Despite the curious fact that almost every transaction in the cryptocurrency economy is recorded in a blockchain's permanent, unalterable ledger, the industry has long been plagued by black market sales, theft, malware, and money laundering. The crypto black market now has fewer options to cash out its profits than it has in a decade, according to new evidence, suggesting that years of improvements in blockchain tracing and crackdowns on that criminal underworld may be having an effect—if not on reducing overall crime, then at least reducing the number of outlets for money laundering.
Cryptocurrency-tracing company Chainalysis notes a new consolidation in crypto criminal cash-out services during the past year in a section of its annual crime report that was issued today and focuses on money laundering. Just 915 of these services were counted as being used in 2022, the lowest number since 2012 and the most recent indication of a continuing decline in the number of these services since 2018. Even fewer exchanges, according to Chainalysis, now permit the money-laundering conversion of cryptocurrencies for real dollars, euros, and yen: It was discovered that only five cryptocurrency exchanges now control roughly 68% of all cash-outs from the illegal market.
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In fact, just four addresses got $1.1 billion of the $6.3 billion in illicit assets that Chainalysis tracked to those cash-out services in 2022, accounting for more over half of the sums received by just 542 cryptocurrency deposit addresses.
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According to Kim Grauer, head of research at Chainalysis, this severe constriction of so-called "off-ramps" for crypto criminality is the outcome of an ongoing government crackdown on crypto money laundering and a sign of future enforcement. When something is so open and obvious to observe using blockchain analytics, Grauer says, "it's surprising to see some of these deposit addresses transferring more over $100 million in criminal funds and still running." Therefore, it appears to be a good chokepoint where we can halt, profile, and, to some extent, remove this behavior.
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While it's unclear whether crypto crime as a whole increased or decreased in 2022: Despite the sharp decrease in bitcoin exchange rates, Chainalysis' data suggests that illegal use of cryptocurrencies grew in 2017. However, those figures also show a sharp increase in illegal transactions at cryptocurrency exchanges that have been sanctioned, which may have less to do with an increase in crime than with the Office of Foreign Asset Control (OFAC) of the US Treasury increasingly imposing sanctions on important participants in the crypto underground. For instance, in April of last year, OFAC imposed sanctions on Garantex, a Russian exchange it claims laundered more than $100 million in criminal revenues, including ransomware payments. It imposed sanctions on Chatex and Suex, two other Russian exchanges, the previous year; both have since closed. And only last week, the Justice Department indicted Anatoly Legkodymov, the Russian founder of Bitzlato, and shut down his organization. Additionally, OFAC sanctioned another exchange, Bitzlato.
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According to Grauer, "you don't launch a ransomware attack if there's no way to transform that money into something usable." "The money-laundering off-ramps are what are actually supporting criminality, and that's what we're really seeing OFAC doing, and that's what we've really highlighted. And I believe the continuous crackdown has demonstrated that people realize they are at a position where a significant intervention is possible.
The five exchanges that Chainalysis claims permitted the majority of cryptocurrency money laundering were not named. This is so that those exchanges might be the subject of continuing investigations, according to the business. (Chainalysis frequently collaborates with law enforcement authorities in their inquiries.) Furthermore, as money launderers frequently go to great lengths to conceal the source of their funds before it reaches an exchange, it's possible that the exchanges are not even aware that they are facilitating that money laundering.
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In actuality, Chainalysis discovered that a significant portion of the illegal cash-outs passed through two categories of intermediates that could conceal criminal funds: Many were traded via "nested services," or exchanges that ostensibly operate independently but in fact use a larger exchange to execute their operations. In certain circumstances, even while the larger exchange supplies the currency reserves for transactions, the nested service, rather than the underlying exchange, is frequently accountable for adhering to "know-your-customer" regulations.
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According to Chainalysis, there is another expanding category of situations where criminals are using stand-alone dark-web money-laundering services. Many of these businesses promise to conceal the source of funds by blending them with other users' transactions in a "mixer." More criminals are turning to smaller dark-web services known as "mom-and-pop" mixers, whose distributed nature makes them harder to seize or disrupt, as law enforcement has cracked down on major mixing services in recent years—seizing and taking offline the mixers Bitcoin Fog and Helix and sanctioning the mixing service Tornado Cash, for example.
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Despite its hesitation to list the top five money-laundering exchanges in its most recent analysis, Chainalysis did so in a study from February of last year, pointing to a group of exchanges with headquarters in Russia that it claims have cashed out substantial amounts of illegal proceeds. Some of the exchangers mentioned in that article have since received penalties or have shut down, but others, like Cashbank and TETChange, seem to still be in operation.
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A representative from the US Treasury declined to comment when WIRED contacted them about any specific exchanges or ongoing inquiries. The official also suggested that Chainalysis' data provided only one incomplete perspective on the cryptocurrency money-laundering landscape and that much of the consolidation it describes might simply be due to 2022's crypto crash and the resulting bankruptcy of several exchanges—particularly more "fly-by-night" ones with looser compliance rules. The official requested anonymity due to the sensitive nature of sanctions policies that are coordinated between multiple government agencies.
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However, the official also cited continuing enforcement initiatives by the Treasury, in collaboration with international partners, as a campaign that has purposefully limited the alternatives available to criminals. "The solution to stop widespread money laundering is to gradually reduce the number of open vulnerabilities. You gradually reduce the gaps, making them smaller and smaller, the authority claims. "Additional water flows through those open holes if you plug more cracks in the dam."
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Even while it may be a long process, Chainalysis' Grauer says it's evidence that efforts to identify and shut down the ATMs used by the crypto-criminal underground are gradually but definitely having the desired impact. "We've made an effort to highlight the money-laundering gaps. There are still holes, according to Grauer. The crackdown is ongoing.
A version of this article first appeared on wired.com.
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