How Does Cryptocurrency Money Laundering Work?
With its decentralized and pseudonymous transactions that offer speed, efficiency, and accessibility, cryptocurrency has revolutionized international finance. These same characteristics, however, make it a desirable instrument for money laundering. Cryptocurrency is used by criminals to hide illicit payments, making it challenging for law enforcement to monitor illicit activities.
Although anti-money laundering (AML) laws have been strengthened by governments and financial watchdogs, criminals are always coming up with new ways to get around enforcement weaknesses. Developing effective countermeasures requires an understanding of how bitcoin supports money laundering.
Phases of Cryptocurrency Money Laundering
Like traditional banking institutions, bitcoin money laundering occurs in three main stages:
1. Placement
By transforming them into cryptocurrency, criminals bring illegal funds into the banking system. This procedure aids in hiding the money’s initial source. Typical placement techniques consist of:
Buying cryptocurrency with cash: Criminals exchange huge amounts of cash for Bitcoin, Ethereum, or stablecoins through cash-intensive enterprises, unofficial peer-to-peer (P2P) exchanges, or cryptocurrency ATMs.
Using fraudulent exchanges: Because certain cryptocurrency exchanges don’t have robust Know Your Customer (KYC) policies, criminals can purchase substantial sums of cryptocurrency without having their identities verified.
Taking advantage of ransomware attacks to steal digital assets: Cybercriminals demand payments in Bitcoin or Monero, thereby transferring illegal funds into the cryptocurrency market.
2. Layering
To obscure the trail of illegal cash and make them more difficult to track, crooks in this stage create several intricate transactions. To conceal ownership, they transfer cryptocurrency assets across different wallets, services, and blockchains. Typical layering methods include of:
Mixing services, often known as tumblers, combine cryptocurrency from several users and distribute it at random, making it quite difficult to identify the source.
Chain-hopping: Criminals use decentralized exchanges (DEXs) that do not require KYC to exchange one cryptocurrency for another across several blockchains.
Gaming and NFT transactions: In order to incorporate illegal monies into the economy, scammers purchase virtual land, in-game assets, or non-fungible tokens (NFTs) and then resale them at inflated or manipulated rates.
3. Integration
Converting laundered cryptocurrency into fiat money or legal assets is the last stage. Clean money is reintroduced into the financial system by criminals through:
using over-the-counter (OTC) brokers that don’t have stringent compliance procedures to sell cryptocurrency for cash.
utilizing cryptocurrency-friendly merchants to invest in high-value assets, real estate, and luxury products.
Using pre-paid cryptocurrency cards that work similarly to debit cards and make spending simple
Typical Techniques for Money Laundering in Cryptocurrencies
1. Services for Crypto Mixing and Tumbling
By combining cryptocurrency from many users and spreading it at random, crypto mixers—also referred to as tumblers—assist criminals in making their transactions anonymous. These services cut all communication between the sender and the recipient, which makes it very challenging for law enforcement to follow money.
2. Making Use of Peer-to-Peer (P2P) Transactions
There is little regulatory control of the operations of many P2P cryptocurrency trading platforms. These platforms are used by criminals to exchange illegal payments without proving their identities. P2P transactions don’t leave a readily identifiable digital trail like centralized exchanges do.
3. Laundering of Decentralized Finance (DeFi)
Without the need for middlemen, DeFi platforms offer financial services like lending, borrowing, and trading. DeFi protocols are exploited by criminals because
KYC and AML compliance are lacking on many DeFi platforms.
Transactions based on smart contracts are hard to track down.
Fast financial transfers made possible by flash loans make detection more difficult.
4. Bridge Exploits and Cross-Chain Swaps
To transfer assets between blockchains without depending on controlled exchanges, criminals utilize cross-chain bridges. Since transaction records are erased by these swaps, tracking down illegal funds is practically impossible.
5. Laundering Via NFTs & Online Gaming
Another channel for money laundering is the gaming sector and NFT marketplaces. Criminals use unlawful monies to buy in-game currency, digital assets, or NFTs, which they then resell to unwary customers, turning illicit cash into legal profits.
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