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  • Flexi Group

Decentralised Finance; A new booming route for money launderers

Pinsent Masons, an international legal firm, released a briefing note on 4 February stating that money laundering using decentralized finance (DeFi) protocols is on the rise.

In 2021, cybercriminals laundered $8.6 billion in cryptocurrencies, a 30% rise over the previous year. More than half of the monies sent to and received by addresses related to criminal activity last year were transferred through central exchanges as these remain the criminals’ favourite conduit. However, there is a definite increase in the use of DeFi protocols for money laundering activities.

One-third of all crypto currency embezzlement in 2021 came via DeFi protocols valued at around $2.2bn. DeFi protocols ais a crucial area of growth for cryptocurrency crime in general. DeFi protocols do not rely on intermediaries such as banks or other financial institutions and this is arguably one of the reasons, they attract illicit forces.

A 1,964% year-over-year growth in the total value of crypto laundered using DeFi protocols was also recorded by data source Chainalysis, hitting $900 million in 2021. These estimates only include the proceeds of cryptocurrency-based criminal activity, such as black-market sales and ransomware attacks.

Profits from 'offline' crimes like drug trafficking, which are later transferred to cryptocurrency, are likely increase the “real” the amount of DeFi money laundering activities considerably.

In and of itself, the use of cryptocurrency for money laundering is nothing new. In order to conceal the source of the money, the ill-gotten gains must still be placed in the financial eco-system, to which crypto exchanges have now been added. The method is designed to refrain law enforcement officials from identifying the laundering offenders nor the laundering activity. Traditional money laundering differs significantly from cryptocurrency money laundering.

Crypto currency exchanges and crypto asset service providers (CASPs) currently operate under a less strict regulatory regime than banks or other financial institution and therefore may be abused by cybercriminals allowing them to evade international borders.

Even though cryptos can provide some advantages over other historically enforced money laundering methods, nonetheless crypto exchanges are publicly recorded and publicly available, making each and every transaction tamper-proof and hence impossible to conceal.

To get around this problem, cybercriminals are increasingly turning to other methods that make it harder to trace the source of their crypto payments and funding. Mining pools is one of the obscure methods employed, in which crypto miners work together to locate blocks on the blockchain in order to divide the reward. In addition, money launderers can utilize cryptocurrency "mixers," which disguise the relationship between an individual and a crypto transfer.

It is evident that there is a need to increase consistency and coordination between jurisdiction in order employ regulatory innovation to protect the crypto-asset industry from criminal abuse. Regulators and law enforcement need to evolve in order to understand the cryptocurrency environment and use new knowledge and skills to identify proceeds of crime and any criminal players laundering through the crypto-exchange scene.

Financial crime frameworks must be evaluated and modified to account for the hazards connected with cryptocurrency.

These tools may be used to help businesses who accept cryptocurrency payments or transfers trace their origins, including whether there are any connections to addresses connected with unlawful activities. The use of digital identification technologies by businesses may also be used to compare the transactions of customers to their customer profiles.


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