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Although Bitcoin was involved in illegal activities many times due to its decentralized nature, it is still out of comparison with money laundering involved in cash transactions. Based on figures for 2019, only $829 million in BTC was spent on the dark web, which is 0.5% of all Bitcoin transactions. However, as the crypto industry evolves and many institutional players step in, the need for Bitcoin transaction security becomes pressing.

How is Crypto Used for Money Laundering

Financial criminals use BTC and other crypto assets to hide illegal activities and the origin of funds. Since transactions in the Bitcoin network are anonymous, it makes it simple for fraudsters to create money laundering schemes and remain unnoticed. However, the same concepts that apply to money laundering in cash apply to money laundering in crypto. Here are common money laundering practices:

  • Tumblers – mixing services split up “dirty” cryptocurrency, sending it through various addresses and recombining it to create “laundered” money.
  • Unregulated exchanges – criminals use exchanges with no AML cryptocurrency checks, trading crypto repeatedly to eventually withdraw “clean” Bitcoin.
  • Peer-to-peer networks – criminals use decentralized networks to send funds across borders.
  • Gambling  – crypto transactions in online gaming and gambling sites can be used for money laundering.

            Most money laundered through these schemes ends up “clean” and is transferred to platforms in countries with no strict AML rules. Once transferred, they are converted into local currencies and used for further purposes, being untraceable and “clean”.

AML Processes for Bitcoin Transactions

Bitcoin Compliance AML includes the following stages:

  • Customer due diligence and crypto address AML check. AML checks begin with the process of CDD, where crypto service providers collect and verify customer information. This involves obtaining details such as names, addresses, and identification documents to establish the identity of users engaging in BTC transactions.
  • Transaction monitoring. Continuous tracking of transactions is a key aspect of AML checks. Automated systems analyze transaction patterns, amounts, and frequencies to detect any unusual activity.
  • Source of funds verification. Verifying the legitimacy of the source of funds is essential in preventing money laundering. AML checks involve scrutinizing the origin of the funds used in Bitcoin transactions.

The cryptocurrency industry is still very young, and despite numerous advantages, it also has some imperfections fraudsters use for building and implementing financial schemes. Money laundering is not only a crypto industry problem. Figures prove, that the damage caused by money laundering schemes with cash is much bigger than that of crypto. Still, it does not mean this issue should not be regulated. Due to AML mechanisms, crypto exchanges and businesses can track illegal actions and pass them to relevant authorities for further investigation.