Why Are Crypto Exchange Founders Always Accused of Money Laundering?

Currently, both FTX founder SBF and Binance founder CZ are involved in criminal cases related to money laundering allegations. Although the term “money laundering” may sound common, it has a precise definition in law.

According to the definition of the Financial Crimes Enforcement Network (FinCEN) of the US Treasury Department, money laundering refers to “the process by which criminals try to disguise the true origin of their illegally obtained funds or criminal proceeds.”

This definition points out that the money laundering process typically involves three steps:

First, illicit funds are clandestinely introduced into the legitimate financial system. Then, the funds are transferred multiple times through wire transfers or transfers between multiple accounts, causing confusion. Finally, through additional transactions, these funds are integrated into the financial system until the “dirty money” becomes “clean.”

Why are cryptocurrency exchange institutions like SBF and CZ always suspected of money laundering allegations? How do cryptocurrency mixers like Bitcoin Fog and Tornado Cash facilitate money laundering? How do virtual asset service providers avoid suspected money laundering transactions and meet compliance requirements? Today, we will explain it all.

From SBF to CZ, Why Do Cryptocurrency Exchange Founders Always Face Money Laundering Allegations?

In November 2023, the US Department of Justice brought charges against Binance for money laundering, operating as an unregistered money transfer business, and violating sanctions, triggering a massive reaction across the cryptocurrency industry. Binance agreed to pay a $4.3 billion fine, and its CEO, Changpeng Zhao (CZ), resigned and admitted to money laundering as part of a settlement with the authorities.

Binance founder and CEO Changpeng Zhao agreed to admit to money laundering offenses and step down from the world’s largest cryptocurrency exchange as part of a comprehensive settlement with US law enforcement and financial regulators.

Less than a month before the Department of Justice, the Treasury Department, and the Commodity Futures Trading Commission announced this news, federal prosecutors persuaded a jury to convict SBF, the former competitor of CZ and founder of FTX, on seven criminal charges, including wire fraud, securities fraud, and conspiracy to launder money. The jury deliberated for only four hours before reaching a verdict, finding SBF guilty of wire fraud, securities fraud, and conspiracy to launder money.

Why do cryptocurrency exchanges or their founders such as SBF and CZ always face money laundering allegations?

Firstly, cryptocurrency exchanges have experienced rapid growth and widespread adoption in the past. This growth has attracted the attention of regulatory and law enforcement agencies, which have begun closely monitoring activities in the cryptocurrency space and enhancing efforts to combat money laundering and other illicit activities. Due to the anonymity and cross-border nature of cryptocurrency transactions, they are seen as potentially providing a convenient means for money laundering.

Secondly, cryptocurrency exchanges typically involve large volumes of fund flows, which may originate from various sources, including both legitimate and illegitimate sources. This makes cryptocurrency exchanges a focal point for regulatory scrutiny. In some cases, specific cryptocurrency exchanges may have failed to fully comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements, or failed to establish effective monitoring and reporting mechanisms, making them susceptible to allegations of involvement in money laundering activities.

From Bitcoin Fog to Tornado Cash, Why Crypto Mixers are Regulated

In addition to exchanges, mixers are also a focus of regulatory attention. Roman Sterlingov, the founder of Bitcoin Fog, was arrested in Los Angeles in April 2021 for operating the notorious cryptocurrency mixer, which transferred around $400 million worth of Bitcoin over a decade.

Sterlingov was convicted of charges including conspiracy to launder money, tricking people into money laundering, operating an unlicensed money transmission business, and violating Washington’s money transmission laws.

Law enforcement agencies have recently turned their attention to the infrastructure enabling rampant cybercrime. This year, Pavel Peltsev, co-founder of Tornado Cash, will face criminal trial for allegedly facilitating money laundering transactions exceeding $1 billion.

Documents released on Tuesday show that Peltsev will stand trial in ‘s-Hertogenbosch, the Netherlands, starting on March 26, with prosecutors listing 36 counts of alleged illegal transactions involving decentralized protocols to Tornado Cash. For example, following the $625 million hack suffered by Ronin in 2022, hackers used Tornado Cash for laundering operations.

One of the main goals of money laundering is to hide the true source of funds. Crypto mixers make it more difficult to track the flow of funds by mixing different users’ crypto assets together. This facilitates individuals who seek to commingle illegally obtained funds with legitimate funds, making them more difficult to monitor and trace.

Second, the operation of crypto mixers often involves anonymity and privacy protection. This allows users of mixers to hide their true identities and trading activities, increasing the risk of money laundering activities. Because of the way crypto mixers operate, it is difficult for regulators and law enforcement agencies to track and monitor these transactions, making them a potential tool for money laundering. These are all reasons why crypto mixers are regulated.

At present, the main reasons why cryptocurrency mixers are suspected of money laundering accusations include hiding the source of funds, anonymity and privacy protection, lack of compliance requirements, and the existence of some abuse cases. Increased oversight of crypto mixers by regulators and law enforcement agencies is aimed at reducing money laundering risks and ensuring compliance requirements are adhered to.

How can virtual asset service providers avoid suspected money laundering transactions?

Virtual asset service providers (VASPs for short) play an important role in the cryptocurrency ecosystem. However, due to the anonymity and decentralized nature of virtual assets, virtual asset service providers (such as cryptocurrency exchanges, crypto wallet providers, cryptocurrency asset payment processors, etc.) also face challenges such as anti-money laundering and anti-terrorist financing. Here are some workarounds and suggestions:

1.Enforce strict KYC and AML regulations

Virtual asset service providers should require users to undergo comprehensive identity verification and ensure they comply with KYC and AML regulations. This includes collecting user identification information, address verification and other necessary information.

2.Monitor trading activity

Virtual asset service providers should implement real-time monitoring systems to detect and analyze suspicious transaction activity. This includes monitoring information such as transaction amount, frequency, source and destination. Virtual asset service providers can use Beosin KYT to analyze each transaction, rate transactions, and identify suspicious behavior on the chain, thereby reducing the risk of criminals using virtual assets to launder money.

Beosin KYT can identify suspicious transactions, conduct comprehensive risk assessments, and identify the risks of on-chain relationships through billions of address tags and black address libraries, helping VASPs build KYT (Know Your Transaction) and continuous risk assessment capabilities. It detects risky behaviors such as security attacks, darknet transactions, mixer usage, fraud, ransomware activity, and gambling.

3.Establish a reporting mechanism

Virtual asset service providers should establish a reporting mechanism to report suspicious transactions or activities through the risk control system. Virtual asset service providers should promptly address these reports and cooperate with regulators in their investigations. Beosin KYT can issue suspicious transaction reports (STR) for virtual asset service providers to help regulatory agencies and law enforcement agencies conduct forensic investigations.

4.Strengthen cooperation and exchanges

Virtual asset service providers should actively cooperate with security companies, regulators and law enforcement agencies to jointly combat money laundering activities. It is foreseeable that criminals will continue to adjust and improve their money laundering strategies to adapt to changes in regulatory measures and AML tools. They may decentralize transactions, use covert transaction routes, or exploit technological vulnerabilities to hide illicit financial flows. Virtual asset service providers should regularly cooperate and communicate with security companies to identify and respond to these changes in a timely manner.

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