While it’s notable that stablecoins are gaining traction, a new report from blockchain analytics firm Chainalysis has found that stablecoins are frequently used for money laundering.
Kim Grauer, Director of Research at Chainalysis, told Cryptonews.com that crypto-native money laundering occurs when an on-chain wallet is associated with criminal activities.
“Exchange heists, crypto scams, and darknet market proceeds are on-chain money laundering examples, rather than off-chain activity like narcotics trafficking and fraud,” Grauer said.
“Because this flow of activity, from the placement stage to the conversion stage, occurs entirely on-chain, we refer to it as crypto-native money laundering.”
Chainalysis’ “Money Laundering and Cryptocurrency” report points out that an increasing portion of illicit funds passing through intermediary wallets are represented by stablecoins. This is consistent with Chainalysis’ previous findings that stablecoins now account for the majority of all illicit transaction volume.
Our Money Laundering report reveals how bad actors now use crypto to launder funds from off-chain crimes — not just crypto-native crimes like ransomware. We explore advanced tracing techniques and how blockchain data is leading the fight against fincrime.https://t.co/32ApuphHpU
— Chainalysis (@chainalysis) July 11, 2024
Why Stablecoins Are Used For Money Laundering
According to Grauer, there isn’t a direct link between stablecoins and illicit activity. However, Chainalysis’ report notes that, “both good and bad actors often prefer to hold funds in an asset with a value that will not change based on swings in the market.”
The increasing rise of stablecoins for money laundering may also be due to non-crypto native criminals using cryptocurrency more frequently. Grauer noted that traditional money launderers are starting to utilize crypto networks to create “large-scale money laundering infrastructure.”
This appears to be the case. Alan Orwick, Co-Founder of Quai Network – a Layer-1 solution – told Cryptonews that the report from Chainalysis highlights sanctioned entities as the key driver of illicit transaction volume.
“Specifically, $14.9 billion in volume from sanctioned entities accounts for 61.5% of all illicit transaction volume, surpassing other categories such as darknets, malware, and stolen funds,” Orwick said.
“Stablecoins offer a lucrative means of accessing the stability of the US dollar, even in the face of sanctions that are more easily enforceable on systems like SWIFT.”
Drawbacks of Using Stablecoins for Money Laundering
Although stablecoins are increasingly being used for money laundering, Grauer said there isn’t a technical feature associated with stablecoins that make them preferable for illicit activity.
In fact, Grauer pointed out that stablecoin issuers can freeze illicit funds if they appear suspicious. Echoing this, Jonathan Thomas, CEO and Co-Founder of Blueberry Protocol, told Cryptonews that stablecoin issuers have been addressing the issue of sanctioned entities by blocking or freezing those addresses.
For example, stablecoin issuer Tether (USDT) recently froze $5.2 million worth of USDT in an effort to combat money laundering. The illicit funds were flagged by blockchain tracking platform MisTrack. The frozen USDT were distributed across 12 Ethereum (ETH) wallets, flagged as “USDT Banned Addresses.” The funds were suspected to have been laundered from numerous phishing schemes.
Tether also froze addresses associated with sanctioned entities in April this year. This was in response to allegations that Venezuela’s state-run oil company, PDVSA, had been utilizing Tether to bypass sanctions imposed on its crude oil and fuel exports.
“Blocking or freezing funds is accomplished by tracking certain patterns when it comes to how stablecoins are used,” Thomas explained.
“When an issuer sees a malicious pattern, that’s when they freeze transactions.”
Grauer added that data analysis from Chainalysis can help identify intermediary wallets holding a large concentration of funds linked to crypto-native criminal activity. These wallets often act as consolidation points, holding cryptocurrency deposited from multiple other intermediary wallets.
Source: Chainalysis“We define intermediaries as distinct unidentified wallets between two known endpoints,” Grauser said.
“In the case of money laundering, intermediaries are between an illicit wallet and a conversion service, and could involve a handoff (or multiple handoffs) from a cybercriminal to a professional money launderer, or it could be one individual sending crypto through many individual private wallets they control.”
Regulations Aim To Prevent Illicit Activity Using Cryptocurrency
Thomas added that freezing or blocking funds is one example of how illicit stablecoin transactions can be prevented. Yet he noted that regulations focused on dealing with bad actors or sanctioned entities will help lower this activity.
Fortunately, Grauer pointed out that this is underway. She remarked that existing regulations like the European Union’s Fifth Anti-Money Laundering Directive, along with the Travel Rule, and anti-money laundering (AML) requirements all are important advancements in the global enforcement of money laundering prevention.
“Combined with enhanced Know Your Customer (KYC) and AML protocols on the part of crypto exchanges and traditional financial institutions, transaction monitoring systems and blockchain intelligence tools can enable a sustainable and secure framework that allows for innovation without illicit activity,” Grauer commented.
This in mind, Grauer is hopeful for a decrease in on-chain money laundering moving forward. Yet she remarked that regulations are still being erected in many countries, therefore it remains difficult to predict near-term trends.
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