According to crypto forensics firm Elliptic, investigators are ill-equipped to deal with the evolving cross-chain movement of illicit crypto.
With crypto-driven money laundering becoming an increasing concern for regulators worldwide, Elliptic has released a new report that sheds light on the latest threat landscape.
In the report, “The state of cross-chain crime,” the company highlights how criminals have grown increasingly sophisticated in obscuring the flow of ill-gotten crypto funds by exploiting decentralized exchanges, cross-chain bridges, and coin swap services. Over $4 billion in illegal funds have been concealed using these three facilities.
Cross-chain money laundering is an increasing concern
Criminals pilfering centralized digital assets like stablecoins Circle (USDC) and Tether (USDT) often use decentralized exchanges (DEXs) like Uniswap to exchange them for non-centralized cryptocurrencies like ETH. This step is essential to the bad actors since centralized crypto issuers can freeze stolen assets, or the stolen asset prices can tank, leaving them with almost nothing. After this, criminals send funds through mixers like TornadoCash and Blender.io or bridge the swapped tokens onto another blockchain using a cross-chain bridge like RenBridge. To date, criminals have used DEXs to process $1.2 billion in stolen funds.
Both cross-chain bridges and mixing services have become effective tools for criminals to increase the anonymity of their transactions and throw authorities off their scent. According to Elliptic, over criminals used bridges to move $750 million across different blockchains, with RenBridge being the most popular. Criminals can use RenBridge to convert renBTC to BTC before passing the funds through a bitcoin mixer, further obscuring their trail of digital breadcrumbs. This level of obfuscation poses a challenge to law enforcement and treasury officials since there is no centralized entity that can be compelled to pull the plug on such services.
Coin swap services allow customers to swap tokens anonymously for a fee via the service’s homepage. Illegitimate iterations of these service services are often based in Russia or Iran. Some may even allow users to swap crypto assets for fiat currencies like the Russian ruble, posing a potential sanctions risk violation. Coin swap services have processed more than $1.2 billion in stolen crypto.
Are existing money laundering controls enough?
Rigorous anti-money laundering controls have heightened the barrier to entry for crypto firms to register in the U.K., Canada, and the U.S. officially. While these controls play an important role in ensuring that users transacting on crypto platforms are not sanctioned individuals or criminals, they alone are inadequate to prevent sanctioned users from using the exchange to move funds.
Without the ability to track the origin of funds in an ETH wallet, the owner of a custodial wallet could be holding funds from entities sanctioned by the government and unknowingly be in breach of sanctions laws.
Hence, the report advocates the use of forensic tools able to track the journey of assets as they move through DEXs, mixers, and coin swap services.
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