Crypto or fiat? The most used method for laundering money

Crypto or fiat? The most used method for laundering money

By Roberto D. | CryptoFarm | 24 Aug 2020

According to a United Nations report, money laundering costs the global economy between $ 800 billion and $ 2 trillion each year.
These figures amount to 2% -5% of the global gross domestic product.

Today, more than 90% of money laundering goes unnoticed. In addition, several technological developments have led to innovative and faster tools: criminals use these innovations to continue laundering money. At the same time, government authorities and fintech firms are leveraging new technologies to identify "nominees" and fight fraud.

Money laundering with Bitcoin

Crypto is a digital representation of value that can be exchanged and transferred digitally and used as a form of payment. Bitcoin (BTC) is the most popular digital asset currently in use.

The mass media often associate Bitcoin with the famous Silk Road (the first online marketplace on the darknet, definitely illegal) where users bought products such as weapons and illegal substances anonymously. In 2013, the United States Federal Bureau of Investigation (FBI) shut down the first iteration of the market.

The mainstream media on Bitcoin and digital assets focuses on criminal activities rather than on technology and innovation. Typical rhetoric is structured in a similar way: due to its anonymous nature, Bitcoin can help criminals.

Let's be clear, the claim is potentially true in part, but physically passing money from one hand to another is anonymous too, right?

Looking more deeply into this statement, can we really say that it is the preferred method of criminals to carry out money laundering activities?


A look at the banks

Cash is another means of payment. Banks still rely on traditional identity systems that use less volatile user information to transfer money (Name, Surname, etc).

National borders severely limit processing times and physical currency transfer. For the average user, it is less obvious that money can be sent from any computer or smartphone in a couple of clicks, and that transfers can be hidden or disguised in a system of bogus companies scattered across strategic jurisdictions.

Globalization brings with it new opportunities to find "comfortable" ways to transfer money in order to exploit economic disparities between countries.

John Sweeney, a British investigative journalist for the BBC, explained:

“It is rude to talk about money laundering. Instead, expressions such as asset management structures and favorable tax regimes are used. "

Banks, which hold everyone's money, are also associated with money laundering.

Financial institutions are continually sanctioned for failing to comply with strict anti-money laundering laws.

One of the most famous money laundering scandals saw HSBC launder $ 881 million is just one of the events that made headlines (also becoming a Netflix documentary).

Technology and innovation in digital currencies promise more efficient, reliable and scalable ways to move and transfer assets in our global economy, but what progress is still needed?


Sanctions for violations of anti-money laundering regulations

2019 was a record year in terms of the number of penalties imposed. Authorities awarded 58 penalties for non-compliance with anti-money laundering (AML) measures, for a total of $ 8.14 billion; double compared to 2018, the year in which we see 29 penalties for a total of 4.27 billion dollars.

US authorities were the most aggressive, with 25 penalties awarded totaling $ 2.29 billion, followed by British authorities with 12 penalties totaling $ 388.4 million, according to a recently published report.

Two thirds of the fines in this area were imposed on banks, while about 17% were assigned to organizations in the gambling and cryptocurrency sectors. These industries are subject to more thorough scrutiny by lawmakers, as they are common channels for money laundering operations.

AML penalties have been increasing since 2015. The average penalty in 2019 was $ 145.33 million. In 2020, we have already seen two penalties over $ 1 billion, with the largest corresponding to a $ 5.1 billion penalty imposed by the French government.


Addressing anti-money laundering rules and regulating cryptocurrencies

Creating new tools for dealing with anti-money laundering regulations is often scrutinized by lawmakers before being accepted. In 2019, stricter AML regulations were established regarding money and digital assets such as cryptocurrencies. Despite this, the crypto sector will continue to grow.

The Financial Action Task Force, or FATF, is a government organization founded in 1989 to combat money laundering: it has published crypto guidelines for many countries where lawmakers urged caution regarding banks' compliance.

