traditional finance, appears to be making its way into the crypto world.
Using multiple intermediate wallets
Interestingly, exchanges that have implemented KYC (Know Your Customer) verification processes have seen a sharp increase in the number of intermediary wallets used by bad actors compared to exchanges that do not have KYC in place.
This trend could indicate that money launderers are becoming more sophisticated in their attempts to evade detection on platforms with stricter verification processes, potentially using multiple wallets to fragment their activities and avoid red flags.
Integrated Wallet
The use of integrated wallets, which receive and consolidate funds from multiple sources, is another technique to look out for: in 2024, the top 100 Bitcoin integrated wallets received £968 million worth of Bitcoin from over 14,970 separate addresses.
Expanding the scope, there will be more than 1,500 integrated wallets receiving a combined total of £2.6 billion worth of Bitcoin in 2024, each receiving funds from at least 10 different wallets.
This pattern of consolidation may indicate an attempt to hide the origin of the funds before moving them to an exchange or other cash-out point.
Prevention strategies
Combating both crypto-native and non-crypto-native money laundering requires a multi-pronged approach, which includes robust regulatory frameworks, advanced technological solutions and strengthened international cooperation.
Regulatory Framework
The report highlights the various regulatory efforts around the world that are shaping the fight against cryptocurrency-related money laundering.
- The European Union’s Fifth Anti-Money Laundering Directive (5AMLD) and updated Transfer of Funds Regulation (TFR) extend AML requirements to virtual asset service providers (VASPs) and implement the travel rule for cryptocurrency transactions.
- Singapore’s Payment Services Act (PSA) Bring cryptocurrency businesses under regulatory oversight, Impose strict AML/CFT requirements.
- Hong Kong’s aforementioned amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) formally cover the operation of virtual asset businesses, New Regulatory Regime for Crypto-Asset Trading Platforms.
- The UK has implemented aggressive national enforcement measures, including the power to seize crypto assets suspected of being linked to money laundering activities pre-arrest.
- The UAE has amended Federal Decree No. (20) of 2018 to introduce AML/CFT obligations for VASPs, with various regulators setting specific requirements within their jurisdictions.
- The United States continues to rely on the Bank Secrecy Act (BSA) as the primary legal framework governing AML regulations, with the Financial Crimes Enforcement Network (FinCEN) providing guidance on how these regulations apply to cryptocurrency businesses.
Technical Solutions
Advanced transaction monitoring systems play a key role in fighting money laundering. The report highlights the growing adoption of blockchain analytics tools, with the number of transactions inspected by Chainalysis Crypto Compliance solutions soaring from less than 200 million in 2018 to more than 1.4 billion by 2024.
These tools use machine learning and artificial intelligence to detect anomalous patterns that could indicate money laundering and provide real-time alerts to compliance teams.
Cross-border collaboration and public-private partnerships
The report stresses the need for global cooperation to address the cross-border nature of cryptocurrency transactions, including through regulatory harmonisation between jurisdictions, information sharing and conducting joint operations.
Public-private partnerships will also be important, allowing for the exchange of information and best practices between government agencies and cryptocurrency companies.
Combating cryptocurrency-related money laundering is an ongoing challenge that requires constant vigilance and adaptation. As the cryptocurrency ecosystem continues to evolve, strategies to prevent its misuse for illicit purposes must also evolve.
By combining strong regulatory frameworks, cutting-edge technology, and international cooperation, the cryptocurrency industry can work towards creating a safer and more trustworthy financial system.
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