Black Money – Domestic and International Efforts

Decoding the Crypto Route for Money Laundering


From UPSC perspective, the following things are important :

Prelims level : Cryptocurrency

Mains level : Money laundering

Money laundering is one of the key charges made by the Enforcement Directorate (ED) against crypto exchange WazirX.

Also a leader in Maharashtra has made ridiculous claim after ED inquiry that he has made Rs.15 Lakh by investing only Rs.5000 in crypto.

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.

What has ED accused Binance and WazirX of?

  • Among other things, the ED claims that WazirX’s holding company 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.

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 a blockchain, said industry stakeholders.
  • The use of KYC-compliant wallets could help add a layer of traceability.
  • 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.

Back2Basics: Cryptocurrency

  • Cryptocurrency is a digital payment system that doesn’t rely on banks to verify transactions.
  • It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments.
  • Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions.
  • When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.
  • The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today.
  • Much of the interest in cryptocurrencies is to trade for profit, with speculators at times driving prices skyward.

How does cryptocurrency work?

  • Cryptocurrencies run on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders.
  • Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins.
  • Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.
  • If you own cryptocurrency, you don’t own anything tangible. What you own is a key that allows you to move a record or a unit of measure from one person to another without a trusted third party.
  • Although Bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still emerging in financial terms, and more uses are expected in the future.
  • Transactions including bonds, stocks, and other financial assets could eventually be traded using the technology.


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Carol Lawrence
11 months ago

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Last edited 11 months ago by Carol Lawrence


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