Law Enforcement’s Battle with Crypto Laundering

As emphasized in a recent Chainalysis money laundering report, advanced crypto-laundering techniques continue challenging law enforcement and crypto-related services

Sophisticated money laundering techniques pose a substantial challenge for cryptocurrency service providers and law enforcement agencies, as per a report by Chainalysis.

A Crypto Money Laundering report was published by Chainalysis, a blockchain analysis firm, on July 11. The report emphasizes the monthly movement of billions through the crypto ecosystem, from illicit wallets to conversion services.

The report demonstrated that these transfers employ sophisticated techniques to conceal the origins and movement of these funds.

The trace is obscured.
The report reveals that using intermediary wallets, or “hops,” is a frequently employed method for concealing the trace of illicit funds.

The flow of funds is difficult to trace due to the numerous “hops,” as intermediary wallets are responsible for traveling through more than 80% of the total value in laundering channels.

The escalating utilization of stablecoins, including Monero (XMR), in these transactions introduces an additional layer of complexity. However, it also introduces risks for money launderers, as stablecoin issuers can block funds.

The Atomic Wallet exploit, perpetrated by the North Korea-affiliated hacking group TraderTraitor in June 2023, is cited in the report as an illustration of the complex strategies employed in crypto-native laundering.

This incident illustrates the persistent challenge that investigators encounter, as it highlights the sophisticated strategies used to conceal illicitly acquired funds.

Mixers are included in the mixture.
Tracing illicit funds is further complicated by obfuscation services, including privacy coins and intermediaries. Tornado Cash is an example of a mixer that combines cryptocurrencies from various users to conceal their origins.

In 2024, mixers have experienced a resurgence, which indicates their ongoing prevalence among criminals despite the implementation of sanctions and regulatory measures. The enhanced anonymity features of privacy coins, including the Monero above and Zcash, have made it extremely difficult to trace such transactions, attracting illicit actors despite regulatory crackdowns.

Exchanges that are centralized
The report also disclosed that centralized exchanges (CEX) remain the primary destination for illicit funds, with over 50% reaching these exchanges due to their high liquidity and integration with traditional financial services.

Nevertheless, the substantial decrease in the volume received by centralized exchanges indicates that anti-money laundering (AML) programs have been enhanced.

Furthermore, the off-ramping of illicit funds has been significantly facilitated by over-the-counter (OTC) brokers, particularly those that operate without proper Know Your Customer (KYC) procedures.

In such cases, these brokers frequently promote their services on platforms that utilize encrypted messaging, providing a direct conversion to fiat currency and appealing to criminals searching for anonymity.

The report emphasizes the necessity of ongoing improvements in blockchain analysis tools and consistent regulatory measures to combat the sophisticated strategies employed in crypto-native money laundering, including implementing appropriate anti-money laundering laws.