Can Blockchain Money Laundering Be Stopped?

Since 2019, a staggering $100 billion in funds have been sent from known illicit crypto wallets to money laundering services — and it is believed to be the tip of the iceberg.

While there are many legitimate uses for crypto, where money flows, so do the criminals. From terrorism to fraud to cybercriminal gangs, illegal money moves by the billions throughout the blockchain, despite its transparent and traceable nature.

Money laundering trends are also shifting. This shift has become a big problem

Techopedia talked to leading blockchain experts to understand the transformation and the new technologies and techniques that can be leveraged to end money laundering.

Table of Contents Table of Contents

1. Key Takeaways
2. Advanced Blockchain Anti-Money Laundering Techniques
3. As Global Crime Goes Crypto, Analysts Must 'Adapt or Fail'
4. The Road Ahead for Law Enforcement and Anti-Money Laundering Agents
5. A Steep But Necessary Learning Curve
6. The Bottom Line
7. References

Show Full Guide

Table of Contents

1. Key Takeaways
2. Advanced Blockchain Anti-Money Laundering Techniques
3. As Global Crime Goes Crypto, Analysts Must 'Adapt or Fail'
Show Full Guide
4. The Road Ahead for Law Enforcement and Anti-Money Laundering Agents
5. A Steep But Necessary Learning Curve
6. The Bottom Line
7. References

Advanced Blockchain Anti-Money Laundering Techniques

In a recent report, Chainalysis presented advanced blockchain tools that can be used to generate intelligence signals for proactive lead generation and more concrete evidence of illicit flows in existing investigations.

The new techniques are designed to help a broad range of analysts and investigators unravel increasingly sophisticated money laundering networks in the blockchain.

Techopedia spoke to Kim Grauer, Director of Research at Chainalysis, to get the inside story on how analysts can face modern crime.

“Effective money laundering prevention in crypto-native and non-crypto-native scenarios requires a multifaceted approach.

“First, expertise in cryptocurrency must extend beyond specialized cybercrime units to include law enforcement agencies of all kinds.”

As Global Crime Goes Crypto, Analysts Must ‘Adapt or Fail’

However, while the volume of dirty money flowing through blockchain networks is alarming, an even greater concern is the expanding criminal network utilizing this technology. Beyond cybercriminals, drug traffickers, fraudsters, and terrorist groups have also adopted cryptocurrency for their illicit activities. Chainalysis said that this shift carries significant implications for investigators.

Money launderers use complex methods that include on and off-chain techniques, crypto mixers, cross-chain bridges, and multiple wallet transfers to disguise the illegal origins of their funds.

Grauer from Chainalysis told Techopedia that prevention must include regulatory measures, technological innovations, and global cooperation.

“Strategies must be tailored to address the unique characteristics of cryptocurrencies while reinforcing traditional anti-money laundering (AML) measures.

“Luckily, with the right data and tools, investigators in the public and private sectors can tap blockchain’s inherent transparency to uncover illicit activity that may otherwise go undetected.”

While Chainalysis offers advanced techniques requiring specialized expertise, its tools also empower analysts of all levels to identify and investigate suspicious blockchain activity.

The Road Ahead for Law Enforcement and Anti-Money Laundering Agents

Steven Deng, CTO of Portkey, a Web3 account abstraction wallet that is built on aelf layer 1 blockchain and incubated by the aelf team, also spoke to Techopedia about the issue.

Deng broke down what it means for law enforcement agencies to be skilled in blockchain intelligence.

“This involves developing extensive on-chain datasets and graphing tools to trace funds and link crypto transactions to real-world entities.

“This contextual information aids in investigating illegal fund flows and identifying potential criminal activity early by analyzing transaction patterns and relationships.”

As Deng explained, all the blockchain data is stored on-chain. This means that every transaction is recorded and cannot be altered.

“Law enforcement can utilize data mapping tools or services to identify wallet addresses that receive anomalous amounts or exhibit abnormal transaction frequencies,” Deng said.

Atypical transactions and wallets can also be monitored for suspicious activities.

“Once suspicious activities are confirmed to be illegal, enforcement agencies should collaborate with offramp platforms to track and freeze these funds and potentially arrest the perpetrators, as most offramp platforms require to Know Your Customer (KYC) information from their users.

“These emerging technologies enable the rapid and meaningful processing of vast amounts of data, reducing the time required for investigations and potentially providing preemptive insights into suspicious patterns and connections that might be overlooked by human investigators.”

A Steep But Necessary Learning Curve

Investigators working to trace cryptocurrency transactions face significant obstacles due to the immense number and intricate nature of these financial activities.

The anonymous characteristics of blockchain transactions further hinder investigative efforts. Nevertheless, emerging technologies such as machine learning and artificial intelligence hold the potential to overcome these difficulties.

Grauer from Chainalysis spoke to Techopedia about the learning curve anti-money laundering experts face.

“While the learning curve of blockchain analytics may be intimidating at first, training programs exist to help both the public and private sectors familiarize themselves with the technology.”

Deng explained that the core methods for combating money laundering continue to rely on forensic accounting and financial tracking techniques. Even with the increasing use of cryptocurrency in criminal activities, the fundamental approach to uncovering these illicit funds remains largely unchanged.

However, Deng also warned that a broadening of skill sets and toolsets is still necessary.

“In addition to blockchain education and intelligence training, law enforcement agencies can collaborate with private sector experts to stay up-to-date with the latest blockchain technologies and tools,” Deng said.

Mastering blockchain involves understanding decentralized ledgers, smart contracts, and the various types of cryptocurrencies. It may be a steep climb, but it is fundamental to combating modern crime.

The Bottom Line

The rise of cryptocurrency has transformed the landscape of financial crime, with money laundering becoming increasingly complex. Criminals exploit the intricacies of blockchain technology to obscure illicit funds, necessitating advanced analytical capabilities to counter this threat.

Law enforcement and financial institutions need specialized tools and training to effectively combat crypto-fueled crime. By understanding blockchain intricacies and collaborating globally, we can disrupt criminal networks and protect the integrity of the financial system.