Crypto Money Laundering

Last Updated on 5 months by newseditor

Financial crimes are common in all countries. Over the years, banks and financial institutions have found ways to navigate these crimes. However, with the emergence of blockchain technology, these financial crimes became relatively more effortless and more rampant. This is due to the specific features of blockchain technology.

For instance, blockchain technology primarily thrives on anonymity. As a result, users can transact while giving little to no information about their identity. This situation is often the perfect breeding ground for money laundering, as criminals can inject money into the financial system with minimal traces.

How Prevalent is Money Laundering in the Crypto System?

Money laundering is heavily prevalent in the cryptocurrency system. In fact, research has shown that there has been a relatively consistent increase in crypto money laundering over the years. For instance, cybercriminals reportedly laundered about $18 billion on crypto in 2021. This amount significantly increased in 2022. According to a Chainalysis report, crypto money laundering peaked at over $20 billion in 2022. This represents an increase of over $2 billion.

Most cybercriminals conduct these money laundering operations through consistent patterns.Some methods used to launder money through crypto include the following:

1. Mixers: These crypto services blend the cryptocurrencies owned by numerous users. The primary aim of this blending is to blur the true origin of these assets. Due to the transparency of public blockchains like Bitcoin, it is often challenging to achieve anonymity without using mixers. The anonymity that mixers offer makes money laundering significantly easier for cybercriminals. For instance, in 2022, 10 percent of money laundered through crypto was facilitated by mixers.

2. Non-Compliant Crypto Exchanges: Non-compliant exchanges do not adhere to regulatory requirements on crypto assets or general crypto exchanges. These exchanges rarely require user verification. They also enable asset transfer without requiring users to confirm their identity. As a result, criminals can easily transact crypto with minimal traces. According to a report, non-compliant exchanges facilitated illicit transactions worth about $4.2 billion in 2020 alone.

3. Nested Services: Nested services are provided by nested crypto exchanges. These exchanges do not qualify as conventional exchanges. Instead, they provide services to customers through accounts on other platforms. Essentially, a user that uses nested exchanges will not be provided services directly but through an account on another crypto exchange. Over the years, nested exchanges have become a popular tool for money launderers to facilitate their transactions.

Governmental Actions

Many countries have discovered the possible downsides and risks of crypto’s anonymity. Thus, these countries have created regulatory requirements to reduce the prevalence of crypto money laundering. One such regulatory requirement is KYC/AML. KYC stands for “Know Your Customer,” and it refers to all the steps an organization takes to verify its users’ identity. On the other hand, AML stands for “Anti-Money Laundering,” and it is the execution of measures to prevent money laundering or terrorism financing.

National governments increasingly require crypto exchanges to implement KYC/AML measures to reduce the occurrence of money laundering on their platforms.

Conclusion

Crypto holds numerous benefits for the global financial industry. However, as it applies to every innovation, criminal activities will occur. This is why governments must work closely with crypto exchanges to reduce these illicit transactions within the crypto ecosystem.

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