Crypto-money laundering: A Decade-long Downtrend Comes to the Fore in 2023 Crypto-money laundering: A Decade-long Downtrend Comes to the Fore in 2023

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By Ronald Tech

The darknet

A striking decline in cryptocurrency transactions associated with illicit activities became apparent in 2023, as per a recent report from Chainalysis. Notably, the report indicated that $22.2B was laundered through crypto, exhibiting a sharp 29.5% drop from the $31.5B recorded in the preceding year.

The Evolution of Crypto-money Laundering

Money laundering in the realm of cryptocurrency involves the process of converting funds into cash while intentionally concealing their origins. This can be achieved through a gamut of mechanisms, such as intermediary services, personal digital wallets, crypto mixers, decentralized finance (DeFi) protocols, and fiat off-ramping services like centralized exchanges and crypto ATMs.

Chainalysis attributed the year-over-year decline in illicit crypto activities to a multitude of factors, ranging from decreased crypto trading volume to heightened regulatory scrutiny. The latter development comes in the wake of U.S. regulators intensifying their crackdown on services that have historically been leveraged by crypto launderers to obfuscate the origins of illegal funds.

The Role of Regulatory Intervention

In a notable instance in 2022, the U.S. Treasury Department imposed sanctions on Tornado Cash—a prominent crypto mixing service widely used by Ethereum (ETH-USD) users to mask their transactions—due to its purported involvement in laundering virtual currency pilfered by North Korean hackers. Similarly, another mixer named Sinbad was reportedly sanctioned and forced to close its operations in November 2023, attributed to its alleged connections to a hacking group in North Korea.

Consequently, the report indicated that funds transferred to mixers from illicit addresses nearly halved to $504.3M in 2023 from $1.0B in the previous year. However, the growing regulatory pressure has stimulated the Lazarus Group—an ensemble of North Korean cybercriminals—to pivot their money laundering tactics, resorting to mixers like YoMix and cross-chain bridges to evade detection.

Emergence of Alternative Practices

The report emphasized, “The growth of YoMix and its embrace by Lazarus Group is a prime example of sophisticated actors’ ability to adapt and find replacement obfuscation services when previously popular ones are shut down,” as it noted that YoMix’s activities surged fivefold in 2023.

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Alongside the deployment of bridges, there was a noticeable uptick in the proportion of illicit funds channeled into DeFi protocols over the course of the past year. Chainalysis underscored that “DeFi’s inherent transparency generally makes it a poor choice for obfuscating the movement of funds,” in contrast to the predilection for centralized exchanges among illicit actors in 2022.

The Regulatory Tug of War

Taking a wider lens, the report pointed out, “The changes in money laundering strategy we’ve seen from crypto criminals like Lazarus Group serve as an important reminder that the most sophisticated illicit actors are always adapting their money laundering strategy and exploiting new kinds of crypto services.”

Demonstrative of the growing popularity of crypto and its integration into traditional markets, there has been a spate of crypto money laundering cases reported on a global scale. In February 2022, the U.S. Justice Department apprehended a couple for allegedly conspiring to launder $4.5B of crypto that had been pilfered during the 2016 hack of crypto exchange Bitfinex. Furthermore, later that year, a cohort of 63 individuals were arrested by Chinese law enforcement for purportedly laundering as much as $1.7B through crypto.

Gearing Up Against Money Laundering

Several countries have already implemented new regulations for money transfers to combat the exploitation of crypto exchanges for money laundering, notably including Japan. In 2021, the Biden administration reportedly endeavored to clamp down on malfeasances perpetrated by virtual currency exchanges, mixing and tumbling services, as well as unscrupulous actors who facilitate money laundering.

Trajectory of Leading Cryptocurrencies

Bitcoin (BTC-USD) and Ethereum (ETH-USD) stand as the two most prominent digital tokens by market capitalization, collectively constituting approximately 70% of the broader $1.95T crypto market. In particular, BTC has soared by over 120% from a year earlier, buoyed by the regulatory ratification of the first U.S. spot bitcoin exchange-traded funds and speculation surrounding interest rate cuts. Analysts have weighed in on the potential future trajectory for BTC.