An exclusive article by Fred Kahn

A growing diversity of money laundering techniques in the crypto sector has made illicit flows increasingly complex and difficult to trace, driving urgent calls for more effective controls and thoughtful regulatory reform. With digital assets gaining mainstream traction, it is now crucial for financial crime specialists, regulators, and financial institutions to understand the range of laundering typologies in this ecosystem and to identify practical measures for countering these evolving threats.

Money Laundering Techniques Using Crypto

Money laundering through cryptocurrencies has evolved alongside digital innovation. Criminals and illicit actors have leveraged the unique features of blockchain-based assets to clean illicit funds, exploit regulatory gaps, and obscure transactional trails. The following methods represent the most common and advanced ways in which money laundering is perpetrated through crypto channels:

Use of Mixers and Tumblers

Mixers (or tumblers) are services designed to enhance transaction privacy by blending potentially identifiable or “tainted” cryptocurrencies with others. A user sends coins to a mixer, which then pools those assets with others and redistributes the amount, minus a fee, to a different address. This process obfuscates the link between the original sender and the final recipient, making it difficult for investigators to trace the origin of the funds. According to Europol’s 2023 Internet Organised Crime Threat Assessment, “mixers remain a key component in obscuring the flow of illicit proceeds, particularly following major hacks or darknet marketplace seizures.” The persistent use of mixers complicates efforts by law enforcement to connect wallet addresses to illicit activity.

Layering Through Multiple Wallets and Chains

Layering is a classic money laundering step adapted for the blockchain. Offenders may transfer crypto assets across dozens or even hundreds of wallets, sometimes using different cryptocurrencies and blockchains (cross-chain swaps)—to create a tangled web of transactions. Each movement adds complexity and reduces the ability of compliance teams to reconstruct a transaction’s path. The use of decentralized exchanges (DEXs) and cross-chain bridges can further obscure funds by rapidly converting assets and moving them across different ecosystems with minimal oversight.

Privacy Coins and Obfuscation Technologies

Certain cryptocurrencies are explicitly designed for anonymity. Privacy coins such as Monero (XMR), Zcash (ZEC), and Dash employ advanced cryptographic techniques (e.g., ring signatures, stealth addresses, and zero-knowledge proofs) to mask transaction details, including sender, receiver, and amount. The Financial Action Task Force (FATF) has repeatedly flagged privacy coins as a high-risk vector for money laundering, noting in 2024 that “these technologies are attractive to criminals for the very reason they are hard to trace.”

Use of Decentralized Finance (DeFi) Platforms

DeFi platforms enable users to transact, lend, borrow, and trade digital assets without centralized oversight. This lack of intermediaries often leads to weak or non-existent customer due diligence (CDD) and Know Your Customer (KYC) procedures. Criminals exploit this by funneling illicit funds through DeFi protocols, staking and swapping assets, and withdrawing proceeds as “clean” crypto. Smart contract automation and anonymous liquidity pools further enhance the appeal of DeFi for laundering operations.

Crypto-to-Fiat Conversion via Unregulated Exchanges

Converting crypto to fiat currency (or vice versa) through exchanges is the crucial “integration” step in laundering. Unregulated or under-regulated exchanges, especially those operating offshore, are frequent targets for laundering operations. Some exchanges have lax KYC/AML controls, allowing criminals to cash out without adequate scrutiny. The FATF’s 2023 assessment highlighted ongoing challenges posed by “jurisdictional arbitrage,” where criminals deliberately use platforms in countries with weak regulatory enforcement.

Use of Non-Fungible Tokens (NFTs) and Digital Collectibles

NFTs have introduced new opportunities for money laundering. Criminals may buy or sell digital art and collectibles at inflated prices to legitimize illicit funds. The pseudo-anonymous nature of many NFT marketplaces, combined with the ease of creating digital assets, makes it challenging to distinguish genuine transactions from laundering schemes. In January 2022, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a notice acknowledging NFTs as a potential vehicle for money laundering.

Smurfing and Micro-Transactions

Much like traditional banking, “smurfing” in the crypto world involves breaking down large illicit sums into many small transactions that are less likely to attract attention. These micro-transactions are sent through multiple wallets or platforms, later aggregated and integrated as clean funds.

Use of Cryptocurrency ATMs

Crypto ATMs are another weak spot. While many operate legally and conduct KYC, a significant portion, especially in jurisdictions with limited regulation, allow for anonymous or near-anonymous transactions. Criminals may deposit cash and withdraw crypto or vice versa, exploiting insufficient oversight.

Containment Strategies: How Crypto Money Laundering Can Be Tackled

Combating money laundering in the crypto sector requires a blend of advanced technology, rigorous compliance, cross-border cooperation, and continuous adaptation to new typologies. The following measures have shown effectiveness, though significant challenges remain:

Advanced Transaction Monitoring and Analytics

Regulated entities, especially exchanges and custodians, are increasingly deploying AI-driven transaction monitoring tools that analyze blockchain data in real time. These systems flag patterns consistent with layering, smurfing, or the use of mixers, generating alerts for compliance review. Companies such as Chainalysis and Elliptic have developed blockchain analytics platforms that map illicit flows, trace ransomware payments, and identify wallet clusters linked to known criminal entities. The key is not only to detect red flags but to automate the prioritization of suspicious activity reports (SARs) for human investigators.

Comprehensive KYC and CDD Procedures

Strong customer due diligence at onboarding and during account lifecycle events is fundamental. This includes verifying identity documents, cross-referencing against sanctions lists, and performing ongoing screening for adverse media or suspicious activity. Many leading exchanges now employ biometric authentication, liveness checks, and remote identity verification technology. The FATF’s Recommendation 10 and the EU’s 6th Anti-Money Laundering Directive (6AMLD) mandate robust KYC procedures for virtual asset service providers (VASPs), including exchanges and wallet providers.

