Cryptocurrency has been growing in recognition and adoption rate, with Bitcoin being the world’s 3rd largest currency in circulation as of Mar 2021 [1]. Rapid technological advancement further accelerated the growth of cryptocurrency. Similarly, the world saw an increase in crypto crimes. In 2020 alone, crypto crime hit $1.9 billion globally – making it the second-highest annual value of crypto crimes recorded [2]. 

Cryptocurrency used to be a curiosity for companies, now more companies are adopting cryptocurrencies as a mode of payment. More businesses see opportunities in crypto but they expose themselves to unprecedented risks unheard of in the traditional space. This increase in popularity will see exponential growth in crypto-related crime as crime will grow with direct proportion to the adoption of crypto; thus resulting in the greater significance of crypto crime in the future. It is hence vital to be able to identify and analyse such crimes, such that adequate technologies can be implemented to combat the crimes. 

Using Crypto for Financial Crimes 

As every financial crime through crypto will eventually require the obscuration of their origins before being converted into cash, money laundering becomes the key to crypto crimes. The decentralisation and semi-anonymity of cryptocurrency make them apt for a host of illegal activities.

Money laundering through cryptos involves three main stages:  

  • Placement

Illicit funds are first placed into the financial system through intermediaries. This includes financial institutions, exchanges, casinos, and businesses. Cryptocurrencies can be purchased using either cash or other types of crypto like altcoin. Most exchanges are Anti-Money Laundering (AML) compliant, meaning they have to follow the regulatory requirements for identity verification and sourcing of funds. Virtual Asset Exchanges are required to explain Know-Your-Customer (KYC) policies and protocols to their customers. This allows for the matching of transaction data to the respective customer. Lawbreakers target exchanges with fewer levels of compliance with AML regulations to better bring in illicit funds. 

  • Layering

Also known as the hiding phase, the illegal source of fund is obscured through structure transactions in this phase. Owing to the lack of trackability, the anonymity of cryptocurrency transactions often allows crimes to be better carried out. To hide one’s identity, a single form of the coin may be used to pay for another, which then blurs the roots of the digital currency. 

  • Integration

The final phase will involve putting back the illicit funds into the economy. To abate traceability, the funds will now have to be of a clean status, convincing the authorities that the funds come from a legitimate source. Illicit income is usually legitimised by posing it as the result of a profitable venture or other currency appreciation. Criminals have found a way to consult thief-party “over the counter” (OTC) brokers to combat the process of KYC. These brokers operate legitimate companies, making it difficult to track money laundering activities due to their nature of business. 

Crypto Mixing: Tumblers, or mixing services, can help to effectively split up dirty cryptocurrencies. This is done by sending the cryptos through a series of various addresses, then recombining it, thereby turning the cryptos ‘clean’. Cryptocurrency normally starts in a legitimate wallet on the clear net, and is then transferred onto the dark web for money laundering. Here, several hops will be made before the currency lands in a second dark web wallet, where it is then safe enough to return into the clear-net for legitimate cryptocurrency exchange. 

Peer-to-peer Crypto Networks: Peer-to-peer networks are decentralised and often international. This allows for the use of unsuspecting third parties to help the criminals do cryptocurrency exchanges and send funds. Being international, dirty currencies can be transferred to other exchanges in countries with less stringent AML regulations, before converting crypto into flat money for luxury goods purchases. 

Crypto ATMs: Anyone would be able to purchase crypto through the use of a crypto debit or credit card. This can sometimes be done through depositing cash. Such cards may also possess bi-directional functionality to facilitate the trading of cryptocurrencies through a scannable wallet address. In such systems, lawbreakers often exploit loopholes to get around money laundering risks, particularly for poorly enforced crypto ATMs. 

Online Gambling and Gaming Sites: Some gambling and gaming allow cryptocurrencies payments for credit or virtual chips. Criminals use cryptos to purchase these chips, and cash them out again after a few small transactions. 

Regtank: Solution to Crypto Financial Crimes

With the existence of financial crimes using cryptocurrencies, the need for RegTech arises. With Regtank’s automated re-screenings and reports, suspicious behaviours and activities would be spotted faster, thereby preventing financial crimes from happening. 


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