Crypto Money Laundering Report: Four Exchange Deposit Addresses Received $1B+ in Illicit Funds Last Year

Money laundering is “crucial” to all financially motivated crime because it’s what enables criminals “to access the funds they generate from their activities,” the team at Chainalysis explains.

Otherwise, why commit the crimes in the first place? The same is true in cryptocurrency. The goal of money laundering in cryptocurrency is “to move funds to addresses where its original criminal source can’t be detected, and eventually to a service that allows cryptocurrency to be exchanged for cash — usually this means exchanges.” If that weren’t possible, “there would be very little incentive to commit crime involving cryptocurrency,” Chainalysis writes in a blog post.

Chainalysis has also explained how money laundering activity is “highly concentrated” to just a few services, and within those services, “concentrated even further to a small number of deposit addresses.”

That remained true in 2022, “with a few new wrinkles.” In an update, Chainalysis looks at the rise of “underground money laundering services that exist separately from the crypto businesses most are familiar with, and also analyze funds still held by crypto criminals on the blockchain.”

Money laundering in cryptocurrency typically involves “two types of on-chain entities” and services:

  • Intermediary services and wallets: These can include personal wallets (also known as unhosted wallets), mixers, darknet markets, and other services both legitimate and illicit. Crypto criminals typically use these services to hold funds temporarily, obfuscate their movements of funds, or swap between assets. DeFi protocols are also used by illicit actors in order to convert funds but, as we will discuss, are not an efficient means of obfuscating the flow of funds.
  • Fiat off-ramps: This refers to services that allow for cryptocurrency to be exchanged for fiat. This is the most important part of the money laundering process, as the funds can no longer be traced via blockchain analysis once they hit a service — only the service itself would have visibility into where they go next. Additionally, if the funds are converted into cash, they can only be followed further through traditional financial investigation methods. Most fiat off-ramps are centralized exchanges, but P2P exchanges and other services can also serve this function.

As noted in the update:

“Overall, illicit addresses sent nearly $23.8 billion worth of cryptocurrency in 2022, a 68.0% increase over 2021. As is usually the case, mainstream centralized exchanges were the biggest recipient of illicit cryptocurrency, taking in just under half of all funds sent from illicit addresses. That’s notable not just because those exchanges generally have compliance measures in place to report this activity and take action against the users in question, but also because those exchanges are fiat off-ramps, where the illicit cryptocurrency can be converted into cash.”

More illicit funds were “sent to DeFi protocols than ever before, a continuation of a trend that began in 2020.”

Chainalysis further noted that DeFi is “not used in the laundering process because it is a useful way of obscuring the flow of funds.”

As mentioned in the report:

“In fact, quite the opposite is true, as unlike with centralized services, all activity is recorded on-chain. Keep in mind too that DeFi protocols don’t allow for the conversion of cryptocurrency into fiat, so most of those funds likely moved next to other services, including fiat off-ramps. … almost all usage of DeFi protocols for money laundering is carried out by one criminal group….”

For more details, check here.

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