What You Need To Know About Crypto And Money Laundering


Crypto has a reputation for facilitating money laundering and illegal activity. While, like any currency, cryptos can be used for illicit purposes, the problem has been significantly overstated – and there are good reasons why criminals would want to avoid using the blockchain, which provides a permanent and transparent record of all their transactions.

What is money laundering?

Money laundering is the activity of taking funds gained through illegal activity of one kind or another and processing them to make it appear that they have come from a legitimate source. ‘Dirty’ money is ‘laundered’, meaning it can be spent without suspicion.

Money laundering is used by criminals of all kinds to hide the origins of their funds. Some laundering is relatively straightforward, but organised crime outfits may set up complex systems of both fake and legitimate businesses (or ‘fronts’) to help them process large amounts of funds effectively, and use a wide range of practices to ‘wash’ their cash.  

Laundered money may come from terrorism, drug trafficking, cybercrime, tax evasion, and other activities. Due to the scale of the problem, financial services companies in most jurisdictions are required to implement anti-money laundering (AML) policies to prevent their business being used to transmit dirty money.

Does using crypto make money laundering easier?

Crypto has a reputation for facilitating crime. In the early days of Bitcoin, one of the chief use cases was as a currency for the darkweb, particularly on sites like the Silk Road, where drugs and other illegal items could be purchased.

In reality, crypto may make it seem easier for users to move illegally-obtained funds; after all, with no middlemen, there’s no way of preventing a transaction being made. But in practice, crypto’s apparent advantages were largely down to the fact that this was a new technology and form of money, and law enforcement had not yet had time to develop the awareness and tools required to combat it. 

The blockchain is a transparent, immutable ledger of transactions, which makes it relatively straightforward to ‘follow the money’ – as numerous high-profile criminals have found out. Crypto’s traceability is one of the reasons few oligarchs turned to crypto to hide money when facing sanctions earlier this year.

Blockchain security firm Chainalysis reports that the share of crypto transaction volumes associated with illicit activities were just 0.15% in 2021. While the sums involved appear large, with some hacks seeing hundreds of millions of dollars in crypto stolen, they are dwarfed by the total volumes of all crypto transactions, which Chainalysis notes leapt to $15.8 trillion last year, up more than 550% from 2020 volumes.

By comparison, the mainstream financial system is a far worse culprit. As Binance – the world’s largest crypto exchange and the target of accusations by Reuters that it allowed money laundering – has noted, ‘The UN estimates that between 2% to 5% of traditional fiat (cash), about $800 billion to $2 trillion in current US dollars, was associated with some type of illicit activity. So let’s call it a trillion dollar a year problem.’ Crypto, by comparison, is relatively under-used as a tool for laundering – and there are good reasons why.

The Bitfinex hack

One example that illustrates how difficult it is to launder money using crypto is the Bitfinex hack in August 2016, in which 120,000 BTC were stolen. The FBI recently managed to recover 94,000 BTC, worth around $3.6 billion at the time. The two individuals arrested were said to have used multiple highly sophisticated means in their attempt to launder the funds – without success. These methods included using fictitious identities to set up online accounts; using software to make many small transactions; depositing and withdrawing funds from a wide range of exchanges and darkweb services, using them as ‘mixers’; converting the BTC to other currencies, including privacy coins; and using accounts for US businesses to give the appearance of legitimacy.

The FBI was nevertheless able to trace the couple, who are facing up to 20 years in prison. Crypto may make it easier to move money around outside of the traditional financial system, but it leaves tracks that are anything but invisible. The extreme measures the criminals used to hide their transfers, and the fact they were caught, indicates that the authorities have powerful tools at their disposal to detect money laundering.

What is being done to address money laundering through crypto?

Recognising the impossibility of preventing users making transactions on open, decentralised platforms, financial regulators have placed the onus for preventing money laundering on exchanges and other financial services active in the cryptocurrency space.

These organisations are expected to carry out Know Your Customer (KYC) checks, to verify the identities of individuals and businesses using their services, and to check for suspicious activity that could indicate money laundering.

In general, AML processes used by exchanges and other crypto organisations include both off-chain and on-chain measures.

Off-chain measures

  • KYC and identity verification, ensuring that funds are not moved anonymously
  • Establishing the source of crypto funds
  • Checking tax returns to ensure income has been declared

On-chain measures

  • Coin checking, which analyses the trail of transactions that leads up to a user deposit 
  • Black listing crypto addresses associated with illicit activity

Exchanges in some jurisdictions are banned from supporting privacy coins like Monero, due to their popularity on the darkweb and use in illegal activities.

What does TimeX do to prevent money laundering and fraud?

As an Australian crypto business, TimeX is fully regulated by AUSTRAC, the country’s financial intelligence agency. AUSTRAC sets best practices for blockchain companies, and ensures that exchanges follow strict rules around money laundering.

AML measures that TimeX uses include:

  • Identity verification, with more documentation required for larger deposits and high-volume traders
  • Particular care around fiat withdrawals, with a security system in place for all transfers to banks, and manual checks on flagged withdrawals
  • Strict adherence to all relevant AML laws and Australian financial regulations.
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