Cryptocurrency Money Laundering: How Governments and Companies Collaborate to Combat Money Laundering
Over the past decade, criminals have utilized various techniques to launder cryptocurrency assets. These include the use of mixers, privacy coins, unregulated cryptocurrency exchanges, DeFi, NFTs, and combinations of these methods, showcasing the cunning and diversity of criminals in evading regulation. At the same time, as criminal money laundering techniques continue to evolve, governments and companies have been strengthening their research on relevant technologies and developing methods to uncover these illicit activities. In my recently published book, “Cryptocurrency Launderers: From the Dark Web to DeFi and Beyond – Crime and Cryptocurrency,” I describe how law enforcement agencies, regulatory bodies, and private sectors have adapted to technological changes and evolving criminal strategies, achieving significant victories to make the cryptocurrency ecosystem more secure.
“Cryptocurrency Launderers: From the Dark Web to DeFi and Beyond – Crime and Cryptocurrency” provides a retrospective of the efforts made in the past decade to combat financial crimes in the cryptocurrency field and how the public and private sectors have responded and adapted to the rapid changes in this field.
From the Silk Road to Blockchain Analysis Technology
The Silk Road dark web case (2011-2013) was the first instance where law enforcement agencies discovered large-scale criminal use of cryptocurrency. The Silk Road quickly became a black market trading website worth millions of dollars, facilitating the purchase and sale of drugs and other illegal items through Bitcoin transactions. This event shocked law enforcement officers, who feared the emergence of a new digital currency black market on the internet.
During the early stages of the Silk Road case, US law enforcement agencies discovered a tool for investigation: the blockchain, the public transaction ledger for Bitcoin. As described in “Cryptocurrency Launderers:”
As law enforcement investigators delved into the Silk Road, they quickly recognized the crucial role played by Bitcoin. Undercover agents began purchasing Bitcoin on cryptocurrency trading platforms to make purchases on the Silk Road. As they became familiar with Bitcoin, they discovered an important feature of this technology: due to all transactions being publicly recorded on the blockchain, government agencies could identify their transactions with the Silk Road by examining the ledger. When illicit vendors were instructed to send Bitcoin to the Silk Road’s address for payment as they conducted phased payments on the website, they could see the Bitcoin received from the illicit buyers on the Silk Road and pay the website vendors with Bitcoin as a fee after the completion of the transaction. With this feature, the FBI was able to monitor hundreds of thousands of transactions involving Bitcoin addresses associated with the Silk Road in real-time.
In fact, during the investigation of the Silk Road, government agencies discovered that the blockchain provided an intelligence source completely different from traditional fields, making financial intelligence more accessible compared to what government agencies obtained in traditional money laundering cases. Unlike investigating money laundering through banks, investigators did not need to obtain bank records through court-issued subpoenas or go through the complex process of obtaining information on international fund flows through mutual legal assistance treaties (MLATs). Because the Bitcoin ledger is globally public and decentralized, anyone can view real-time, continuously updating transaction information, providing real-time financial intelligence.
Using blockchain technology, US law enforcement agencies combined transaction data from the Silk Road with other sources of information, successfully arresting and convicting its founder, Ross Ulbricht, on charges of money laundering and other crimes.
The Silk Road case not only demonstrated law enforcement agencies’ astonishing innovative abilities when faced with new technology but also showcased their ability to adapt to the ever-changing criminal environment. As the cryptocurrency field continues to develop, criminals also adapt and evolve, with new dark web markets like Alphabay and Hansa Market surpassing the Silk Road in scale. Additionally, new types of cryptocurrency mixers like Helix Mixer and Bitcoin Fog allow illegal users to “clean” billions of dollars’ worth of Bitcoin. Scammers and Ponzi scheme organizers are increasingly targeting innocent and unsuspecting cryptocurrency investors, attempting to steal billions of dollars and leaving victims bankrupt.
In the face of an expanding cryptocurrency crime ecosystem, law enforcement agencies cannot solely rely on manual analysis of blockchain data, as they did in the Silk Road case. They require new specialized capabilities to address this complex environment. As described in “Cryptocurrency Launderers:”
The Silk Road case and subsequent investigations into dark web markets clearly demonstrate that law enforcement agencies need sophisticated capabilities to investigate the expanding cryptocurrency crime ecosystem. While the open and transparent nature of the blockchain is suitable for monitoring transactions, it is not realistic for law enforcement investigators and compliance analysts of cryptocurrency exchanges to manually analyze billions of cryptocurrency transactions. Relevant parties in the public and private sectors need specialized tools to quickly and seamlessly navigate the growing volume of blockchain data.
With the increase in varieties of cryptocurrencies, including thousands of new coins, the demand for blockchain data analysis becomes more significant. Analyzing the data of the entire cryptocurrency ecosystem, excluding Bitcoin, requires the ability to effectively browse the increasing amount of transaction information in thousands of ledgers. Police investigators or analysts face massive amounts of cryptocurrency transaction data and must not be distracted by various information that can hinder the progress of their investigations.
These challenges have given rise to the blockchain data analysis industry, which specializes in developing software to enable fast analysis and detection of illicit activities in the entire cryptocurrency ecosystem.
Indeed, several years after the Silk Road case, blockchain data analysis technology has been commonly used in law enforcement investigations involving cryptocurrencies and has played a crucial role in criminal cases such as the 2020 Twitter hack.
