Money Laundering And Cryptocurrency

Shyam Sewag
6 min readApr 6, 2021


Money Laundering And Cryptocurrency

Money laundering and Cryptocurrency is a dangerous combination. I will try to cover the basic foundation of money laundering and cryptocurrency. Cryptocurrency as a standalone concept is very progressive in theory though it still has many concerns to be addressed. Money laundering on the other hand is completely illegal and criminal activity.

The professional money launderers keep discovering new and innovative ways to cheat the government and financial regulators. They try to capitalize on loopholes as well as use every possible means to inject the ‘dirty’ money into the economy. With the development of technology around the world, these launderers are also looking for many digital ways to launder money successfully. Let’s understand how cryptocurrency can be used to launder money.

Here Is How Cryptocurrency Poses A Potential Risk Of Money Laundering:

What Is Money Laundering?

By definition, money laundering is ‘the illegal process of concealing origin source of money by passing through a complex sequence of transactions’. In general parlance why would you make efforts to conceal the source of money? Because it is obtained from illicit business-like drug trafficking, illegal arms dealing, human trafficking, etc.

There are multiple involved in the process and just to give a perspective of how much money gets laundered, it is estimated that at least 2%-3% of the global GDP (which is huge). Even after relentless efforts by global financial institutions and regulators money still gets laundered. Not only that, but it has been also observed over the years that this money is also used for financing terrorism. Terrorism is the worst anti-social factor in existence. Imagine terrorists getting more funds to cause more chaos.

Throughout the years we have seen a lot of cases getting investigated under Anti Money Laundering laws. I will cover details about those cases in a separate blog post.

What Is Cryptocurrency?

The concept of money has evolved over the years along with human society. In the 21st century, we are witnessing revolutionary initiatives towards money and currency. We are now getting into the phase of digital currencies. Some of these currencies are regulated by financial institutions and regulators. These are called ‘centralized digital currencies. But then there are certain which are independent. These are called ‘Decentralised digital currencies.

Coming to the meaning of cryptocurrency, it is the form of digital currency which is created online with the help of mathematical problems and encrypted with the highest security to preserve the privacy of the user. As of now, the most prominent cryptocurrencies are decentralized. These prominent cryptocurrencies include Bitcoin, Ethereum, Litecoin, Dogecoin, etc.

In recent years we have seen an exponential surge in the popularity of cryptocurrencies. People are looking at it from an investment perspective, from a speculation perspective, and in this case, from a money laundering perspective. The anonymity and decentralized factor make it more attractive for scammers and fraudsters.

How does Money Laundering work?

The process of money laundering has 3 important stages. These stages are Placement, Layering, and integration.

In placement, the launderer introduces dirty money in the financial system. Generally, the proceeds of illicit activities are collected in cash. In order to make this huge amount of cash being transferred through legitimate sources first, it needs to be introduced. To make it possible, professional money launderers use different methods.

Once the dirty money is introduced, it needs to be disguised and transferred from one place to another place. This stage is called layering. In this stage, the launderer focuses on passing the dirty money from as many channels as possible to obscure the source and ownership of the money.

The last stage of the process is Integration. At this stage, the ‘dirty’ money travels all the way back to its true owner. The money has now transferred through many channels, countries, and regions. Therefore, for any financial regulator, it is difficult to trace the origin. Now the original user can utilize this money to make legitimate transactions.

To complete the whole process, professional money launderers charge a hefty amount in the form of processing fees. That is why people go to such lengths and take unimaginable risks. The punishment for getting caught in any of the acts or even conspiring to launder money can put you in prison for a very long period. Therefore, one should avoid getting involved in such activities at every possibility.

Framework Of Cryptocurrency

When it comes to cryptocurrency, as it is a digital currency there is no physical existence like paper-based currency. The basic framework involves computers with super high computation capacity (like a supercomputer) which work as the individual servers, encryption mechanism, validating mechanism, e-wallets for storage, and convenience in completing transactions.

You can own any cryptocurrency, and as it is decentralized as well as not pegged to any central currency you don’t need to worry about foreign exchange rates. It is one of the many perks of cryptocurrency. One way of owning a cryptocurrency is to mine them. The mining process is complicated and power-consuming. It is ideal if you have a dedicated system that can just work on cracking the algorithm to solve a mathematical problem. It requires exceptional computation power. If your system finds a solution to the problem, then it gets validated by the existing miners. Blockchain technology is currently being used to keep a ledger and track all the transactions. Once they validate your solution you get rewarded with a cryptocurrency. In this case, it is Bitcoin as it is widely being accepted.

Different cryptocurrencies can have their own functioning, mining, encrypting, and validating mechanisms. We are just starting to get a hang of the concept and there is still a huge room for development.

Another way through which you can own the cryptocurrency is by buying it from an existing currency holder. These cryptocurrencies have their currency exchanges from which the same can be purchased and stored in your corresponding e-wallets.

Legitimate Usage Of Cryptocurrency

With the increasing popularity and acceptance by a lot of countries, cryptocurrencies are being used for legitimate use. This is happening for buying basic things like grocery and we will soon experience buying luxurious items with cryptocurrencies. All of this, because has the potential to improve payment efficiency and reduce transaction costs for payments and fund transfers. To boost the possibilities, many multinationals are heavily investing in cryptocurrencies which gives the future prospects that these cryptocurrencies will become as common as our coins and paper-based money.

At present, the majority of the products/services are not being sold with the use of cryptocurrencies because still many people are unaware of them and even if they are aware, they are skeptical of the concepts. There is good reason for that, in the past, we have seen many hacking attempts wiping the wealth, many currency exchanges being closed overnight and the e-wallets to stop providing services locking the funds of the users, etc.

Potential Risk Of Money Laundering Using Cryptocurrency

Lastly, it is important to understand what kind of potential threats cryptocurrency poses from money laundering perspective. To some extent, the digital currencies which are centralized or have a mechanism to be monitored by the financial institution are still less vulnerable than cryptocurrencies.

Cryptocurrencies, being decentralized form of digital currency is vulnerable because of the framework that it has. By design, cryptocurrencies like Bitcoins do not disclose account number, location, name of the user, etc. The money gets transferred from the user ID to another user ID. Nobody knows who is transferring the money to whom. The current Anti Money Laundering software that we currently have is still unable to monitor and identify suspicious transaction patterns. If the user cannot be identified then the law enforcement agencies will also not be able to charge anyone related to the crime.

Moreover, the use of cryptocurrency is increasing on the dark web which poses a huge risk of the money being used to finance anti-social activities. The framework for cryptocurrency is so complex in nature that it will be difficult for law enforcement agencies to take necessary actions. Because the transaction can take place in a completely other jurisdiction from the one where the criminal is residing.

Therefore, in the hands of professional money launderers, cryptocurrency can be a lethal weapon. Not only it will open new ways to conceal the proceeds from illicit crimes but also provide for more criminal and anti-social activities.



Shyam Sewag

Budding blogger. Interested in finance and global economic affairs.