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Elliptic: Find That Culprit Transaction (Part I)

Elliptic: Find That Culprit Transaction (Part I)

As the crypto market grew in popularity, many started to notice its unique features and qualities. And among all, it was anonymity that become arguably the fascinating trait for groups with contradicting interests: privacy proponents, regulators, and criminals!

The increase in the price of bitcoin was accompanied by growing concern about the illicit use of cryptocurrencies which usually came in the form of money laundering and terrorist financing. These concerns were addressed later on in 2019 by Financial Action Task Force (FATF), the main regulatory body that focuses on the two problems. In that year, FATF expanded its standards for anti-money laundering and counter-terrorist financing (AML/CFT) to include Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs) as well.

However, long before that, many analytical firms took this upon themselves to help crypto and blockchain companies in their mission to keep their operations clean and compliant. Founded in 2013, Elliptic was one of the leading analytical firms that started offering such services to crypto companies, especially cryptocurrency exchanges. According to its website, “66% of the crypto volume runs through exchanges using Elliptic.”

The company published its “Preventing Financial Crime in Cryptoassets” report in 2022, a detailed practical guide crafted for professionals that deal with governance, risk, and compliance. The report is organized into three parts which we will look into separately.

Part I: Money Laundering

Malicious actors try to launder their dirty money through different crypto platforms, exercising different methods.

Here’s a quick brief:

Cryptocurrency Exchanges

Non-compliant or unlicensed crypto exchanges are the attractive heaven for money launderers as they don’t follow a strict Know-Your-Customer (KYC) or other due diligence processes.

They may purposefully choose exchanges that are operating in higher-risk jurisdictions that don’t have proper documentation regarding their ownership, location, or any other information relative to the exchange.

Criminals may also use fraudulent documents or money mules for their money laundering purposes, adding a legitimate layer to their criminal activities. According to a report by Guardian, university students were the target of such a scheme that was published as a job advertisement. Criminals would move funds to students’ bank accounts and ask them to transfer the funds to crypto exchanges and buy crypto assets to earn something between £500-£1,000 a week.

Peer-to-Peer (P2P) Platforms

P2P exchanges are not usually subject to existing laws in different jurisdictions. Criminals can use individual brokers who are willing to exchange between fiat currencies and crypto assets for a fee.

Decentralized Finance (DeFi)

Decentralized Exchanges (DEXs) have grown in popularity in recent years as they offer a more open alternative to centralized exchanges (CEX) that are controlled by a main entity. This also means that on DEXs, we don’t have a central group to oversee users’ transactions and activities.

The Kucoin hack in 2020 is a good example in which perpetrators laundered the stolen funds through DEXs like Uniswap and Kyber.

Criminals also use mixing services available in DeFi to obfuscate the source of the transaction, making their illicit trades harder to trace.

Cross-chain bridges are another option for criminals in the DeFi section as they provide an easy solution for swapping between different crypto assets without having to go through a KYC process.

Cryptocurrency ATMs

Just like regular ATMs, Crypto ATMs can be used for changing cash to digital currencies and vice versa. Crypto ATMs are not subject to regulations in many jurisdictions which makes them a very attractive solution for criminals to change huge amounts of dirty cash to crypto assets.

Gambling and Gaming

Criminals can use gambling sites to launder their dirty money. These websites usually don’t require KYC, making it easier for bad actors to buy chips or credits using their illicit funds. They then participate in the activities and withdraw their funds after winning or losing, giving them a new clean source.

Blockchain games that have their own in-game tokens are another option. Criminals buy in-game tokens with their dirty funds and sell them to players in exchange for fiat, cashing them out later on.

Prepaid and Fiat Cards

Perpetrators can transfer their funds to a service that offers prepaid cards in return. These cards can be used then to purchase luxury and expensive goods or services. They can also use their stolen crypto assets to buy fiat cards directly, or purchase stolen card information from the dark web and transfer their assets to these stolen cards, using them later on for their deeds.

Mixers and Privacy Wallets

As we mentioned before, mixers can be used by criminals to obscure the origin of the funds, making it harder for analysts and authorities to track them. Privacy wallets can be used for this as well as they use anonymization techniques to help users obfuscate the source of their assets.

New Tokens and Stablecoins

This is an interesting approach taken by criminals as they invest in newly launched tokens using their illicit funds and proceed to sell these new tokens, giving their dirty money a legitimate face.

Non-fungible Tokens (NFTs)

The NFT market is highly liquid with many NFTs getting a price tag worth millions of dollars. Like the conventional art world, it’s not easy to assess the worth of each NFT as it seems like they are mostly based on users’ artistic tastes.

The nature of the NFT markets makes them a good place for Trade-Based Money Laundering (TBML) where criminals use their illicit funds to buy expensive goods and services.

Privacy Coins

Privacy coins were proposed as a more private and anonymous alternative to crypto assets like Bitcoin and Ethereum. These coins hide the sources of transactions from anyone except the parties responsible. This feature usually makes these coins attractive to criminals as they can change their dirty money to privacy coins or receive the money in these coins directly, hiding the illicit origin of their funds.

Let’s wrap the report here.

Stay tuned for Part Two of this report where we will talk about Terrorist Financing and the Key Trends that Criminals and Threat Actors follow.

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