Why crypto money laundering is on the rise has become one of the most pressing questions in the financial world. The apparent contradiction in this situation is that it is happening despite the fact that blockchains are transparent, regulation is on the rise, and blockchain analysis software has never been more advanced.
The key to answering this question is not to be found in some particular loophole or vulnerability, but rather in the way in which the global financial system is developing. Economic sanctions, geopolitical fragmentation, and the inconsistent regulation of the global financial system, along with the rapid development of decentralized infrastructure, have all contributed to a new paradigm for the movement of value across borders. Crypto has increasingly found itself positioned as a neutral financial layer in this new paradigm, used by both legitimate and illegitimate parties.
This article will explore why crypto money laundering is on the rise, how the methods of money laundering have developed, and why enforcement has been unable to keep pace.
What Is Crypto Money Laundering?
Crypto money laundering is the act of disguising the origin, ownership, or destination of digital currencies that have been obtained through illicit means such as hacking, fraud, ransomware, or sanctions bypassing. Although the aim is the same as traditional money laundering—placement, layering, and integration—the process is remarkably different.
Unlike traditional cash transactions, blockchain transactions are:
Pseudonymous, not anonymous
Accessible worldwide without the need for intermediaries
Immutable and recorded on a distributed ledger
This presents a distinct challenge where transactions are transparent, but attribution, jurisdiction, and enforcement are not. As the use of crypto continues to increase, these challenges have become more apparent rather than less.
Why Crypto Money Laundering Is on the Rise: The Main Structural Drivers
1. Fragmentation of the Global Financial System
The first reason for the rise in crypto money laundering is the growing fragmentation of the global financial system. The sanctions regime, trade barriers, capital controls, and geopolitical rivalries have made it difficult for some countries, entities, and individuals to access the traditional banking system.
As a result, new means of settlement have become more prominent. The crypto system enables the transfer of value without the need for correspondent banking or a clearing system. Although this is convenient for those who are excluded from the financial system, it also provides a way for money laundering to occur.
2. The Paradigm Shift from Individual Tools to Laundering-as-a-Service (LaaS)
The early days of crypto money laundering were characterized by a tool-based approach to laundering. This involved the use of individual mixers and tumblers to mask transaction trails. These were easy to detect and disable.
The current state of crypto money laundering is that of Laundering-as-a-Service (LaaS). This is a sophisticated ecosystem that offers end-to-end laundering services. These services are much like fintech, offering automation, risk management, and support.
Common LaaS services include:
Wallet rotation and fragmentation
Multi-chain routing
Stablecoin conversion strategies
Jurisdictional arbitrage
This is why crypto money laundering can rise even when enforcement actions are successful. The system has become modular, dynamic, and profit-driven.
3. Chain-Hopping and Cross-Chain Complexity
Another key driver of the increasing problem of crypto laundering is chain-hopping, which is the process of routing funds through several blockchains to make them harder to track.
Instead of using a single privacy solution, the latest approaches to money laundering involve splitting transactions across:
Layer 1 and 2 blockchains
Wrapped assets and bridges
Decentralized and centralized exchanges
Each hop introduces complexity to the analysis. While it is still possible to track the funds, cross-chain transactions make it more expensive, time-consuming, and uncertain. Chain-hopping is more of a risk diversification technique than a concealment mechanism, similar to diversification of assets across financial instruments in traditional markets.
Peel Chains: Slow Fragmentation as a Laundering Technique
Peel chains are a commonly observed laundering technique in which a large balance is gradually “peeled” off into smaller transactions over time, rather than being moved in a single transfer. Each transaction sends a small portion of funds to a new address while the remainder continues forward, creating a long chain of linked outputs.
Unlike mixers or privacy tools, peel chains do not aim to obscure transactions completely. Instead, they exploit behavioral thresholds in monitoring systems. By maintaining transaction sizes below alert levels and spreading activity across time and addresses, peel chains reduce the likelihood of immediate detection or prioritization by enforcement teams.
Peel chains are often used in combination with other methods such as chain-hopping, stablecoin conversion, or eventual routing into OTC markets. While analytically traceable, they significantly increase investigative cost by expanding the number of touchpoints that must be monitored. In this sense, peel chains function less as a concealment mechanism and more as a friction generator within enforcement workflows.
The Use of Stablecoins in Illicit Financial Flows
Stablecoins are the latest addition to crypto money laundering, not because they are bad but because they offer a combination of price stability and blockchain portability.
Why Stablecoins Are So Popular:
They are less volatile
They are highly liquid on exchanges and DeFi platforms
They can easily be converted to local currencies
This has created a dilemma for regulators who want to prevent their misuse without stifling international payments.
Sanctioned Tokens vs. Sanctioned Wallets
A key policy debate shaping enforcement effectiveness is the distinction between sanctioned tokens vs. sanctioned wallets.
