Centralized Exchanges as Key Laundering Hubs

Illicit actors are increasingly turning to centralized crypto exchanges for laundering activities due to their liquidity, integration with traditional finance, and ease of converting crypto to fiat, according to a report by Chainalysis.

Massive Laundering Operations in the Crypto Industry

Over the past five years, nearly $100 billion worth of crypto has been laundered from illicit wallets to conversion services, with the majority of these funds ending up at crypto exchanges. The Chainalysis report on money laundering in the crypto industry reveals that 50% of illicit crypto funds are directed to centralized exchanges, either directly or after using obfuscation techniques.

Obfuscation Methods: Mixers and Blockchain Bridges

Obfuscation methods, including crypto mixers like Tornado Cash, have seen significant growth over the last year. Despite a slowdown in usage following sanctions from the U.S. Treasury’s OFAC, Tornado Cash remains a popular tool among malicious actors. Additionally, blockchain bridges have emerged as a favored method for hiding the origin of stolen funds. Chainalysis reported a surge in illicit funds moved across bridges starting in late 2023, with an estimated $234 million illicit inflows recorded in January 2023, most of which stemmed from Tornado Cash.

Centralized Exchanges Under Regulatory Scrutiny

Despite various laundering processes, more than half of illicit funds ending up at crypto exchanges is a significant concern. Centralized exchanges are now facing increased regulatory pressure to crack down on such activities.

“Illicit actors might turn to centralized exchanges for laundering due to their high liquidity, ease of converting cryptocurrency to fiat, and integrations with traditional financial services that help blend illicit funds with legitimate activities,” stated Chainalysis.

Decline in Illicit Fund Inflows to Exchanges

While at least $1 million worth of illicit funds flow into hundreds of centralized exchanges annually, this figure has significantly decreased from its peak of $2 billion per month, indicating some success of AML (Anti-Money Laundering) programs.

Crypto’s Role in Laundering Proceeds from Various Crimes

“The growing ubiquity of crypto has made it a tool for laundering proceeds from various off-chain crimes, such as narcotics trafficking and fraud,” Chainalysis reported. “In 2024, money laundering in crypto encompasses all crime — not just that which is inherently tied to the crypto ecosystem.”