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Money Laundering Cryptocurrency: The 3 Stages Of Cryptocurrency Money Laundering

Last Updated October 31, 2023 11:58 AM
Alisha Bains
Last Updated October 31, 2023 11:58 AM

Key Takeaways

  • Cryptocurrencies offer a level of anonymity that traditional financial systems lack, enabling money launderers to obscure transaction origins effectively.
  • Criminals utilize sophisticated methods such as mixing services, cross-border transactions, and privacy coins to layer and launder funds, making detection arduous.
  • Regulatory bodies are increasingly implementing Know-Your-Client (KYC) measures and collaborating internationally to curb money laundering in the cryptocurrency space.
  • The rise of decentralized finance (DeFi) platforms adds complexity, enabling peer-to-peer transactions and smart contract automation, posing new challenges for detection and prevention efforts.

What Is Crypto Money Laundering

Traditional money laundering conceals the origins of illicit funds before introducing them into the economy. Crypto money laundering, similarly, disguises the sources of unlawfully acquired cryptocurrency

Criminals use various techniques to launder crypto with one method involving a rapid shuffle of transactions across multiple wallets or accounts to make it difficult to track the original source of the illicit funds. 

To combat crypto money laundering, global authorities are enforcing Know-Your-Client (KYC) measures and procedures that companies like exchanges must enforce on their customers.

Is Crypto Used For Money Laundering?

Indeed, cryptocurrencies can and have been exploited for money laundering. Much like conventional financial systems, the semi-anonymous nature of many cryptocurrencies allows wrongdoers to conceal the origins of illicit funds. 

However, it’s crucial to highlight that evolving blockchain analytics, regulatory interventions, and heightened oversight are making it increasingly difficult for malevolent parties to misuse cryptocurrencies for laundering. 

In 2022, illicit activities involving cryptocurrencies had reached an all-time high of $20.6 billion, as reported  in Chainalysis’s 2023 report. It’s noteworthy that 43% of the illicit transaction volume for the year was linked to sanctioned entities, coinciding with the implementation of some of OFAC’s most ambitious and challenging-to-enforce crypto sanctions.

Reasons for sanctions.
Reasons for sanctions. | Credit: Chainalysis

While cryptocurrencies can be a conduit for money laundering, they account for only a small portion of global money laundering endeavors. Persistent efforts are underway to curtail the misuse of these digital currencies.

3 Stages Of Money Laundering In Cryptocurrency

Money laundering in the context of cryptocurrency typically involves three stages: placement, layering, and integration. These stages are not unique to cryptocurrency; they apply to traditional money laundering methods as well.


The first phase of “dirty” money’s introduction into the financial system is called placement. This can entail converting illegal funds into cryptocurrencies in the context of cryptocurrencies. To convert fiat money into cryptocurrency, criminals may employ a variety of techniques, as explained below:

  • Mixing services: Mixing illegally made cryptocurrency funds with other legal cryptocurrency. This makes it hard for authorities to trace the origins of illicit coins.
  • Peer-to-peer exchanges: Direct transactions between parties without the need for a centralized exchange or intermediary allow for more anonymity, especially if done offline or in person.
  • Tumbling: Similar to mixing, tumbling involves sending cryptocurrency to a service which then returns the same amount minus a fee, but sourced from numerous other unrelated transactions, breaking the direct link between the source and destination addresses.


At this stage, the key aim is to hide the money’s source. This might entail intricate transactions in the context of cryptocurrencies that are intended to confuse people and make it challenging to identify the original source of funding.

A money launderer might, for instance, utilize a mixing service, which pools the cash from several users and redistributes it so that it is difficult to connect the funds to any one person or transaction. 

Other methods of layering in the crypto space includes the following:

  • Multiple transactions using different cryptocurrencies: To obscure the trail of illicit funds, money launderers divide big sums of money into several, tiny transactions using different cryptocurrencies. This makes it more difficult to determine the original source and destination.
  • Cross-border transactions and exchange platforms: Through the use of international exchanges with loose restrictions, criminals take advantage of the global nature of cryptocurrencies for cross-border transactions, moving money covertly and avoiding traditional banking oversight.
  • Privacy coins and anonymous wallets: To ensure that transactions are untraceable and make it difficult for authorities to keep an eye on and identify the persons involved, money launderers utilize anonymous wallets and privacy-focused cryptocurrencies.
  • Algorithmic trading and market manipulation: Illicit actors use algorithmic trading and market manipulation to manipulate crypto values artificially, hence generating chances for money laundering through intricate trading techniques, taking advantage of price fluctuations, and circumventing regulatory gaps.


The last phase of integration is the reintroduction of “clean” money into the established economy, giving the impression that it originated from reputable sources. In the context of cryptocurrencies, this can entail exchanging the layered funds for fiat money once more or using them to pay for goods or services.

Methods of integrating laundered cryptocurrency into legitimate economy may include:

  • Conversion to fiat money through cryptocurrency exchanges: Through the use of exchanges, cryptocurrency that has been laundered is transformed into fiat money, hiding its true source and blending it into the legal economy to make it harder to track down.
  • Investments in lawful ventures (Real estate, businesses): Criminals use money laundered from their crimes to invest in lawful enterprises (real estate, businesses), blending the illegal funds with lawful financial activity to evade detection by law enforcement.
  • Purchase of high-value goods and services: The illegal money is integrated into the legal economy by using laundered cryptocurrency to purchase high-value goods and services, like luxury automobiles or works of art, which can later be sold for legal money.
  • Offshore accounts and shell companies: To launder cryptocurrency, criminals create offshore accounts and shell companies and use intricate financial complex financial networks, obscuring the original source and layering the funds to make them appear legal and untraceable.