Addressing New Challenges
For law enforcement agencies, acquiring new investigative tools is crucial in dealing with the constantly evolving landscape of crime and cryptocurrencies. As new and more sophisticated criminals begin to utilize updated technologies, new challenges arise.
For example, by 2018, there was evidence of organized criminal groups attempting to launder money across borders using Bitcoin ATMs, converting their illicit cash proceeds into cryptocurrencies through these self-service stations. As described in the book:
With the growth in the number of Bitcoin ATMs, organized crime networks began adopting the trend of Bitcoin more widely. In the early days of cryptocurrencies, illegal users primarily came from online black markets and online scammers, who discovered that digital payment methods supported their online criminal activities. Organized crime networks involved in physical-world crimes such as street drug trafficking or human trafficking did not initially adopt cryptocurrencies on a large scale, as these criminal activities typically involved large amounts of cash.
Over time, evidence showed that organized crime groups increasingly integrated cryptocurrencies into their existing money laundering schemes. International drug trafficking networks have long used various methods to launder money through the banking system, including strategies such as “smurfing” and complex trade-based money laundering techniques, which involved repeatedly depositing small amounts of cash into different bank accounts to avoid suspicion in large cash transactions. For decades, drug trafficking groups have also relied on trade-based money laundering techniques, such as the infamous “Black Market Peso Exchange,” a money laundering method that allows South American drug traffickers to purchase goods with funds acquired from drug transactions and sell the goods overseas through international trade to realize their value. With the proliferation of Bitcoin ATMs, organized crime groups discovered an opportunity to combine these long-standing money laundering techniques with new technology.
The physical nature of Bitcoin ATMs meant that law enforcement agencies had to combine their policing skills used on city streets with new tracking capabilities for tracking cryptocurrency assets. Successful cases, such as the crackdown on a money laundering network in Spain in 2019 that used Bitcoin ATMs to funnel proceeds from drug sales to South American drug cartels, demonstrate this combination of skills.
Similarly, advanced cybercriminals, especially those associated with sanctioned countries like North Korea, Iran, and Russia, have posed new challenges by using cryptocurrencies for ransomware attacks and hacking cryptocurrency exchanges, disrupting illegal fund flows detection and interference. “Cryptocurrency Launderers” describes the complexity of the emerging online money laundering ecosystem that these cybercriminals can exploit:
Like ransomware attackers, exchange hackers can utilize increasingly sophisticated money laundering ecosystems to transfer the large amounts of cryptocurrency they acquire. In addition to laundering through non-compliant exchanges, using mixers and coin swapping services, or laundering through the dark web, hackers can employ other methods to handle their large amounts of cryptocurrency. For example, they can purchase stolen credit card, debit card, and prepaid card information from the dark web, or acquire personal identity information that helps them bypass AML/CFT controls of compliant exchanges, enabling them to cash out funds stolen from other exchanges. This method prompts hackers to recruit “mules” or agent teams, specialized in providing money laundering services for hackers.
Faced with increasingly complex cryptocurrency money laundering methods, investigators must devote more manpower and resources to research and decryption. And they have indeed done so. In the Colonial Pipeline case, US law enforcement agencies successfully identified and seized Bitcoin from Russian ransomware attackers. In the Bitfinex hack case, investigators relied on advanced technological analysis of transaction flows on the blockchain, marking the largest amount involved in a hacking attack in US history. The book “Cryptocurrency Launderers” provides a detailed review of the details of these cases.
From Cross-Chain Crimes to NFTs
With the arrival of the 2020s, the public and private sectors dedicated to reducing cryptocurrency crimes face a series of new challenges: how to address emerging and innovative criminal technologies in the cryptocurrency field.
Firstly, the emergence of DeFi has opened up significant new possibilities and avenues for innovators seeking to launch financial products in the cryptocurrency field, such as DEX. However, it has also opened up new channels for cross-chain money laundering. As described in “Cryptocurrency Launderers:”
With the increase in the number of token transactions in the Ethereum ecosystem, DEX trading volumes have rapidly grown. In particular, the minting of stablecoins has allowed users to transfer funds in and out of DEX more quickly, greatly enhancing the liquidity of DEX. From 2017 to 2019, DEX trading was relatively small, but it saw significant growth in 2020. By mid-2021, DEX’s monthly trading volume exceeded $160 billion. From the perspective of money laundering, this rapid growth has had a significant impact: the highly liquid DEX ecosystem does not require user identification information, transactions are fully automated, and there are no intermediaries, providing criminals with new opportunities to attempt to hide their criminal activities by switching tokens.
DeFi presents new challenges for regulatory agencies, including how to regulate a decentralized environment. However, it also has a crucial point: transactions conducted in the DeFi ecosystem are transparent. Even if criminals attempt to disguise their activities through complex operations, detection and tracking of funds can still be achieved through blockchain data analysis technology. This enables investigators to trace the flow of funds within the DeFi ecosystem, as demonstrated by the recent case of stolen funds during the collapse of the FTX exchange in November 2023.
Another innovative technology, NFTs, emerged in the early 2020s and was widely involved in fraud and scams, forcing investigators to take creative measures. Despite being a novel and innovative technology, investigators have been able to utilize their skills and techniques developed over the past decade to bring criminal charges against individuals using NFTs for illicit activities and ensure convictions.
