Criminals use DeFi services to launder money from illegal activities such as fraud and drug trafficking report from USTreasury.

Decentralized Finance has revolutionized the financial landscape, but with increased access comes increased vulnerability. Malicious actors like ransomware gangs, scammers, and drug traffickers are exploiting DeFi's open nature to launder their ill-gotten gains. From chain-hopping to liquidity pool layering, these criminals leave a trail of dirty money that threatens the entire ecosystem.

The degree to which a purported DeFi service is in reality decentralized is a matter of facts and circumstances, and this risk assessment finds that DeFi services often have a controlling organization that provides a measure of centralized administration and governance.

There have been several instances of actors, including ransomware actors, thieves, scammers, and drug traffickers, using DeFi services to transfer and launder their illicit proceeds. These actors use a variety of techniques and services to accomplish this, including exchanging virtual assets for other virtual assets that are easier to use in the virtual asset industry or less traceable, sometimes using cross-chain bridges to exchange virtual assets for others that operate on other blockchains; sending virtual assets through mixers; and placing virtual assets in liquidity pools as a form of layering.

Steps that criminals take involving DeFi services may not be for the specific purpose of obfuscation but could instead be to move illicit proceeds generated from thefts from DeFi services. For the purpose of this report, this is considered in the section on money laundering, as it is part of an overall process to enable criminals to profit from their crimes. While the objective of the money laundering process by malign actors using DeFi services remains the same, criminals may use new means to do so, for example through chain hopping. In many cases, criminals use DeFi services for these purposes without being required to provide customer identification information. This can make DeFi services more appealing to criminals than centralized VASPs, which are more likely to implement AML/CFT measures.

These laundering methods can create challenges for investigators attempting to trace illicit proceeds, and many actors will use more than one of the techniques below. The level of sophistication will likely depend on the individual actor’s technical experience and familiarity with virtual assets and DeFi services. However, law enforcement has observed even lesser-skilled actors using some of the techniques below.

U.S. DEPARTMENT OF THE TREASURY

How criminals get clean at DeFi?

• Criminals exchange stolen crypto for less traceable assets, often hopping between different blockchains to further obfuscate their tracks. Imagine a thief swapping ill-gotten Bitcoin for Monero on a decentralized exchange, then whisking it through multiple blockchains before cashing out.

• Like a digital laundromat, mixers obscure the origin of funds by pooling and redistributing them. Criminals throw their dirty crypto into the mixer, receiving untraceable coins in return.

• Criminals can launder funds by depositing them into DeFi liquidity pools. These pools act as reservoirs for trading pairs, making it challenging to pinpoint the source of specific coins. Picture a criminal parking their stolen assets in a pool alongside legitimate funds, then slowly withdrawing them over time, effectively "cleaning" them.

The toughening rhetoric of the US authorities towards cryptocurrency mixers potentially threatens criminal cases against their developers, but is unlikely to solve the problem of money laundering, drug trafficking and terrorism financing in practice.

According to Chainalysis research, in 2023, the most popular crypto money laundering mixers were:

• Bitcoin Blender

• MixTum

• CoinMixer

• BestMixer

• Mixer99

Also, we should not forget about Tornado Cash, which has contributed to the development of the crypto money laundering.

According to Chainalysis, a company that analyzes blockchain transactions, over $3.5 billion has passed through Tornado Cash since its launch, of which up to $1.2 billion is directly related to theft, hacking and money laundering.

Example: Over the past two years, Israeli authorities have confiscated millions of shekels in crypto accounts they suspected of having ties to Hamas and other militant organizations in the Middle East.

https://www.wsj.com/world/middle-east/militants-behind-israel-attack-raised-millions-in-crypto-b9134b7a

Bringing Purity to DeFi

Bringing Purity to DeFi is an important step for the development of the DeFi market, as it will allow investors to feel safer and more confident.

Projects like PureFi & AMLbot are making the DeFi market much cleaner and safer with their products.

PureFi tackles the laundering challenge head-on by analyzing on-chain data and identifying suspicious activity. Using AI and machine learning, PureFi tracks transaction patterns, flags high-risk wallets, and alerts DeFi platforms and law enforcement to potential money laundering rings.

AMLbot empowers DeFi platforms to proactively implement AML measures. It integrates seamlessly with existing protocols, automates KYC checks, and monitors transactions for anomalies. Think of AMLbot as a tireless compliance officer, working tirelessly behind the scenes to keep bad actors out and good actors safe.

DeFi's promise lies in its democratization of finance, but that freedom shouldn't come at the cost of harboring dirty money. By embracing innovative solutions like PureFi and AMLbot the DeFi community can ensure that its revolutionary technology remains a force for good, not a playground for criminals.

Drug Trafficking

Drug trafficking organizations are growing more comfortable with darknet markets and the use of virtual assets generally to launder funds, including increased use of DeFi services, according to law enforcement assessments and analysis by blockchain analytic firms.

For example, one blockchain analytics company identified that drug-focused darknet markets generated nearly $2 billion in virtual assets in 2021 through sales, representing a steady increase in revenue since 2018. Still, the size and scope of drug proceeds generated on the darknet and laundered via virtual assets remain low in comparison to cash-based retail street sales.

In addition to darknet market sales in drugs, law enforcement assesses that certain drug traffickers are increasingly converting fiat currency proceeds into virtual assets for laundering.

U.S. DEPARTMENT OF THE TREASURY

DeFi protocols, which operate without traditional intermediaries, are increasingly being used by criminals to launder money.

These services can disguise the origin and destination of funds, making them attractive to illicit actors.

Every year the popularity of decentralized finance only grows, attracting not only investors but also dishonest market players who try to use DeFi tools for their dirty deeds. DeFi needs market regulation, but without losing decentralization, freedom and anonymity.

