03 Mar The DOJ’s €3.19B Seizure Shows How Hard It Is to Launder Crypto
Last week’s arrest of prominent crypto Tiktoker Heather Morgan, aka Razzlekhan, has made it clear that using crypto as an avenue to launder money is a foolish venture.
What is money laundering?
Simply put, money laundering is the process of obscuring the origins of illegally obtained money by flushing it through legitimate businesses. Usually, it is done to fund further criminal activities with untraceable money, so the allure of cryptocurrency as a virtually anonymous currency is understandable.
Crypto’s usage amongst criminals
According to Chainanalysis, there has been a significant increase in the amount of money used solely via crypto for criminal activity. An almost 80% jump from €6.91 billion in 2020 to €12.4 billion in 2021 is unprecedented. Although the numbers seem high, they are but a small part of the total money in circulation on the blockchain. The transaction volume of all cryptocurrencies is an estimated €13.99 trillion in 2021, and upon comparing the illegal transactions, they amount to less than even 0.2%.
What do these stats tell us about crypto being used by criminals?
The first thing we get to know is that by comparing the total transaction volume of the cryptocurrency ecosystem with the transaction volume of criminal usage, criminal usage is negligible. According to the UN, the net amount of money laundered per year is 2-5% of the global GDP, or $800 billion to $2 trillion. This is quite high compared to crypto by both gross amount and percentages.
From this, we can conclude that crypto has a better track record of keeping its ledgers clean than fiat money.
How money laundering in crypto works
Money laundering in crypto works similarly to fiat money, albeit with the involvement of more technical know-how. It is primarily divided into three steps, namely: placement, layering, and integration.
Placement is the first stage of laundering money. It involves moving the assets away from the “virtual crime scene”. For example, let’s assume a centralized exchange gets hacked, similar to the Bitfinex hack of 2016. Once the coins are stolen, the thieves use a process called chain hopping to obfuscate the trail of transactions. Chain hopping is a process in which virtual assets such as coins or NFTs are moved through a series of wallets in quick succession, often changing the currencies. This makes it exponentially harder to track the transaction history of the coins.
Layering is the second stage. This often involves sending coins to a tumbler or mixer. Some of the more famous mixers, such as Helix and Bestmixer, are known to be used for illegal activities. Mixers work as follows: they “mix” together tokens from multiple addresses together before releasing them at irregular intervals to new addresses in small amounts. This way, the transaction history of the stolen coins comes to a halt and begins anew from a new wallet.
Integration is the last step and the riskiest to take part in. This involves converting the cryptocurrencies to fiat so as to buy luxury items and/or investments in traditional banking systems. Since centralized exchanges, or CEX, need government ID verification for their KYC policies, any unusual activity, such as withdrawal of large sums trips alarms, which prompts the government to investigate.
Now that we’ve seen how crypto is used to launder money let’s also take a look at why it’s harder to get away with it than it looks like on paper.
Why money laundering via crypto is hard
When we talk about crypto being anonymous, we often forget that each transaction is stored indelibly on the blockchain, and outmaneuvering the consensus mechanisms is unrealistic in a decentralized network.
Chainhopping, while an effective tactic, is only a temporary solution. With enough time and energy, tracing transactions is not an insurmountable task. In fact, blockchain analytics has become a burgeoning industry.
Mixers and blenders are helpful to a certain extent, but they aren’t infallible. Once their servers are hacked or accessed, the missing links between the old and the new wallets become as visible as the regular blockchain. This happened in 2011 when the DOJ arrested an individual for running a mixer.
Centralized exchanges can convert crypto into fiat in large volumes, given their setup and structure. So no matter what steps one takes before this, a large transaction is bound to turn heads no matter who conducts it or where.
Even if somehow one manages to get past the government while converting to fiat, pulling stunts like these with stolen money is sure to put you in the spotlight for all the wrong reasons.
Sure, it may be tempting to use crypto for criminal activities. But these issues quickly make it very obvious that a blockchain’s transparency makes it at the least hard and at the most impossible to launder money securely. The result? It’s a high-risk, low-reward operation. What are your thoughts?
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