Crypto crime is becoming increasingly white collar due to the common denominator in all iterations of this crime: money laundering. Organised crime groups who deal in cryptocurrencies need a way to “cash out” while evading law enforcement.

The architecture of Bitcoin and other cryptocurrencies relies on “blocks”, which are collections of historical data referred to as “blockchains”. A recent report by Chainalysis, a blockchain analysis company, investigates cryptocurrency’s money laundering ecosystem through the lens of blockchains.

Crypto exchanges and the role of professional facilitators

A cryptocurrency exchange is a business that allows customers to convert cryptocurrencies such as Bitcoin into cash, or trade them for other assets.

The report shows that a relatively small number of accounts at the largest crypto exchanges are receiving the most illicit funds from criminal sources. Who is driving this activity?

It is posited that many of these are Over The Counter (OTC) brokers who facilitate trades between individual buyers and sellers. While most OTC brokers run a legitimate business, some of them specialise in providing money laundering services to criminals. OTC brokers often have much lower KYC requirements than the exchanges they operate on, taking advantage of this fact to assist criminals in laundering proceeds of crime.

The report shows that that the total value of bitcoin received by such brokers has increased at a rapid rate over the past two years. While these funds only account for approximately 1% of all bitcoin activity, this is far from an insignificant amount, with more than USD $3 billion worth of illicit bitcoin received over the course of 2019.

How do OTC brokers operate?

Blockchain analysis can provide insight into how OTC brokers interact with criminals, and with each other.

For example, one case examined in the report shows that illicit funds from a criminal entity were sent to an OTC intermediary wallet, then moved to two different OTC brokers, who moved the funds to a large cryptocurrency exchange, most likely to be converted to cash.

Another case demonstrated that OTC brokers frequently transact with one another, which could potentially be attempts to “fool” blockchain analysis software by artificially lowering their exposure to criminal wallets.

The benefits of blockchain analysis

Traditional investigation techniques such as obtaining search warrants and analysing bank records can often be very slow. Blockchain analysis allows for immediate analysis of transactions, providing insight into how criminals are laundering funds much faster.

The recommendations

The report makes two key recommendations:

  1. Law enforcement and regulators need to become experts in blockchain technology to be better equipped in the fight against money laundering in cryptocurrency.
  2. Cryptocurrency exchanges need to carry out more extensive due diligence on OTC brokers operating on their platforms.