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Decoding the use of cryptocurrency to launder money

Money laundering is one of the key charges made by the Enforcement Directorate (ED) against crypto exchange WazirX. The ED isn’t the first agency to level such allegations against a crypto platform, despite blockchain’s inherent property of traceability. Mint explains.

Are blockchains traceable?

Transactions on a blockchain are always traceable. Most courts and law enforcement bodies around the world have recognized their immutable nature and accept blockchain records as legal proof of transaction histories. However, crypto transactions can sometimes happen “off-chain”, or other methods can be used to obfuscate the flow of funds. Moreover, blockchains are like conveyor belts, which facilitate the flow of crypto from one wallet to another. The identity of the person who holds that wallet has to be ascertained by the wallet service provider and this is often not done to protect user privacy.

How do they hide transaction trails?

One of the most common methods used by hackers and criminals, is called mixing or tumbler. As each crypto token is traceable, tumblers break down multiple tokens from different blockchains and mix them. They then transfer the original amount to the owner, but through multiple transactions and from multiple wallets, obfuscating the trail. Illicit users also transfer traceable tokens to privacy-centric blockchains such as Monero, which hide wallet addresses and particulars. There are also over-the-counter brokers who accept payments in any form, including cash, and transfer the equivalent amount in crypto to a user’s wallet.

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What has ED accused Binance and WazirX of?

Among other things, the ED claims that WazirX’s holding company, Zanmai Labs Pvt. Ltd, is offering “contradictory and ambiguous answers” about crypto-to-crypto transactions made on WazirX. The ED said WazirX had failed to provide data and show transactions on its blockchain for purchases made by numerous under-investigation fintech firms.

See also  India Freezes Assets Of Binance-Linked Crypto Exchange WazirX On FX Allegations

How do off-chain transactions work?

When users withdraw crypto from an exchange, they enter a wallet address and the tokens are transferred, with a record being maintained on the blockchain. However, they also have to pay a gas fee, which is used to pay miners on the blockchain. To avoid this fee, two platforms can integrate with each other and allow users to transfer crypto without using the blockchain. Such transactions can raise questions regarding the tracing of money, as the records aren’t maintained on the blockchain.

How can exchanges prevent laundering?

Exchanges could adopt a resolution on KYC data and maintain transaction logs for eight to 10 years on blockchain, said industry stakeholders. The use of KYC-compliant wallets could help add a layer of traceability, said Triveni Singh, superintendent of police, cyber crime, Uttar Pradesh Police. However, KYC norms for wallets held on platforms outside India can differ from those in India. Some blockchain research firms are also working on machine learning-based tools that can flag illicit accounts.

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