Hong Kong recommended banks take a risk-based approach to the sector. The Financial Crimes Enforcement Network, or FinCEN, an office of the US Treasury Department, has pushed to oppose money laundering and terrorist financing, urging banks to report suspicious activities related to digital currencies such as cryptocurrencies.

Singapore, Japan and South Korea will also introduce a cryptocurrency regulatory framework in 2020. Meanwhile, banks have taken significant steps to reduce the risks associated with the crypto sector. The FATF has specified that this risk elimination approach is not sustainable in the long term as the crypto ecosystem will continue to grow. Therefore, avoiding exposure will be almost impossible.


The stages of money laundering

Criminals paid in cryptocurrencies must turn them into money, a process that requires obfuscating the origins of the funds. Unfortunately, several sophisticated services and tools help criminals to do this. After all, if the bad guys had no way to cash in on cryptocurrencies received through illegal channels, the incentives to commit crime would be much lower.

Here is an example of the money laundering process:

  • Introduction: a movement of money from its source. Money is put into circulation within the existing monetary system through certain intermediaries, such as financial institutions, casinos, shops or currency exchanges.     Examples of these activities include the smuggling of cash out of a country, the complicity of a bank, the exchange of currency, the purchase of assets and so on.
  • Stratification: In the second phase, the goal is to make it more difficult to disclose the recycling activity. To do this, criminals must stratify spending and hide the trail of dirty money. This is usually done by converting the money into monetary instruments or buying assets with illicit funds to resell them.
  • Integration: This is the final stage of money laundering, in which the laundered money re-enters the economy through the banking system and, consequently, is considered "clean". The methods used in this phase include, among other things, real estate sales, front companies, foreign banks and false invoices.

Given its digital nature and intrinsic characteristics, Bitcoin appears to be an adequate medium for the introduction and layering phases. Starting with the introduction, Bitcoin could be a useful tool for exchanging fiat currency with BTC, and then switching back from cryptocurrency to another fiat currency, thus moving money from one country to another. However, given that many criminals use Bitcoin to receive money, the main problem is integration, i.e. reintroducing illicit funds into the economy to hide their illegal activities.



According to the "Chainalysis 2020 Crypto Crime Report", many criminals launder cryptocurrencies with the help of over-the-counter brokers. OTC brokers are traders or companies that facilitate trades between buyers and sellers who don't want (or can't) trade on a cryptocurrency exchange.

OTC brokers are popular among traders and miners who want to sell large quantities of crypto assets at a negotiated price, as using a regular exchange to sell large volumes could affect market prices. Most OTC traders partner with exchanges, but many of them “offer much lower KYC measures than the exchanges they operate on”.

Many take advantage of this opportunity and specialize in money laundering services for criminals. However, exchanges remain the preferred means of cleaning "dirty" Bitcoins. Over the course of 2019, more than $ 2.8 billion worth of Bitcoin was sent by criminal entities to exchange platforms, and 52% of these went to two of the largest exchanges, Binance and Huobi.


Bitcoin appears to be more practical for the second stage of money laundering: layering. It is a digital currency that can be used to shop over the network without the constraints of physical boundaries. By paying enough attention (and using techniques to preserve privacy), it is possible to spend Bitcoin to buy assets or to cash it through OTC traders.

For example, someone might buy an expensive watch on a secondary market and resell it for fiat money. However, it will be quite difficult for criminals to purchase monetary assets as most are only accessible through intermediaries who apply Know Your Customer and AML measures.

However, it is important to point out that, unlike cash, cryptocurrencies are inherently transparent as all transactions are recorded in a public ledger. As the Chainalysis report points out, all these illicit funds leave traces. By accumulating the necessary information, it becomes possible to identify who is hiding behind the Bitcoin address used to launder money.

