Criminals are increasingly using blockchain and cryptocurrencies to launder money from off-chain crime such as fraud or selling drugs, according to research by forensics firm Chainalysis.

Digital assets have been used by criminals since their inception and various means of attempting to launder ill-gotten gains are nearly a decade old. They include mixers like Tornado Cash, centralized exchanges with lax compliance and over-the-counter brokers. Off-chain crime, however, is finding its way on-chain, Chainalysis said.

“In 2024, money laundering in crypto encompasses all crime — not just that which is inherently tied to the crypto ecosystem,” the firm said in a report released today. In the larger context, as an overall percentage of blockchain transactions, crime accounted for 0.34 percent in 2023, Chainalysis has said previously. A mainstay of crypto money launderers is called a mixer because it pools crypto from many users and then redistributes it randomly, making tracking more difficult. Tornado Cash is a mixer, and was put on the U.S. government’s sanctions list in August, 2022.

Surprisingly, Tornado Cash usage is still strong and increasing, according to Chainalysis. The sanction makes it a crime for any American to interact with Tornado Cash. “Early 2023 marked an inflection point” for Tornado Cash, Chainalysis wrote. “When inflows to the smart contract mixer began to increase again.”

Curtesy of Chainalysis

One of the trickier things about laundering crypto is converting it back to U.S. dollars or yuan or Euros. Centralized exchanges have always been one of the quickest ways to attempt to wash Bitcoin or USDC.

“Over 50% of illicit funds wind up at centralized exchanges, either directly or indirectly after the use of obfuscation techniques,” Chainalysis said. “Despite a dispersion across many services, there is a high concentration of illicit funds flowing to just five centralized exchanges. So far in 2024, there has been a particular surge in the use of just a few conversion services for funds from darknet markets, fraud shops, and malware.”

Curtesy of Chainalysis

Another way criminals get their crypto converted to fiat is by using over-the-counter brokers. Chainalysis noted this growing OTC trend in China where some services advertise on Telegram.  

Curtesy of Chainalysis

It's much harder to track real-world money laundering than in crypto due to blockchain’s inherent transparency. Spotting instances when off-chain dirty money comes on chain is likewise tricky, Chainalysis noted, unless investigators use other means to know where the money came from. While still imprecise, Chainalysis identified potential red flags including amounts that are just below amounts that trigger government reporting, the use of a lot of intermediary wallets before a transaction arrives at an exchange and payments made in rounded amounts.

“For illicit actors looking to cash out, time is often more critical than obtaining the best price, making speed a higher priority at this stage of the laundering process,” Chainalysis said. “Regardless of the intention, investigators often flag many rounded amounts in an investigation as a noteworthy pattern.”

While overall crime is a miniscule part of blockchain transactions, the forensics firm expects more off-chain crime to find its way on chain.

“As the global acceptance of cryptocurrencies grows and barriers to entry diminish, Chainalysis expects this type of money laundering to become more significant, as illicit actors historically co-opt new technologies for their own purposes,” the firm said. “Authorities must navigate the usage of these heuristics carefully, ensuring they have robust evidence to support their claims without unduly disrupting legitimate financial operations.”