Crypto Money Laundering Drops by 30%, Says Chainalysis: Warns of New Strategies

Blockchain analysis firm Chainalysis has found that the crypto transaction volume associated with money laundering activity dropped by almost $10B in 2023. Compared to the $31.5B in total cryptocurrency laundered in 2022, last year’s $22.2B represents a decrease of 29.5%.

The firm also found that the value of all crypto raised from ransomware attacks increased significantly, almost doubling that of last year. With $1.1B in total value received by ransomware operators, 2023 set a new record. The report, however, concludes the surge in activity is the result of major geopolitical events and not an indication of an ongoing trend.

The findings come at a time when countries around the world are trying to put systems in place to deter the use of crypto for illegal activities. While this has been much more difficult in the past due to illicit crypto services, the increasing popularity of DeFi is making things easier.

A Year in Review

In its report, Chainalysis found that the drop in money laundering activity matched the timing of an overall decrease in crypto transaction volume. The drop in money laundering-related activity surpassed that of legitimate market activity by 14.6%.

The rise of DeFi has also resulted in the shrinking of illicit services, which has resulted in more illicit funds going to DeFi protocols. This growth can be counterintuitive as DeFi’s additional transparency makes it easier to track all transactions, making obfuscation much harder. As such, Chainalysis attributes this to the growth of DeFi in general, instead of it being the most efficient method.

As in previous years, centralized exchanges continue to be the main destination for illicit cryptocurrency, with a volume almost five times higher than DeFi. This is explained by the multiple fiat off-ramps offered by centralized exchanges, with five services being especially attractive to bad actors. These five unnamed services account for 71.7% of all illicit funds sent to fiat off-ramps.

Money Launderers are Changing Tactics

Despite the reduction in money laundering-related transaction volume, 2023 saw more wallets being used than ever before. In 2022 only 40 exchange deposit addresses received more than $10 million in transactions each, for a total of almost $2 billion. 2023, on the other hand, saw a total of $3.4 being spread in 109 wallets that received over $10 million.

Crypto money laundering by year, Source: Chainalysis

This trend suggests that bad actors are “diluting” transactions at an increasing rate, using more addresses to avoid detection. An added benefit of such an approach is mitigating the impact of seizing by regulators, law enforcers, and centralized platforms. The strategy has proven to be most popular among scammers and market vendors, which show much less concentration than ransomware operators.

While most of this illegal activity is performed by unsophisticated actors who make use of basic tools and strategies, many are using much more advanced strategies. Cross-chain bridges and mixers have become the go-to solutions for entities like North Korea’s Lazarus Group, who have found services like YoMix especially useful.

Law Enforcers and Compliance Teams Must Step Up

Governments around the world have scrambled over the past decade to pass legislation specifically designed to regulate cryptocurrency. While some countries have succeeded, the technical complexity of cryptocurrency and its decentralized nature makes it difficult to keep up with illicit and legitimate use of the technology.

South Korea saw an increase of 48.8% in the reports for suspicious cryptocurrency transactions. This increase is partly explained by more efficient communication between law enforcement and crypto firms. Countries like Nigeria have also seen illicit activity related to crypto increase over the past year, which has prompted experts to push for crypto regulation.

According to Chainalysis, which works with several government agencies across the world, “studying these new laundering methods” is the way to go. The firm believes that by “becoming familiar with the on-chain patterns associated with them”, regulators and enforcers can become much more efficient at taking action.

However, the firm believes this record to be the result of major geopolitical events like the Russian Invasion has made these efforts more difficult, often resulting in governments establishing harsher controls over all crypto transactions.

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