Crypto's Dirty Laundry: How Traditional Money Launderers Are Exploiting Blockchain Networks

Crypto criminals may not be the only ones trying to hide their illicit fund movements across blockchains. According to analytics company Chainalysis, traditional money launderers – criminals working outside crypto – may be moving their cash on-chain too.

Uncovering the Murky World of Blockchain-Based Money Laundering

The Rise of On-Chain Money Transfers

Chainalysis' latest report on crypto money-laundering sheds light on an apparently flourishing world of on-chain money transfers that aren't definitively illicit but nevertheless share the characteristics of transactions that would raise eyebrows in banks. These transfers don't originate from the crypto scams, thefts and ransomware attacks that Chainalysis is famous for flagging on the blockchain, the transparent digital ledger of all crypto transactions. Instead, they come from wallets that aren't known to be illicit, but flow across blockchains and into exchanges following strategies that traditional financial compliance departments would likely flag.One such strategy is splitting funds into rounded tranches sized just below know-your-customer reporting thresholds, and then sticking them back together later on. While this doesn't necessarily prove wrongdoing, it's a tactic commonly used by money launderers to avoid detection.

The Scale of the Problem

Chainalysis found that this more opaque class of transaction is orders of magnitude larger than even the known illicit transaction base. The company's analysis of all transfers sent to exchanges in 2024 revealed a glut of transactions valued just below the ,000 mark – at which point additional know-your-customer rules kick in. This is a well-known tactic used by money launderers in the traditional financial system to fly under the radar.Grauer, Chainalysis' Head of Research, emphasizes that just because a crypto transaction to an exchange is, say, below the ,000 threshold, it isn't definitively illicit. However, banks and money services businesses in the traditional financial sector have long used heuristics like this to track down criminal activity.

The Shift to Crypto-Based Money Laundering

The report also highlights a more concerning trend: traditional money launderers are starting to utilize crypto networks to create "large-scale money laundering infrastructure" to clean cash that originated outside of crypto. This represents a significant shift, as crypto has historically been associated with illicit activities originating within the digital asset ecosystem.Grauer explains that these transactions are more opaque and harder to detect than the crypto scams, thefts and ransomware attacks that Chainalysis is known for tracking. While the company's software and labeling systems help crypto exchanges and other entities avoid accepting funds from criminal activity and assist government investigators in tracking suspects down, this new class of transaction poses a greater challenge.

The Need for Improved Compliance Techniques

Chainalysis' findings underscore the need for the crypto industry to develop more sophisticated compliance techniques to mirror those used in traditional banking. Grauer emphasizes that this is "trying to advance the conversation about how we in crypto think about compliance techniques."The report suggests that while a transaction may not be definitively illicit, it could still raise red flags for financial institutions. Factors like transaction size, flow patterns, and connections to over-the-counter brokers who advertise their willingness to turn criminal crypto into dollars can all be indicators of potential money laundering activity.As the crypto industry continues to mature and attract more mainstream adoption, it will be crucial for exchanges, regulators, and law enforcement to stay ahead of the curve and adapt their compliance strategies to address this emerging threat. The battle against crypto-based money laundering is far from over, and the industry must remain vigilant to protect the integrity of the blockchain ecosystem.