Money laundering is the illegal process of making money from criminal activity appear to come from legitimate sources. In cryptocurrency, laundering often involves moving value across wallets, networks, and services to reduce the traceability of where funds originated, before attempting to convert them into spendable assets or cash.
How money laundering works, including in crypto
Traditionally, laundering is described in stages: placement (introducing illicit funds into the financial system), layering (creating complex movements to obscure the trail), and integration (reintroducing funds as apparently legitimate wealth). Crypto can be used in the layering stage because transfers can happen quickly across borders and through many intermediaries. While many blockchains are public and auditable, identifying the person behind an address can be difficult without additional information from exchanges or other service providers.
A common real-world pattern is illicit proceeds being converted into cryptocurrency, split across many addresses, routed through multiple blockchains, then sent to a custodial service where it can be exchanged into other assets. Criminals may also use decentralized finance services to swap tokens repeatedly, aiming to complicate analysis.
Common obfuscation methods and AML controls
To hide transaction links, criminals may use mixing services, privacy-focused wallets, or chains with enhanced privacy features. They can also use “peel chains,” where small amounts are gradually moved out of a larger balance, or rapid cross-chain swaps to break straightforward tracing.
Because of these risks, crypto businesses implement Anti-Money Laundering (AML) programs, including customer identification checks, transaction monitoring, sanctions screening, and reporting suspicious activity. Blockchain analytics tools can flag patterns associated with known illicit sources, mixers, or high-risk services.