Mixing dirty money with crypto mining

Chainalysis, a blockchain analysis company, has identified a new method by which some individuals have allegedly laundered money through crypto mining.

It seems that mixing funds from cyber theft or scams with the new coins minted from mining pools has become an attractive practice for those seeking to lose their tracks.

Let’s take a look at all the details below.

The relationship between cryptocurrency mining pools and money laundering

Cryptocurrency mining is a key piece of many decentralized economies, especially for Bitcoin, where those who devote their computing power to the network contribute to its security and livelihood.

Despite this, it has already been pointed out in the past how dirty players have infiltrated this activity, tapping into mining to clean up the money trail.

In the past, some nation-states that have been sanctioned by the Western US government, such as Iran, have turned to this business to obtain new capital in cryptocurrencies. without going through traditional banking systems.

The North Korean hacker group Lazarus is also known to have exploited the mining niche for its own criminal interests, specifically using cryptocurrencies from cyber theft to participate in hashing services and extract new, totally clean coins.

Chainalysis, a blockchain monitoring and analysis company, has pointed out in one of its studies that more methods of laundering money through cryptocurrency mining pools have been developing lately.

In detail, the research discusses two separate instances where coins that come from ransomware attacks and cyber scams have been mixed with new Bitcoin that are issued from mining activities.

In fact, by mixing new coins that are issued from the Bitcoin protocol with others that have had an illicit past, criminals lose their tracks and are able to convert their earnings into FIAT via large exchanges.

In detail, a very egregious case was identified in which an address related to several Bitcoin mining activities received $19.1 million in BTC from ransomware attacks. 

This address has been very active in transferring funds to high-level exchanges to convert to FIAT in proceeds.

Usually these money transfers occur through intermediary addresses that serve to ward off the correlation between clean and dirty activity.

Chainalysis fears that these movements will become increasingly frequent between now and the next few years.

Mining pools to clean up the proceeds of crypto scams

Another very interesting case of the link between mining pools and cryptocurrency money laundering involves a number of addresses involved in some cyber scams.

Going more specific, Chainalysis has collected data showing that two wallets associated with the notorious “BitClub Network” scam, which embezzled hundreds of millions of dollars from investors from 2014 to 2019, mixed these funds with the earnings of some mining operators.

The truckloads of Bitcoin stolen by BitClub Network during those years were sent to some clandestine money-laundering companies based in Russia, which handily moved those assets to traditional stock exchanges. 

The same addresses linked to the transfers, received large deposits from a mining operation also based in Russia.

The intent is probably to make it appear that all the money stolen in the scam came from the blockchain mining business in Bitcoin.

As in the case of ransomware, data suggest that other cryptocurrency scammers and money launderers working on their behalf also use mining pools as part of their money laundering process.

Overall, from 2018 onward there has been a growing trend of the phenomenon of deposit addresses on exchanges receiving money from both illicit activities such as scams and the proceeds of crypto mining.

In the graph below we can see the value of all addresses involved in this mixing that have received at least $1 million from mining pools.

In 5 years, approximately $1.1 billion related to cybercrime has been sent to these wallets

Is there a solution to prevent the use of cryptocurrencies as a means of money laundering?

There would be many useful methods to limit, if not prevent, the proliferation of this kind of money laundering activity.

In the blockchain world, every penny that is moved can be carefully monitored if you have the right technologies, as is the case with Chainalysis.

In fact, the company has managed to detect several cases of mixing cryptocurrencies from illicit activities and mining pools solely through on-chain monitoring.

Cryptocurrency exchanges, which are the hook between traditional fiat money and cryptocurrencies, should be more careful in their KYC checks and consider the exposure profile of all wallets sending them funds.

It is not enough to identify the core business from which part of the cryptocurrencies come, but it is necessary to be more meticulous, especially in exchanges involving millions of dollars, and verify that the entire supply moved is clean and free of any connection to scams or theft.

The same care should be taken by mining pools and hashing services, which, through detailed screening, could verify the sources from which their clients draw to participate in the business and reject funding from addresses involved in illicit activities.

As always, solutions in the crypto world exist, all it takes is the will to implement them.

Unfortunately, these situations, which correspond to a small niche of all legitimate movements that take place via cryptocurrency, end up ruining the reputation of the entire industry.

Even though the percentage of money laundered using these methodologies represents a small percentage of what is moved every day, the absolute value remains undeniably high and risks turning newbies away from the fantastic world of decentralization.

Fortunately, the narrative that cryptocurrencies are just a place devoted to money laundering is waning more and more in recent years, given the growth the industry has experienced in recent years. 

Just consider that Blackrock co-founder Larry Fink in 2018 had described Bitcoin and crypto assets in general as an “index for money laundering.”

Now he seems to have changed his mind as the financial giant has applied for a formal application to the SEC to open the doors to the first spot ETF for the first cryptocurrency by capitalization.