The vast majority (72%) of illicit funds were sent to just five off-ramping services as criminals sought to convert illegal crypto earnings into fiat currencies
Shining a spotlight on the laundering of cryptocurrencies, Chainalysis today revealed that such activity fell sharply, by nearly 30% last year. The blockchain data company’s researchers have found that in 2023, crypto criminals managed to launder just US$22.2 billion worth of illicit earnings, compared to the all-time high of US$31.5 billion the previous year.
“Thanks to increased investments in compliance, including continued implementation of stringent KYC (know your customer) and AML (anti-money laundering) measures, exchanges and law enforcement agencies can prevent bad actors from cashing out their ill-gotten gains.”
Kim Grauer, Director of Research at Chainalysis.
By tracking the flow of funds across blockchains, Chainalysis also uncovered that centralised exchanges remain the primary means of off-ramping (converting cryptocurrencies into traditional fiat currencies), serving as the destination for 62% of all funds leaving illicit wallets.
“The good news is that centralised exchanges offer opportunities to freeze and seize crypto assets associated with illicit activities. Thanks to increased investments in compliance, including continued implementation of stringent KYC (know your customer) and AML (anti-money laundering) measures, exchanges and law enforcement agencies can prevent bad actors from cashing out their ill-gotten gains,” said Kim Grauer, Director of Research at Chainalysis.
Crypto-related money laundering is also generally concentrated among a relatively limited number of exchanges. In 2023, the large majority (72%) of illicit funds sent to all off-ramping services went to just five services, up from 69% in the previous year.
That being said, an obfuscation tactic that is being increasingly employed by crypto criminals is the diffusion of illicit funds across a greater number of deposit addresses (akin to bank accounts in traditional financial systems) at centralised exchanges. In 2023, 1,425 deposit addresses received over $1 million in illicit cryptocurrency, for a total of $6.7 billion, which accounts for 46% of all illicit value received by exchanges for the year.
“It’s possible illicit actors are diversifying their money laundering activity across more deposit addresses in attempts to conceal it from law enforcement and exchange compliance teams. This may also be their strategy to lessen the impact of any one deposit address being frozen for suspicious activity,” explained Grauer. “As a result, fighting crypto crime via the targeting of money laundering infrastructure may require greater diligence and understanding of interconnectedness through on-chain activity than in the past, as the activity is more diffused.”
While centralised exchanges still see the highest volume of crypto laundering activity, perhaps unsurprisingly, as the popularity of DeFi protocols grows, so too has their utilisation by more sophisticated crypto criminals. Overall, the flow of illicit funds to DeFi protocols has followed a steady upward trend over the last five years, and now accounts for 13% of laundering activities.
And then there is a small subset of organised criminal gangs, such as North Korea’s infamous Lazarus Group, that utilise chain hopping via cross-chain bridges. Cross-chain bridges allow users to move funds from one blockchain to another and last year illicit actors’ use of these bridge protocols for money laundering purposes grew substantially.
Overall, bridge protocols received US$743.8 million in crypto from illicit addresses in 2023, up from just US$312.2 million in 2022. “The changes in money laundering strategies we’ve seen from crypto criminals like Lazarus Group serve as an important reminder that the most sophisticated illicit actors are always adapting their money laundering strategy and exploiting new kinds of crypto services. Law enforcement and compliance teams can be more effective by studying these new laundering methods and becoming familiar with the on-chain patterns associated with them. Many of these methods, including chain hopping, can be traced using Chainalysis investigative solutions,” Grauer added.
