Money Laundering in Cryptocurrency: Trends and Detection Techniques

Money
laundering
in
the
cryptocurrency
ecosystem
is
evolving,
encompassing
a
wide
range
of
illicit
activities.
According
to
Chainalysis,
the
latest
research
delves
into
the
complexities
of
crypto-based
money
laundering
and
introduces
advanced
data
techniques
for
detection
and
investigation.

Expanding
Crypto’s
Role
in
Money
Laundering

Public
blockchains,
while
transparent
and
traceable,
are
increasingly
used
by
illicit
actors
to
launder
funds
due
to
their
cross-border,
instantaneous,
and
cost-effective
nature.
This
trend
is
not
limited
to
cybercriminals;
it
now
includes
broader
illicit
activities
such
as
narcotics
trafficking
and
fraud.
The
ubiquity
of
cryptocurrency
has
made
it
a
tool
for
laundering
proceeds
from
various
off-chain
crimes.

This
shift
has
significant
implications
for
investigators.
Expertise
in
cryptocurrency
must
extend
beyond
specialized
cybercrime
units
to
include
all
law
enforcement
agencies.
Cryptocurrency
is
now
one
of
the
payment
methods
used
by
illicit
actors
worldwide,
necessitating
a
comprehensive
understanding
of
both
blockchain
transaction
tracing
and
traditional
money
laundering
tactics.
However,
the
transparency
of
blockchain
provides
a
silver
lining:
with
the
right
data
and
tools,
investigators
can
uncover
illicit
activity
that
might
otherwise
go
undetected.

Understanding
Money
Laundering

Money
laundering
involves
concealing
the
origins
of
money
obtained
from
illegal
activities,
making
the
funds
appear
legitimate.
The
process
generally
consists
of
three
stages:
placement,
layering,
and
integration.
Placement
introduces
illicit
money
into
the
financial
system,
layering
obscures
its
origin
through
a
series
of
transactions,
and
integration
re-enters
the
money
into
the
legitimate
economy.

Chainalysis
has
published
analyses
in
its
annual
Crypto
Crime
Reports,
dissecting
the
flow
of
funds
from
known
illicit
wallets.
These
wallets
hold
funds
connected
to
confirmed
crypto-native
criminal
activity,
such
as
exchange
heists,
scams,
and
darknet
market
proceeds.
Conversion
services,
which
include
centralized
exchanges,
DeFi
services,
gambling
sites,
mixers,
and
bridges,
represent
the
layering
stage
of
laundering.
Because
this
activity
occurs
entirely
on-chain,
it
can
be
traced
and
analyzed
with
a
higher
degree
of
accuracy
and
speed
compared
to
traditional
financial
systems.

Significant
Findings

Since
2019,
nearly
$100
billion
in
funds
have
been
sent
from
known
illicit
wallets
to
conversion
services.
The
highest
amount
recorded
was
in
2022,
with
$30
billion
identified,
largely
attributable
to
transactions
involving
sanctioned
services
such
as
the
Russian
exchange
Garantex.

These
amounts
represent
the
dollar
value
of
the
assets
at
the
time
they
leave
wallets
associated
with
illicit
actors.
These
estimates
only
include
the
totals
moved
from
illicit
sources
to
crypto
services
and
do
not
include
the
value
sent
and
received
among
intermediaries,
which
can
involve
numerous
transactions.
This
estimate
also
excludes
transactions
where
cryptocurrency
is
used
to
launder
funds,
but
the
source
of
the
illicit
activity
is
unidentified
or
off-chain.

For
example,
a
drug
cartel
selling
narcotics
and
paying
a
distributor
using
cryptocurrency
might
have
transactions
flowing
directly
between
two
known
exchanges.
Without
specific
lead
information,
this
would
be
indistinguishable
on-chain
from
legitimate
service-to-service
transfers.
However,
investigators
can
still
follow
these
funds
using
a
combination
of
off-chain
intelligence
and
on-chain
analysis,
and
compliance
teams
can
flag
unusual
transactions
outside
of
their
customers’
business
profiles.

Conclusion

This
report
broadens
the
analysis
of
money
laundering
to
include
not
only
crypto-native
activities
but
also
suspicious
transaction
patterns
that
may
indicate
money
laundering
tied
to
off-chain
crimes.
The
ongoing
research
underscores
the
importance
of
advanced
blockchain
intelligence
and
data-driven
insights
in
combating
financial
crimes.

For
more
information,
visit

Chainalysis.

Image
source:
Shutterstock