Cryptocurrency and Money Laundering

Cryptocurrency is a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority. It is not issued by any central authority, rendering it theoretically immune to government interference or manipulation. According to blockchain analytics firm Chainalysis, Criminals laundered $2.8bn in 2019 in Bitcoin to exchanges.

Cryptocurrencies are more vulnerable to criminal activity and money laundering. They provide greater anonymity than other payment methods since the public keys engaging in a transaction cannot be directly linked to an individual.


Cryptocurrency and money Laundering:

  • Criminals open online accounts with digital currency exchanges, which accept fiat currency from traditional bank accounts. Then, they start a ‘cleansing’ process (mixing and layering), i.e., moving money into the cryptocurrency system by using mixers, tumblers, and chain hopping (also called cross-currency). Money is moved from one cryptocurrency into another, across digital currency exchanges — the less-regulated the better — to create a money trail that is almost impossible to track.
  • According to the “Cryptocurrency Anti-Money Laundering Report,” criminals also use theft and gambling to launder cryptocurrencies.
  • Creation of Dark Web or Dark Market which cause it to exploit users through hacking.
  • With a market capitalization of $350 billion, bitcoin is the largest cryptocurrency in the world. A distinctive feature of bitcoin is that a record of all transactions is held in a public ledger maintained simultaneously across thousands of computers. As per bitcoin proponents, the latter are prone to manipulation or hacking.
  • Cryptocurrency does not have any legal tender. So, it cannot be authorized and can be subscribed by anyone which results in money laundering.
  • Since it doesn’t have regulatory authority, it is easy to trade between countries and can cause money laundering in disguise of trading.
  • Cryptocurrency is highly encrypted and cannot be traced easily.
  • Layering: Cryptocurrencies can be purchased with cash (fiat) or other types of crypto (altcoin). Online cryptocurrency trading markets (exchanges) have varying levels of compliance with regulations regarding financial transactions. Legitimate exchanges follow regulatory requirements for identity verification and sourcing of funds and are Anti-Money Laundering (AML) compliant. Other exchanges are not as AML compliant. This vulnerability is where most transactions related to bitcoin money laundering take place.
  • Hiding: Crypto-based transactions can generally be followed via the blockchain. However, once a dirty cryptocurrency is in play, criminals can use an anonymizing service to hide the funds’ source, breaking the links between bitcoin transactions. This can be accomplished both on regular crypto exchanges or by participating in an Initial Coin Offering (ICO), where using one type of coin to pay for another type, can obfuscate the digital currency’s origin.
  • Integration: The point at which you can no longer easily trace dirty currency back to criminal activity is the integration point – the final phase of currency laundering. Despite the currency no longer being directly tied to crime, money launderers still need a way to explain how they came into possession of the currency. Integration is that explanation. A simple method of legitimizing the illicit income is to present it as the result of a profitable venture or other currency appreciation. This can be very hard to disprove in a market when the value of any given altcoin can change by the second.
  • Tumblers: Mixing services, known as “tumblers,” can effectively split up the dirty cryptocurrency. Tumblers send it through a series of various addresses, then recombine it. The reassembly results in a new, “clean” total (less any service fees, which can often be substantial.
  • Unregulated Exchanges: Another avenue through which criminals can undertake bitcoin money laundering is unregulated cryptocurrency exchanges.
  • Peer to Peer: To lower bitcoin money laundering risk, many criminals turn to decentralized peer-to-peer networks which are frequently international. Here, they can often use unsuspecting third parties to send funds on their way to the next destination.
  • Gaming site: Online gambling and gaming through sites that accept bitcoin or other cryptocurrencies is another way to conduct a crypto money-laundering scheme. Crypto can be used to buy credit or virtual chips which users can cash out again after just a few small transactions.


Way forward

  • Bringing KYC norms into cryptocurrencies.
  • Bringing Japan Model where they are provided with licenses and can be easily traceable.
  • Adhering to FATF guidelines regarding cryptocurrency.
  • Need to expand capabilities on ways to probe virtual assets and regulate virtual asset provides to prevent money laundering.
  • A multi-disciplinary agency to work with public and private partnership is key tackling criminal finances.
  • Enforcing new technologies in criminal finance networks.
  • Enacting Data Protection Laws, hiring ‘’White Caps’’ and enabling web audits of money transfer by banks.


International Examples

  • Financial stability board: Global watchdog that runs financial regulation for G-20 economies for regulating digital currencies.
  • United Kingdom: Its Legal to operate currencies but have to register with financial conduct authority and also assure the anti-money laundering and counter terrorism standards.
  • South Korea: Here it’s not a legal tender but use of anonymous bank accounts for virtual coin trading is prohibited.



Since Cryptocurrencies doesn’t have legality, in long term it poses risk to total economy. They have to be regulated on par with normal currencies and measures have to be taken accordingly.