Crypto 101

Cryptocurrencies encourage money laundering: Debunking the myth




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money laundering

The concept of cryptocurrency has raised a lot of controversies ever since Bitcoin broke into the limelight in 2009. You have probably heard people asking all manner of questions on social corridors like: Is cryptocurrency totally anonymous? Will government regulation kill Bitcoin? Is it too late to invest in cryptocurrencies? Or, can criminals use cryptocurrencies to execute money laundering?

There are several myths and misconceptions surrounding Bitcoin and other cryptocurrencies. Some of them emanate from city folklore while others are occasioned by the complexity of the technology. One myth that has dominated headlines over the last few years is the claim that cryptocurrencies fuel money laundering. This guide will debunk this myth and highlight some of the regulatory frameworks that help fight global money laundering. Read on!

Are crypto transactions totally anonymous and untraceable?

Cryptocurrencies can only encourage money laundering if transactions were completely anonymous and untraceable. However, it is bad news for people who relied on Bitcoin to deal in drugs or evade taxation. Many cryptocurrencies are traceable. Criminals who were enthusiastic about using Bitcoin to finance their illegal activities are becoming aware that this technology may not be as anonymous as they initially believed. 

Being a public ledger, blockchain only guarantees a certain level of anonymity. Tracing a Bitcoin transaction may not seem simple from the face value, but it is very possible. If the wallet owner can be identified, they can be exposed based on their activity on the network. In terms of tax evasion, blockchain keeps records of all transactions carried out on the network. These records can be viewed and accounted for when the need arises.

Tracing the virtual money

The blockchain technology is the technology that powers cryptocurrencies. It theoretically makes it easy for governments and financial investigators to follow the money trail. All transactions are recorded permanently in a shared ledger, and no single entity can alter or delete the transactions. The money trail literally stays in the network forever and can be used as evidence in later years.

Bitcoin, for example, links all transactions and user accounts to real people in real world. So, identifying a potentially criminal transaction and the criminals behind it is made possible. This functionality is known as “attribution” problem. Developers use heuristics to create clusters (groups of transactions that are executed by the same entity). They then employ techniques to de-anonymize these clusters.

Many people fear using cryptocurrencies out of fear of violating the law and getting punitive penalties. Since some global money laundering cases have been linked to cryptocurrencies, many people have been duped to believe that cryptocurrencies are synonymous with money laundering and other criminal activities. That is further from the truth. 

Many governments have not accepted cryptos today, but that doesn’t mean it is illegal. The good news is that many governments are working on developing legal frameworks to regulate cryptocurrencies and manage taxation issues. 

Crypto-based legislation

The market differentiator for the innovative crypto ecosystem lies in effective and efficient regulatory frameworks. Proper legislation ensures that cryptocurrencies are stabilized and legitimized across the globe. From global anti money laundering perspective, the following measure can help curb any incidents of money laundering:

  • Utilizing the blockchain technology to validate customer behaviors using the information collected from customer due diligence process.
  • Consistently monitoring blockchain to detect potentially illicit transactions using connector tracking and plain text analysis. Digital wallet connections could also help.
  • Identifying customers who use tumblers to conceal sources of their funds or to maintain anonymity.
  • Investigating instances where customers use licensed, reputable exchanges to transfer money from less-compliant crypto platforms to mainstream banks.
  • Utilizing readily available ID verification tools to mitigate fraud and identity theft.
  • Implementing general cybersecurity principles of firewalls, malware prevention, security configuration, and access management to safeguard customer assets and data.
  • Monitoring potential manipulations of the crypto market by customers or exchanges.
  • Calibrating transaction alert threshold to curb wild volatility.

The KYC factor

The Know Your Customer (KYC) compliance has occasioned even giant financial institutions to consider developing their own blockchain technologies. Banks are using blockchain technology for several ways, including customer identification. AML/CFT regulations demand customer identification and KYC standards. The regulation will bring about cryptographic protection by continually sharing updated records with banks, exchanges, and other regulatory parties.

These impressive benefits of blockchain technology will be fully realized by enforcing the right compliance. This could fully address the current misconception that cryptocurrencies are creating avenues for criminals to subvert sanctions, preserve anonymity, and carry out illicit transactions.

In-house blockchain technology can provide the compliance link between crypto exchanges and banks. However, the approach may bring some new risks. A recent report pointed to the concerns that some employees of some banks could abuse the crypto ecosystem for personal gains. For example, they could access useful information and carry out insider trading. Another problem is that regulators could agree on the nature of cryptocurrencies (whether to consider cryptos as commodities, currencies, or securities).

This is critical since each designation comes with its own regulatory requirements, compliance standards, and controls. For example, the term “cryptocurrency” may appear to identify a clear designation. But, some regulators like SEC and CFTC hold different opinions. 

No venture or innovation is immune to risks

It is clear that cryptocurrencies themselves don’t open avenues for money laundering. The real risk lies in the exchanges or banks where these cryptos are cashed out as fiat currencies. If exchanges can establish a stringent compliance standard that meets or even exceeds regulatory expectations, the risks can be significantly mitigated. The perception for governments and traditional financial institutions will ease and open doors for widespread adoption of cryptocurrencies

Ultimately, the crypto community should undertake the difficult work of upfront compliance in order to enjoy long-term rewards. Both individual players and businesses will significantly benefit.


The crypto ecosystem is surrounded by many myths and legends. Being a very young industry that runs on libertarian ideas, it is quite normal for people to act skeptical. The blockchain technology sounds like rocket science to some people, but hopefully, this article has cleared the air on the subject of global money laundering.