Blockchain Intelligence and Public-Private Collaboration

Law enforcement agencies are rapidly improving their ability to analyze blockchain transactions. Successful investigations often rely on collaboration between regulators, crypto businesses, and analytics firms. Europol, INTERPOL, and the U.S. Department of Justice have all reported successes stemming from joint efforts and intelligence sharing with blockchain experts. For example, the takedown of the Hydra darknet marketplace in 2022 involved extensive analysis of Bitcoin flows with assistance from private sector partners.

Blacklisting and Freezing of Illicit Addresses

Many blockchain projects and exchanges maintain lists of wallet addresses associated with criminal activity, scams, or sanctions violations. Transactions involving these addresses can be automatically blocked or flagged for further investigation. The U.S. Office of Foreign Assets Control (OFAC) has added crypto wallet addresses to its Specially Designated Nationals (SDN) list, legally requiring U.S. entities to block these assets.

Regulatory Oversight of Crypto ATMs and Exchanges

Several jurisdictions have moved to license, register, or directly supervise crypto ATMs and exchanges. The EU’s Markets in Crypto-Assets (MiCA) Regulation (adopted in 2023) imposes obligations on VASPs, including transaction monitoring and reporting. In the United States, FinCEN treats many crypto businesses as Money Services Businesses (MSBs) subject to AML program requirements.

Suspicious Activity Reporting and Information Sharing

The mandatory filing of SARs for crypto-related transactions, especially those involving large or unusual activity, is increasingly enforced. Information sharing across borders has improved with FATF-driven initiatives and bilateral agreements, such as the Joint Chiefs of Global Tax Enforcement (J5).

Regulatory Changes Needed to Strengthen Controls

Current regulations have not kept pace with the rapid evolution of digital assets and laundering methods. Lawmakers and regulators globally are considering, or have already implemented, several strategies that could make a measurable difference:

Harmonizing Global Standards

Regulatory arbitrage remains one of the biggest challenges, as criminals exploit weak or inconsistent rules across jurisdictions. Full adoption of the FATF’s Travel Rule—which requires VASPs to share sender and receiver information for transfers above a threshold—has lagged, with only a minority of jurisdictions fully compliant by early 2025. Universal implementation and enforcement of the Travel Rule would close a major loophole.

Expanding Scope to DeFi and NFTs

Existing AML/CFT regulations typically cover centralized exchanges and wallet providers, but many DeFi platforms, DAOs (decentralized autonomous organizations), and NFT marketplaces operate without regulatory oversight. Extending regulatory requirements—such as KYC, recordkeeping, and SAR filing—to these platforms could significantly reduce risks. The European Union’s MiCA regulation takes steps in this direction, but global harmonization is lacking.

Mandating Stronger KYC for Crypto ATMs and Onramps

Many jurisdictions allow crypto ATMs to operate with minimal oversight, creating easy on-ramps for illicit funds. Mandating robust KYC, transaction reporting, and surveillance for all ATM operators would reduce this risk. Canada and Singapore have already implemented such requirements, showing it is both feasible and effective.

Encouraging Advanced Forensics and Reporting Standards

Legislative support for blockchain forensics, including public funding for law enforcement training and technology adoption, would level the playing field between criminals and investigators. Enhanced reporting standards, including faster SAR processing and real-time alerts to regulators, would further increase detection rates.

Increasing Penalties and Enforcement

Stronger penalties for non-compliance and deliberate AML breaches, especially among VASPs and other crypto businesses, can deter negligent or complicit behavior. The EU’s 6AMLD includes criminal liability for legal persons and increased fines, while the United States has similarly expanded enforcement authority for agencies like FinCEN.

Promoting International Cooperation

Money laundering is a transnational crime, and effective prevention hinges on cross-border information sharing and coordinated action. Forums such as the Egmont Group and FATF can facilitate such collaboration, but political will and resource commitment are essential. International task forces have already shown success in large-scale crypto seizure operations, such as those tied to ransomware gangs and darknet markets.

Conclusion: The Path Forward for Crypto AML

Cryptocurrency money laundering has proven both adaptive and resilient, capitalizing on new technologies and the limitations of traditional financial controls. While containment strategies are increasingly sophisticated—leveraging AI, blockchain analytics, and cross-sector collaboration—the pace of innovation means risks remain high. Regulatory evolution must be equally dynamic, extending controls to DeFi, NFTs, and crypto ATMs, harmonizing standards globally, and holding both criminals and complicit facilitators to account.

Looking ahead, a robust combination of regulatory clarity, technological advancement, and international cooperation will be required to tip the scales in favor of AML professionals and law enforcement. The stakes are high: as digital assets become further intertwined with the global economy, effective money laundering controls will be pivotal to protecting the financial system’s integrity.

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Related Links

• FATF Guidance for a Risk-Based Approach to Virtual Assets and VASPs
• European Union Markets in Crypto-Assets (MiCA) Regulation
• U.S. Financial Crimes Enforcement Network (FinCEN) – Virtual Currencies Guidance
• Europol Internet Organised Crime Threat Assessment
• OFAC Sanctions List Search – Crypto Wallets

Other FinCrime Central News About Stricter Regulation Changes

• Stricter South Korea Crypto Regulations to Safeguard KRW 108 Trillion Market
• Aggressive EU Crypto Transfer Rules Aim At Enhancing Transparency
• EU’s Bold Move: Privacy Coins and Anonymous Crypto Banned by 2027

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