Bitcoin recycling

Bitcoin can be a useful tool for the introduction and stratification in the recycling process. But can we say that it offers a better alternative to the current system? Only 1.1% of the total volume of cryptocurrencies is considered illegal. The vast majority of crypto-related crimes involve fraud with volumes totaling $ 8.6 billion. Excluding PlusToken, Bitconnect and OneCoin - the three largest Ponzi schemes in crypto (I talked about it HERE) - fraud accounts for around 0.46% of all cryptocurrency assets.

Based on preconceptions about anonymity and identity, the argument that Bitcoin is a better tool for laundering money is wrong. The identities on the Bitcoin blockchain are not anonymous, but pseudo-anonymous. Each identity is associated with an alphanumeric string, called a private key. Although it is possible to argue that Bitcoin offers a certain level of protection on the identity of its users, the transactions are actually public.

Due to its inherent characteristics, all transactions on a blockchain are shared between participants, whose consent is required to validate their history.

Dave Weisberger, CEO of CoinRoutes, explained:

The goal of money laundering is to create a chain of transactions that cannot be traced, and since the Bitcoin blockchain is designed to have an indelible public record of all transactions, 'money laundering' becomes much more difficult.


The mixers

If pseudo-anonymity does not offer enough privacy, so-called "mixers", software or services that allow users to transact by mixing coins with other users can be used to preserve privacy. This allows users to hide outputs and addresses - and hence their true identities.

Cryptocurrency mixers ended up in the news spotlight in 2019, with reports of service closures by European authorities. However, according to the Chainalysis report, mixers appear to be used far more for privacy than for illegal activities. Only 8.1% of all mixed coins were stolen, and only 2.7% of mixed coins were previously used in darknet markets.

Mixers aren't exactly user-friendly, and still can't provide the same level of security associated with "traditional methods" for money laundering. The use of a mixer could be suspicious, but these tools can effectively hide transactions only if a critical mass of Bitcoin is mixed. In addition, the authorities have more advanced countermeasures available, such as blockchain analysis, which can link even mixed Bitcoins to the correct addresses.

Unlike cash, every cryptocurrency transaction is documented in a publicly visible ledger. With the right tools, it is possible to investigate which cryptocurrency operations are associated with illegal activities, collect information on their obfuscation techniques and share findings with law enforcement to prevent criminals from abusing the system.

So crypto or Fiat currency better to launder money?

The data presented suggests that Bitcoin may be an additional tool available to criminals for money laundering. For example, they may use disposable addresses and mixing techniques as precautions to ensure they are protected by an adequate level of privacy. However, the pseudo-anonymous identities, public transactions and system complexities required to use Bitcoin do not currently provide a more efficient or effective alternative to laundering money. Criminals do not want a permanent record of their illegal activities to be published and shared openly.

Furthermore, Bitcoin cannot handle the huge volume of money needed for money laundering activities. In fact, the Bitcoin network has a fairly low daily volume when compared to other asset classes: about 25 billion dollars in January 2020. Moving such a sum of money would immediately sound the alarm for blockchain analysis companies and would require additional intermediaries and centralized exchanges.

In 2017 and 2018, the Lazarus Group, a hacker group associated with North Korea, cashed in most of its funds via exchanges with minimal KYC measures. In 2019, however, the group's techniques became more sophisticated. Half of the funds were cleaned through the CoinJoin wallet (mixer), while the other half still remains in its wallets.

AML regulations were not formulated for the current state of affairs. Greater international collaboration and oversight is needed to enable the freedom of movement of funds and money. Unfortunately, legislations have failed to keep pace with rapid technological advances. For an alternative to our traditional banking systems, new rules and regulations are needed to ensure adequate governance globally.


What do you think of it? In light of what you have read, if you have made it this far, is Bitcoin (or other crypto) convenient for the purpose of laundering money? In my view of things, given to hands, I would say no.

Let me know yours in the comments, and see you next time!




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Roberto D.
Roberto D.

Born, and still living, in Italy. Passionate about cryptocurrencies since I discovered ethereum in 2016


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