Criminals use DeFi services to launder money from illegal activities such as fraud and drug trafficking report from USTreasury.

Decentralized Finance has revolutionized the financial landscape, but with increased access comes increased vulnerability. Malicious actors like ransomware gangs, scammers, and drug traffickers are exploiting DeFi's open nature to launder their ill-gotten gains. From chain-hopping to liquidity pool layering, these criminals leave a trail of dirty money that threatens the entire ecosystem.

The degree to which a purported DeFi service is in reality decentralized is a matter of facts and circumstances, and this risk assessment finds that DeFi services often have a controlling organization that provides a measure of centralized administration and governance.

There have been several instances of actors, including ransomware actors, thieves, scammers, and drug traffickers, using DeFi services to transfer and launder their illicit proceeds. These actors use a variety of techniques and services to accomplish this, including exchanging virtual assets for other virtual assets that are easier to use in the virtual asset industry or less traceable, sometimes using cross-chain bridges to exchange virtual assets for others that operate on other blockchains; sending virtual assets through mixers; and placing virtual assets in liquidity pools as a form of layering.

Steps that criminals take involving DeFi services may not be for the specific purpose of obfuscation but could instead be to move illicit proceeds generated from thefts from DeFi services. For the purpose of this report, this is considered in the section on money laundering, as it is part of an overall process to enable criminals to profit from their crimes. While the objective of the money laundering process by malign actors using DeFi services remains the same, criminals may use new means to do so, for example through chain hopping. In many cases, criminals use DeFi services for these purposes without being required to provide customer identification information. This can make DeFi services more appealing to criminals than centralized VASPs, which are more likely to implement AML/CFT measures.

These laundering methods can create challenges for investigators attempting to trace illicit proceeds, and many actors will use more than one of the techniques below. The level of sophistication will likely depend on the individual actor’s technical experience and familiarity with virtual assets and DeFi services. However, law enforcement has observed even lesser-skilled actors using some of the techniques below.

U.S. DEPARTMENT OF THE TREASURY

How criminals get clean at DeFi?

• Criminals exchange stolen crypto for less traceable assets, often hopping between different blockchains to further obfuscate their tracks. Imagine a thief swapping ill-gotten Bitcoin for Monero on a decentralized exchange, then whisking it through multiple blockchains before cashing out.

• Like a digital laundromat, mixers obscure the origin of funds by pooling and redistributing them. Criminals throw their dirty crypto into the mixer, receiving untraceable coins in return.

• Criminals can launder funds by depositing them into DeFi liquidity pools. These pools act as reservoirs for trading pairs, making it challenging to pinpoint the source of specific coins. Picture a criminal parking their stolen assets in a pool alongside legitimate funds, then slowly withdrawing them over time, effectively "cleaning" them.

The toughening rhetoric of the US authorities towards cryptocurrency mixers potentially threatens criminal cases against their developers, but is unlikely to solve the problem of money laundering, drug trafficking and terrorism financing in practice.

According to Chainalysis research, in 2023, the most popular crypto money laundering mixers were:

• Bitcoin Blender

• MixTum

• CoinMixer

• BestMixer

• Mixer99

Also, we should not forget about Tornado Cash, which has contributed to the development of the crypto money laundering.

According to Chainalysis, a company that analyzes blockchain transactions, over $3.5 billion has passed through Tornado Cash since its launch, of which up to $1.2 billion is directly related to theft, hacking and money laundering.

Example: Over the past two years, Israeli authorities have confiscated millions of shekels in crypto accounts they suspected of having ties to Hamas and other militant organizations in the Middle East.

https://www.wsj.com/world/middle-east/militants-behind-israel-attack-raised-millions-in-crypto-b9134b7a

Bringing Purity to DeFi

Bringing Purity to DeFi is an important step for the development of the DeFi market, as it will allow investors to feel safer and more confident.

Projects like PureFi & AMLbot are making the DeFi market much cleaner and safer with their products.

PureFi tackles the laundering challenge head-on by analyzing on-chain data and identifying suspicious activity. Using AI and machine learning, PureFi tracks transaction patterns, flags high-risk wallets, and alerts DeFi platforms and law enforcement to potential money laundering rings.

AMLbot empowers DeFi platforms to proactively implement AML measures. It integrates seamlessly with existing protocols, automates KYC checks, and monitors transactions for anomalies. Think of AMLbot as a tireless compliance officer, working tirelessly behind the scenes to keep bad actors out and good actors safe.

DeFi's promise lies in its democratization of finance, but that freedom shouldn't come at the cost of harboring dirty money. By embracing innovative solutions like PureFi and AMLbot the DeFi community can ensure that its revolutionary technology remains a force for good, not a playground for criminals.

Drug Trafficking

Drug trafficking organizations are growing more comfortable with darknet markets and the use of virtual assets generally to launder funds, including increased use of DeFi services, according to law enforcement assessments and analysis by blockchain analytic firms.

For example, one blockchain analytics company identified that drug-focused darknet markets generated nearly $2 billion in virtual assets in 2021 through sales, representing a steady increase in revenue since 2018. Still, the size and scope of drug proceeds generated on the darknet and laundered via virtual assets remain low in comparison to cash-based retail street sales.

In addition to darknet market sales in drugs, law enforcement assesses that certain drug traffickers are increasingly converting fiat currency proceeds into virtual assets for laundering.

U.S. DEPARTMENT OF THE TREASURY

DeFi protocols, which operate without traditional intermediaries, are increasingly being used by criminals to launder money.

These services can disguise the origin and destination of funds, making them attractive to illicit actors.

Every year the popularity of decentralized finance only grows, attracting not only investors but also dishonest market players who try to use DeFi tools for their dirty deeds. DeFi needs market regulation, but without losing decentralization, freedom and anonymity.