Dimension | Sanctioned Wallets | Sanctioned Tokens |
Scope | Address-specific | Asset-wide |
Precision | High | Low |
Impact on Legitimate Users | Limited | Significant |
Enforcement Complexity | Moderate | High |
Wallet sanctions are precise but easily circumvented through new addresses. Token sanctions risk systemic disruption and collateral damage. This unresolved tension incentivizes laundering networks to design systems that regenerate faster than sanctions can be applied.
Geopolitics and the Rise of Crypto Financial Corridors
Geopolitical forces have emerged as one of the most influential catalysts for the development of alternative financial systems, and the development of crypto-based financial corridors is a result of these forces. When nations are subjected to sanctions, banking restrictions, or other limitations on capital, their access to traditional financial infrastructure is reduced significantly. Eventually, this leads to the development of parallel systems that can facilitate the flow of funds without the need for intermediaries.
The nature of crypto systems is such that they are not influenced by geopolitical considerations. They do not care about national boundaries, sanctions, or geopolitical relationships. This makes them extremely attractive in a geopolitically constrained world. Consequently, financial corridors developed on the back of crypto systems are increasingly becoming an alternative to traditional trade and settlement channels.
These corridors are not hidden channels that operate in the dark. Rather, they are open and robust channels that assume partial visibility but are sustained by complexity and enforcement gaps.
State-Affiliated Cyber Groups and the Lazarus Model
One of the most frequently cited examples of state-aligned crypto laundering activity is the Lazarus Group, a cyber collective widely attributed to North Korea. Rather than operating as a traditional criminal syndicate, Lazarus functions at the intersection of cyber operations, financial extraction, and geopolitical strategy.
The group has been linked to large-scale crypto thefts, ransomware campaigns, and exploits targeting exchanges, bridges, and DeFi protocols. What distinguishes Lazarus is not just the scale of theft, but the sophistication of post-exploitation laundering. Stolen assets are rarely moved directly to cash-out points. Instead, they are routed through complex laundering pipelines involving chain-hopping, stablecoin conversions, decentralized liquidity pools, and OTC intermediaries.
Lazarus illustrates how crypto laundering has evolved from opportunistic concealment into a strategic capability. The objective is not merely to hide funds, but to convert cyber-derived value into usable economic resources while minimizing exposure to sanctions enforcement. This model has influenced broader laundering practices by demonstrating that partial visibility on public blockchains can be managed through complexity, timing, and jurisdictional fragmentation rather than total anonymity.
The Russian-North Korean Corridor
The Russian-North Korean corridor is often pointed to as a good example of how sanctioned nations use cryptocurrencies to cope with financial isolation. Instead of being a straightforward channel, the Russian-North Korean corridor is more of a loosely organized environment that matches strategic requirements with technological feasibility.
In this particular scenario, crypto is employed for the following purposes:
Cyber operations and technical know-how monetization
International liquidity access
Reduction of reliance on hostile financial infrastructure
The Russian-North Korean corridor is a complex system that combines various levels of infrastructure, such as state-affiliated cyber actors who buy digital assets, offshore trading platforms that enable liquidity conversion, OTC brokers that facilitate fiat currency settlements, and decentralized systems that allow funds to flow without any centralized approval.
It is essential to note that crypto laundering in the Russian-North Korean corridor is more than just a process of hiding illicit funds. It is also a means of maintaining economic continuity despite restrictions.
Institutionalization of Crypto Money Laundering
One of the most obvious indicators of the increasing problem of crypto money laundering is the level of institutionalization that is taking place. In the early days of crypto crime, it was often disorganized and dependent on the technical abilities of the individuals involved. Today, crypto money laundering is becoming more and more like a legitimate financial service.
These activities use business models such as pricing structures, customer segmentation, and risk management. They provide different levels of service based on the size of the transaction, the speed of processing, and the level of risk involved. More expensive levels of service may include additional processing steps or access to countries with less stringent regulation.
Risk-adjusted transaction routing enables money to be routed based on the likelihood of detection, while automated compliance camouflage uses legitimate platforms and high-volume protocols to mix illicit transactions with legitimate ones. Revenue-sharing models further aligns the interests of the participants, which helps to stabilize the network.
This level of institutionalization makes it easier to take enforcement action. Taking down one of the service providers does not cause the problem to go away anytime soon.
Automation, Smart Contracts, and Laundering Infrastructure
Automation has dramatically changed the economics of crypto laundering. What was once a process requiring constant human interaction can now be accomplished via smart contracts and scripted processes.
Smart contracts allow for the following in a laundering system:
Transfers over time to avoid behavioral anomalies
Breaking down large amounts of money into thousands of micro-transactions
Reassembling money after a sufficient amount of “distance” has been established via transactions
These processes, when built into decentralized infrastructure, make laundering a repeatable and scalable process. Human interaction is reduced to a minimum, eliminating operational mistakes and emotional decision-making. This creates a laundering system that is more akin to infrastructure than a set of operations.
This is not unique to illicit finance, as automation has already changed the economics of trading, treasury, and compliance in the legitimate finance world. Illicit finance is not innovating on its own—instead, it is following the same efficiencies.
