Money laundering has been around since the advent of currency and costs the UK economy more than £100 billion a year according to the National Crime Agency. Wherever you find financial motivated crime, money laundering is not far behind and in recent years the emergence of cryptocurrency has allowed the illicit practice to flourish by adding another layer of complexity to asset tracing. While many of us are aware of how laundering money works in real-life situations – most often by concealing the source of the money through inventive bookkeeping, such as by setting up ‘fronts’ or ‘offshore’ accounts – it’s a little harder to understand how it works in the world of cryptocurrency.
Cryptocurrency follows precisely the same patterns as cash money laundering: placement, hiding and integration, but beyond that the system becomes a little more complicated. BanklessTimes.com can report that in 2022 cryptocurrency laundering typically involved two types of on-chain entities and services.
Two Typical Ways Cryptocurrency is Laundered
The first and most common practice is for crypto criminals to use intermediary services and wallets to hold funds on a temporary basis, swapping assets and obfuscating the movement of money. These intermediary services cover a wide range of entities, ranging from the legitimate to the illegal, and the term extends to darknet markets and mixers, personal wallets and even gift cards. Illicit actors also used decentralised finance platforms or DeFi protocols to convert funds. These platforms allow users access to a range of financial services on the blockchain, such as trading, staking, lending, borrowing and even yield farming, but are not thought to be an efficient method of concealing the flow of money.
The other way that money laundering occurs in cryptocurrency is through the use of fiat off-ramps that allow cryptocurrency to be exchanged for fiat (e.g. pounds sterling and dollars). This method means that the funds can no longer be traced by blockchain analysis once they hit a service, and only the service itself has visibility as to where the funds go next. If the funds are converted into cash, they can then be followed through the more traditional methods of financial investigation. Fiat off-ramps are typically centralised exchanges, but the function can also be served by P2P exchanges.
$67.7 Billion Worth of Cryptocurrency Has Been Laundered Since 2015
A recent survey carried out by Chainanalysis shows that since 2015 more than $67.7 billion worth of cryptocurrency has been diverted for illicit purposes. $23.8 billion of this was from the year 2022 alone, a 68.0% increase on the amount laundered in 2021. In turn, the $14.2 billion laundered in 2021 represented a 67.05% increase on the 2020 amount, suggesting that cryptocurrency laundering is growing at a consistent and alarming rate.
Cryptocurrency laundering appeals to criminals not only because of the anonymous nature of the process, but also due to the ease and speed at which funds can be sent to anywhere in the world. The numbers may at first appear alarming, but we have to remember that there are protocols in place to report suspicious activity and also that, compared to the amount of illicit funds involved in the traditional methods of finance, they are significantly smaller.Jonathan Merry, CEO of BanklessTimes.com
DeFi Received More Illicit Funds in 2022 than Any Other Year
More illicit funds were sent to DeFi protocols in 2022 than any other year. However, it remains to be seen why criminals are using a service that is both ineffective at obscuring funds and doesn’t allow for the conversion of cryptocurrency into fiat. One explanation for the popularity of DeFi might be that it is built on blockchain technology that provides a high degree of anonymity for users and makes it difficult to trace the origin or destination of funds, which is attractive for hackers who want to launder their stolen cryptocurrency. DeFi protocols are also decentralised and not controlled by any central authority, which makes them more resistant to censorship or shut-down by authorities. This again appeals to hackers who wish to avoid detection.
Perhaps this is why, in 2022, 57.0% of hackers handling stolen cryptocurrency are sending the funds to DeFi protocols. In fact, the study confirmed that almost all usage of DeFi protocols for money laundering is carried out by one criminal group of hackers stealing cryptocurrency. These hackers are associated with the Lazarus group – a Pyongyang based criminal syndicate in North Korea. In 2022, the group alone stole £1.4bn in cryptocurrency assets, a number which outweighs North Korea’s total annual exports. Although researchers have in the past linked the group to Kim Jong Un’s government it is not known whether they are an external hire or part of the government’s own operations. However it would be correct to say that cryptocurrency laundering represents a large proportion of North Korea’s economy.
Most other crypto-criminals send the majority of their funds directly to centralised exchanges, such as fiat off-ramps, where they can then be exchanged for fiat unless compliance teams take action. There is one notable exception in the graph; darknet market vendors who send most of their funds to other illicit services, primarily darknet markets, which offer their own money laundering services.
So what can we expect to see in 2023? Sadly it seems almost certain that cryptocurrency laundering will continue to be a problem well into this year and indeed beyond. As more people turn to use cryptocurrency and its popularity grows, then so too does the opportunity for criminals to exploit the system for their own end. We at Bankless Times hope that governments and regulators around the world will begin to take a more concerted and joined-up approach to tackling this sort of abuse before it begins to undermine the confidence in and legitimacy of what is, for millions of users around the world, an exciting and revolutionary step forward in global trading.
Contributors
