Is Crypto Laundering Distinct from Money Laundering?

Introduction

Money laundering has traditionally been recognised as a global financial crime. In summary, money laundering involves the concealment of illicitly obtained funds to make them appear legitimate. With the rise of digital assets, crypto laundering is fast emerging as a new variant. And it has not gone unnoticed. Financial regulators around the world have acted swiftly to address cryptocurrency laundering as a subset of the broader umbrella of money laundering. However, is cryptocurrency laundering distinct from traditional money laundering? In addressing this question, this essay examines some salient features of crypto laundering and makes a case that crypto laundering is not a distinct financial crime but a distinct modality of money laundering.

Traditional Money Laundering

Traditional money laundering typically follows the three-stage model, namely (i) Placement (or the introduction of illicit funds into the financial systems, such as depositing cash into banks); (ii) Layering (that is, obscuring the origin of funds through complex transactions, shell companies, or offshore accounts); and (iii) Integration, which involves the re-introduction of laundered funds into the legitimate economy, often via investments or businesses.

Placement, Layering and Integration rely heavily on financial intermediaries such as banks, money service businesses, and corporate structures; ergo, regulatory oversight is premised on centralisation with institutions subject to anti-money laundering (AML) obligations, reporting requirements, and customer due diligence.

Crypto Laundering

In many aspects, crypto laundering adapts the same objectives of concealing gains obtained from financial crime and integrating them into the economy. But the mode of operation uses digital assets and blockchain technology as the medium. Some distinctive features of cryptocurrency laundering include:

1. Pseudonymity: Wallet addresses are not directly tied to identities, complicating attribution.
2. Mixing and Tumbling Services: Tools that blend illicit coins with legitimate ones to obscure transaction trails.
3. Chain-Hopping: Rapid conversion between cryptocurrencies to evade detection.
4. Privacy Coins: Assets like Monero or Zcash that mask transaction details.
5. DeFi and NFTs: Exploiting decentralised finance protocols and non-fungible tokens to launder value outside traditional oversight.

Unlike traditional laundering, crypto laundering is borderless and instantaneous, bypassing many jurisdictional constraints.

Regulatory Treatment

Global regulators have begun to recognise crypto laundering as a distinct risk. For instance, FinCen in the US applies anti-money laundering rules to virtual asset service providers (VASPs), treating them as money transmitters. The European Union (under MiCA & AMLD6) has introduced comprehensive frameworks for crypto-assets, explicitly addressing money laundering risks. Similar developments have been noted in Asia (eg. Hong Kong, Taiwan, Japan, Singapore, Vietnam), Africa (Ghana, Kenya, South Africa) and the Middle East (notably, Dubai and Bahrain).

These frameworks demonstrate that while crypto laundering is conceptually part of money laundering, regulators treat it as a distinct operational challenge requiring tailored rules at the national level. However, this jurisdictional approach to regulation is not without problems. As mentioned in the preceding paragraph, cryptocurrency laundering transcends national borders and is instantaneous. With the lack of global harmonisation of cryptocurrency rules, criminals will exploit corrupt jurisdictions with lax rules to further their financial crimes.

Conclusion

This brief essay has outlined that cryptocurrency laundering is not a distinct financial crime because the end goal (as with traditional money laundering) is to “wash” illegally obtained gains and reintroduce them into the economy with a legal “gloss”. However, cryptocurrency laundering has a distinct modality. Its reliance on blockchain technology, pseudonymity, and decentralised systems differentiates it from traditional laundering methods. Consequently, new methods, especially advanced technological methods, have to be invented to combat this high-tech crime. Tech tools aside, there is a need for a harmonisation of laws to define the nature of cryptocurrency laundering as a crime and a uniform sentencing framework to punish criminals involved in cryptocurrency laundering. The obvious challenge lies in balancing innovation with enforcement, ensuring that the financial system remains resilient against both traditional and digital laundering threats.

Author: Balan

Is Crypto Laundering Distinct from Money Laundering? was originally published in Pundi X on Medium, where people are continuing the conversation by highlighting and responding to this story.