Money Laundering Cases In The Crypto Space

Cryptocurrency’s pseudonymity has led to notable money laundering cases, raising concerns about illicit activities and regulatory challenges. Here are some notable cases of money laundering using cryptocurrencies:


U.S. authorities fined and closed down  the cryptocurrency exchange BTC-e in 2017 for aiding and abetting criminal activity, including money laundering. The exchange was charged with money laundering related to a number of well-publicized ransomware and hacking events.


One of the biggest darknet markets, AlphaBay, was used to trade illicit items and services, such as drugs and stolen information. When law enforcement agencies closed down  AlphaBay in 2017, they discovered widespread use of cryptocurrency for illicit transactions; however, the specifics of the money-laundering techniques employed are not fully revealed.

Silk Road

One of the first and most notorious darknet markets, Silk Road, was shut down in 2013 . Ross Ulbricht, the founder, was found guilty of money laundering in addition to other offenses for using Bitcoin to support the sale of illegal drugs and other unlawful operations.

Bitfinex Hack

Approximately 120,000 Bitcoins were lost in a hack that occurred in 2016  on the Hong Kong-based exchange Bitfinex. There are concerns regarding the possibility of widespread money laundering in the cryptocurrency industry, even though the precise facts of how the stolen Bitcoins were laundered are not publicly known.

Quadriga CX

The Canadian cryptocurrency exchange QuadrigaCX’s founder passed away suddenly in 2019, preventing users from accessing their money since he was the sole owner of keys. The case’s investigations turned up evidence of possible fraud, including allegations of money laundering .

War vs. Cryptocurrencies

On October 7, Israel made a significant move that not only altered the geopolitical landscape but also set the stage for a potential Israeli ground assault in the Gaza Strip. The repercussions of this event are now reverberating into the cryptocurrency industry, catching the attention of the United States Department of the Treasury. 

Cryptocurrencies have become a focal point in their efforts to curb the anonymity services associated with these digital assets. According to The Wall Street Journal, the militants affiliated with Hamas, the group behind the attack in Israel, had managed to raise millions  through cryptocurrency channels. 

Whether wars are funded with cryptocurrency or not, the crucial point is the evolving landscape of financial anonymity and security challenges. The necessity of comprehending the complex relationships between developing technology, finance, and conflict is highlighted by this dynamic landscape. 

The focus is not only on individual instances but also on the larger ramifications for security, regulation, and the future of global banking in a period dominated by digital currencies as states and international organizations struggle with these difficulties. 

Challenges Faced In Detecting And Preventing Cryptocurrency Money Laundering 

Law enforcement agencies and regulatory bodies across the world have substantial problems identifying and combating cryptocurrency money laundering. A significant obstacle arises from the intrinsic characteristics of cryptocurrencies, which include decentralization and pseudonymity. 

Crypto transactions take place over decentralized networks, which makes it difficult to identify the people involved, in contrast to regular financial transactions, which are frequently carried out through regulated organizations. This anonymity makes it more difficult to connect transactions to people or organizations in the real world, which makes it more difficult to hunt down illegal money.

Furthermore, there are significant obstacles due to the quick development of blockchain technology and the rise of cryptocurrencies with a privacy focus. With privacy coins, transaction confidentiality is improved, and money movements are almost impossible to track. Coin tumblers and sophisticated mixing services further obscure transaction trails, making it difficult for authorities to piece together the intricate network of money laundering activities.

Additionally, the global and borderless nature of cryptocurrencies exacerbates the challenge. Criminals can easily move money across international borders by taking advantage of jurisdictional disparities and loose restrictions in different nations. Because of the disparities in legal frameworks and enforcement capacities, this problem makes it difficult for regulatory authorities to work together and creates loopholes that money launderers can take advantage of.

Furthermore, another level of complication is introduced by the emergence of decentralized finance (DeFi) systems. Peer-to-peer transactions are facilitated by these platforms, which operate without the typical middlemen, making it difficult for authorities to adequately monitor and regulate financial operations. The automated and anonymous transactions made possible by smart contracts and decentralized applications (DApps) make it more difficult to identify and stop money laundering operations.


Fighting money laundering in the constantly evolving cryptocurrency world is a difficult task. The convergence of global financial networks, decentralized systems, and technology makes it more difficult to detect and stop illegal activity.

Notwithstanding these obstacles, the battle against cryptocurrency money laundering is making headway thanks to ongoing developments in blockchain analytics and regulatory actions.


Can cryptocurrencies be traced in money laundering activities?
Cryptocurrencies offer pseudo-anonymity; while transactions are recorded on the blockchain, identifying individuals behind wallets can be challenging due to encryption methods.

How are regulators addressing cryptocurrency money laundering?
Regulators are enforcing stricter KYC protocols on exchanges, collaborating internationally, and investing in blockchain analytics to enhance surveillance capabilities.

What role do privacy coins play in money laundering?
Privacy coins enhance transaction privacy, making it difficult to trace funds, allowing money launderers to move illicit wealth discreetly.

Are cryptocurrencies the primary medium for money laundering globally?
While cryptocurrencies facilitate money laundering, they represent only a fraction of global illicit financial activities; traditional methods remain prevalent, but crypto-related cases are on the rise.

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