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The scale of crypto’s involvement in money laundering

Author: Syedur Rahman  16 February 2024
2 min read

Syed Rahman considers the arguments about why crypto may play a bigger than expected role in illicit activity.

There has been a hint of optimism when it comes to the world of cryptocurrency in the past year or so. Pricing has stabilised, to some degree, and recently-published statistics show a fall in the amount of assets being received by illicit cryptocurrency addresses.

There are – as I wrote a day or two ago – some reasons for cheer in the world of crypto. But it is still worth sounding a note of caution. Yes, there seems to have been a decrease in the recorded use of crypto by criminals. But it is worth emphasising that it would be a mistake to view this as the whole picture.

The research that is cited to show that money laundering accounts for only a very small fraction of crypto transaction volume (0.62% in 2022, according to Chainalysis) can be countered by the argument that such analysis is not comprehensive.

That argument, which has been heard recently in the US Congress, is based on the research not covering off-chain activity. While blockchain analytics firms see what is on the chain, they are not witnessing off-chain activity. Law enforcement agencies have to observe the whole illegal crypto world and all the transactions being conducted within it.

Transparency

Crypto’s supporters have, for many years now, voiced the opinion that illicit activity can be hampered by the transparency of blockchain, which offers far greater openness than the traditional financial system. There are, after all, many statistics that can be employed to emphasise the extent to which money laundering pervades the international banking system.

This opinion, however, does not take into account the fact that a lot of illicit activity happens at exchanges that internally match customer orders but do not report this on the blockchain.

There are, for obvious reasons, no definitive statistics regarding how much of this activity goes on. But with the independent, non-profit US-based National Bureau of Economic Research estimating that off-chain transaction volume for Bitcoin is at least 10 times greater than its on-chain transaction volume, the scale of it cannot be ignored.

Mixers and Bridges

And that is before the effect of mixers has even been considered. Crypto mixers (aka tumblers) are by their very nature a challenge to blockchain transparency. Mixers, such as Tornado Cash, exist to enable users to blend their assets with others before they are sent to the intended recipient.

There could not be a more definitive way of obscuring the trail of assets. Unsurprisingly, mixers are popular with those looking to hide their tracks after illegal activity. The benefits of doing so are clear to anyone looking to keep the authorities (and those they have illegally obtained assets from) off their trail.

This was emphasised five months ago, when the US Treasury’s Financial Crimes Enforcement Network (FinCEN) designated mixing as both a prime money laundering concern and an acute national security threat. FinCEN wants to see rules brought in that would place an obligation on banks to report suspicious transactions involving their mixer-using customers.

Such a move comes after US enforcement actions against some of the bigger mixers, including Tornado Cash; which was accused of aiding transactions by the likes of, among others, the North Korea-linked Lazarus Group hackers. This, however, may have had the effect of making cross-chain bridges more appealing to criminals.

Functioning as a decentralised application that enables the transfer of assets from one blockchain to another, a cross-chain bridge can facilitate liquidity between distinct blockchains. The data tends to indicate that criminals are increasingly attracted to this, especially as the authorities are taking a closer look at mixers.

There is little doubt that the criminals and those who pursue them are involved in a high-tech game of hide and seek, with the former always looking for ways of staying one step ahead of the latter. It is this drive to remain hidden that makes it so hard to accurately gauge how big a role crypto plays in illegal activity.

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Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, international arbitration, civil recovery, cryptocurrency and high-stakes commercial disputes.

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