Huggies Research | How to launder money through cryptocurrency
Money laundering through virtual currencies is an increasingly common method
This is mainly because virtual currency has the characteristics of anonymity, decentralization, and convenient cross-border operation.
This makes it more difficult to track the flow of funds.
1. Mixers/Tumblers
Coin mixing services are a common method of money laundering in cryptocurrency
Coin mixers mix cryptocurrencies from different users
The funds are then sent back to the user at a new address, obscuring the source and destination of the funds. This process disrupts multiple transactions, making it difficult to easily trace the original source of the funds.
Operation process:
Money launderers send ill-gotten cryptocurrencies to mixing services
Coin mixers mix funds with other users’ funds
The money launderers then withdraw the cryptocurrency in batches through different new addresses.
The resulting cryptocurrency appears to come from different sources, obscuring the original source of the illicit funds
2. Decentralized Exchanges (DEXs)
Decentralized exchanges such as Uniswap and PancakeSwap allow users to trade cryptocurrencies without identity verification.
Money launderers can use DEXs to convert one cryptocurrency into another, bypassing the traditional financial system’s regulation
Operation process:
After money launderers convert illegal funds into virtual currency
Multiple currency swaps on decentralized exchanges make funds difficult to track
After multiple cross-chain transactions
Funds are transferred to multiple wallet addresses to further disperse and hide their origin
Eventually, the funds are transformed into legal crypto assets through multiple transactions and can be used in other occasions.
3. Cross-chain transactions and cross-chain bridges
Cryptocurrencies can be transferred to different blockchain networks via Cross-Chain Bridges
These cross-chain transactions can further obscure the flow of funds, making it more complicated to track funds.
Operation process:
Money launderers transfer cryptocurrency from one blockchain to another (e.g., from Bitcoin to Ethereum) to exploit differences in privacy and regulation between blockchains.
On the target blockchain, money launderers may continue to trade through DEX or transfer funds to multiple wallet addresses
The complexity of fund flows is greatly increased by using cross-chain transfers, and it is difficult for regulators to track these transactions uniformly.
4. Over-the-counter (OTC) trading of virtual currencies
The Over-the-Counter (OTC) market allows individuals to buy and sell cryptocurrencies without a public exchange. Since both parties in the OTC market can be anonymous and there is no public record of the exchange, this facilitates money laundering.
Operation process:
Money launderers find buyers or sellers through the OTC market
Quickly convert cryptocurrencies into cash or other cryptocurrencies at a price lower or higher than the market price
Because OTC markets usually have no KYC requirements
The source and destination of funds are not easily monitored by regulators
5. Money Laundering Through NFTs
The NFT market has also become a new way for cryptocurrency money laundering in recent years.
NFT prices are highly volatile and transactions can be conducted anonymously, providing cover for money laundering activities
Operation process:
Money launderers create or purchase NFTs
Then sell it to another address or account, usually multiple virtual wallet addresses controlled by oneself
Prices are artificially inflated
Through these inflated transactions
Money launderers transfer illicit funds to their new wallets
On the surface, these funds were obtained through legitimate NFT transactions
Eventually, money launderers can convert these funds into legal currency through legal virtual currency trading platforms.
6. Use privacy coins
Privacy coins (such as Monero, Zcash, Dash, etc.) make it difficult to track the transaction path and balance of funds through built-in privacy functions. Compared with cryptocurrencies with public ledgers such as Bitcoin, privacy coins have stronger anonymity and are commonly used by money launderers.
Operation process:
Money launderers convert ill-gotten cryptocurrencies into privacy coins
Transactions in these privacy coins cannot be publicly tracked on the blockchain like Bitcoin can.
Through privacy coins, funds can flow freely and no third party or regulator can effectively monitor their transfer path.
Finally, the money launderer can redeem the privacy coin for a public ledger cryptocurrency or fiat currency to complete the “laundering” process.
7. P2P Trading
Peer-to-Peer (P2P) transactions are another way to launder money using cryptocurrency
Through the P2P trading platform, buyers and sellers trade directly
No need to go through a centralized exchange Many P2P platforms do not require strict identity verification
Operation process:
Money launderers find buyers or sellers willing to trade anonymously on P2P platforms
Directly sell or buy virtual currency and settle with legal currency or other payment methods
Because these transactions do not go through centralized exchanges, they do not leave easily traceable records, further hiding the path of fund flows.
8. Double Spending Attack
Although not common, in some cases
Money launderers may use double spending attacks to launder funds
By sending multiple transaction requests for the same cryptocurrency to different parties, money launderers attempt to obtain additional cryptocurrency or fiat currency from exchanges or service providers.
Operation process:
Money launderers take advantage of network latency or differences in blockchain confirmation times
Send multiple trade requests for the same funds on different platforms
Once the platform confirms the transaction
Money launderers can withdraw the original funds in a short period of time and obtain multiple benefits at the same time and continue to operate as "legal income"
Money laundering challenges and responses:
As the means of money laundering using virtual currencies become more complex, global regulators are also strengthening their monitoring of cryptocurrency transactions and implementing stricter KYC and AML (anti-money laundering) regulations. For example:
Exchange compliance: Many centralized exchanges require users to provide detailed identity information and report suspicious transactions to regulators.
Blockchain analysis tools: Specialized blockchain analysis companies (such as Chainalysis, Elliptic, etc.) help regulators identify suspicious money laundering activities by tracking the flow of funds on the blockchain.
Nevertheless, due to the anonymity and technical complexity of cryptocurrencies, money laundering using virtual currencies remains quite concealed.
