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Crypto’s $100 Billion in Illicit Flows Swamp Stablecoins, Exchanges


(Bloomberg) -- Suspect digital wallets have distributed close to $100 billion in illicit funds across the cryptocurrency market since 2019, flows that often touch popular stablecoins and centralized exchanges, according to Chainalysis. 

Bad actors are making record use of stablecoins, which now account for most of the illicit transaction volume in crypto, Chainalysis said in a study. More than half of all questionable flows wind up on centralized exchanges, it added. Stablecoin issuers Tether and Circle didn’t immediately return requests for comment.

Officials globally are tightening regulations for stablecoins and digital-asset platforms to curb crypto’s use in crimes such as money laundering and terrorism financing. But lawbreakers keep looking for ways to skirt rules. 

“The ecosystem is constantly changing,” Kim Grauer, director of research at Chainalysis, said in an interview. “There are new cryptocurrencies and use cases for criminals, and they are getting more sophisticated with laundering.” 

Stablecoins typically seek to hold a steady value of $1 underpinned by reserves of cash and bonds. Centralized exchanges custody customer assets whereas decentralized alternatives leave users in control of their tokens. Stablecoins and centralized exchanges are the key pillars of the digital-asset market. 

Major Challenge

Illicit flows have led prosecutors to target the crypto industry. Binance, the biggest digital-asset exchange, is now operating under US oversight after being hit with a landmark $4.3 billion penalty last November in a plea deal with the Department of Justice over anti-money laundering and sanctions violations.

Illegal funds from sources like darknet markets, fraud, ransomware and malware are concentrated in five centralized exchanges, Chainalysis found, without naming them. Aside from trading platforms, criminals also tap decentralized financial services, gambling sites, crypto mixers and blockchain bridges to wash money.

“Illicit actors might turn to centralized exchanges for laundering due to their high liquidity, ease of converting cryptocurrency to fiat, and integrations with traditional financial services that help blend illicit funds with legitimate activities,” Chainalysis, a specialist in tracking blockchain transactions, said in its report. 

At the same time, the volume of suspect funds arriving at exchanges is dropping, potentially because the platforms have stepped up checks amid tougher regulations. The figure is down to about $780 million a month from an earlier peak of nearly $2 billion, according to the study.

Intermediary Wallets

The number of intermediary digital wallets — used by bad actors to pass through funds to obscure their origin — is growing faster on exchanges that comply with know-your-customer rules, Chainalysis said. This is likely “in attempts to avoid the detection of illicit activity,” according to the report.

The total market value of stablecoins has surged to more than $160 billion from about $29 billion at the start of 2021, DeFiLlama data show. Tether Holdings Ltd.’s USDT dominates with a 69% share, followed by Circle Internet Financial Ltd.’s USDC at 21%. An array of tokens comprise the rest of the market.

Stablecoins are mainly used by crypto speculators to park funds between trades, but can also be deployed for payments and remittances, part of an increased interplay between digital assets and mainstream finance. Criminals use them even though authorities can demand that they be frozen.

Grauer said illegal schemes are becoming more sophisticated, spurring investigators to use detection techniques like behavioral analysis. “As crypto becomes a more integrated financial asset, we are starting to use the type of pattern recognition that a bank may be looking for,” she said. 

--With assistance from Emily Nicolle.

(Adds in the second paragraph that Tether and Circle didn’t immediately reply to requests for comment.)

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