DeFi Protocols and Unintentional Exposure
DeFi protocols were intended to remove intermediaries, enhance efficiency, and expand access. However, the permissionless aspect of DeFi also leads to unintentional exposure to illicit activities.
Most DeFi protocols:
Do not require any form of identity verification
Are global and lack geographical constraints
Aggregate assets from different sources into a common pool of liquidity
When illicit assets are deposited into these pools, they are not concealed but rather statistically mixed. This raises difficult questions for regulators and compliance professionals. At what point does the contamination stop? Who is liable when illicit assets are transmitted through autonomous systems without human interaction?
This is why law enforcement is increasingly targeting access points like user interfaces, governance models, and developer-controlled modules rather than the code itself.
Asymmetry of Regulation and Enforcement
The regulation of crypto assets is still asymmetrical across the globe, and this is one of the factors that contribute to the high levels of laundering. Although some countries have established strong regulations, others do not have the capability to enforce similar standards.
The laundering networks take advantage of the asymmetry by directing the transactions through countries that are not strict on regulations before they proceed to the regulated markets. This does not require any secrecy but only coordination.
As a result of selective enforcement, the cost of regulation is quantified rather than being a deterrent. This is similar to financial crimes, where asymmetry of enforcement has been a factor in shaping laundering behavior for a long time.
OTC Brokers and the Informal Financial System
Over-the-counter brokers are critical for linking crypto-systems with the fiat system. Unlike traditional exchanges, OTC brokers usually function with a low profile and flexible organizational structure.
Informal brokers usually function through:
Encryption messaging services
Trust networks within diaspora communities
Entities operating in legal gray areas
These brokers fill a liquidity gap where formal systems are not feasible or available. The persistence of these brokers indicates a crucial point: crypto money laundering is more than a technology issue. It involves human networks and local knowledge superimposed on technology.
Why Crackdowns Sometimes Increase Laundering Activity
Crackdowns and enforcement actions are also times when there is a short-term increase in laundering activity. This is because of the behavioral responses that occur due to the pressure.
Actors rush to launder money before the rules become more stringent, test new approaches under pressure, and integrate services to make them more robust. Instead of reducing, the laundering activity becomes more centralized and professionalized.
This is an indication that enforcement without coordination and change may actually accelerate rather than suppress laundering activity.
Transparency Without Authority: A Core Limitation
The transparency provided by blockchain technology is often considered the biggest advantage of crypto in the fight against illicit finance. However, transparency is not the same as authority.
Jurisdictional issues, delays in the legal system, and a lack of international cooperation can make transparency ineffective. In most cases, the transparency is available, but the authority to act is not present.
In such cases, transparency is more of a diagnostic than a preventive measure.
Common Crypto Laundering Steps
While laundering methods vary widely, a typical crypto laundering cycle may include:
Acquisition of digital assets through hacks, fraud, or ransomware
Fragmentation across multiple wallets
Chain-hopping to distribute enforcement risk
Conversion into stablecoins to reduce volatility
Cash-out through OTC brokers or peer-to-peer markets
These steps are modular and often overlap, allowing laundering networks to adapt quickly to changing conditions.
Pros and Cons of Crypto in the Context of Illicit Finance
Advantages
Crypto offers transparent ledgers, immutable transaction records, and programmable compliance tools that can aid detection and forensic analysis. In many cases, illicit flows are more visible than in cash-based systems.
Challenges
At the same time, cross-border enforcement limitations, rapid technological innovation, and increasing interoperability introduce complexity that outpaces regulatory adaptation.
Conclusion: Why the Rise Is Structural, Not Accidental
Why crypto money laundering is rising cannot be explained by technology alone. It reflects deeper shifts in global finance, geopolitics, and regulatory coordination. From Laundering-as-a-Service and chain-hopping strategies to unresolved debates around sanctioned tokens vs. sanctioned wallets and the emergence of corridors like the Russian–North Korean network, crypto laundering has evolved into a systemic phenomenon.
Crypto itself is neither inherently criminal nor inherently compliant. It is infrastructure—neutral by design and shaped by the incentives imposed upon it. Addressing illicit use will require not just enforcement, but coordination, nuance, and an understanding of the structural forces driving change.
FAQs
Q1. Is crypto laundering increasing faster than adoption?
No. Illicit activity grows alongside adoption but remains a small fraction of total volume.
Q2. Can DeFi be regulated effectively?
Regulating interfaces and access points is more practical than regulating code.
Q3. Will AI reduce crypto laundering?
AI improves detection but also enables automation on both sides.
Q4. Are state actors the main risk?
State-aligned activity increases complexity, but most laundering still involves non-state actors.
Q5. Can blockchain analytics stop laundering?
Analytics improve detection but cannot replace legal authority or international cooperation.
Q6. Are privacy coins the main issue?
Privacy coins represent a small portion of illicit flows. Most laundering uses mainstream assets.
Q7. Why don’t governments ban crypto?
Because crypto also supports legitimate innovation, investment, and financial inclusion.
