Centralized Exchanges Are Still Criminals’ Favorite Crypto Money Laundering Tool

This summer season, Roman Storm, the co-founder of the notorious crypto mixer Twister Money, was convicted in New York federal court docket of conspiring to function an unlicensed cash transmission enterprise.

Prosecutors celebrated Storm’s conviction as a significant victory within the battle towards cryptocurrency cash laundering, however the actuality is extra difficult.

For years, regulators have handled mixers like Twister Money as the final word cash laundering menace. Nameless, opaque, and seemingly tailored for criminals, it is easy to imagine that these instruments are inflicting nearly all of cryptocurrency laundering. However the numbers inform a distinct story.

The preferred crypto cash launderers aren’t cash mixers, they’re centralized exchanges: giant, brand-name buying and selling platforms which might be licensed, regulated, and brazenly linked to the worldwide banking system. These exchanges seem like extremely regulated and well-supervised, touting compliance groups and “Know Your Buyer” (KYC) verification checks; In apply, nevertheless, they permit felony exercise to propagate and act as the primary on- and off-ramps for soiled crypto.

To really fight cryptocurrency cash laundering, regulators ought to focus their efforts on strengthening KYC necessities and monitoring the centralized exchanges the place most cash laundering happens.

Centralized exchanges are cash laundering facilities

Based on a 2025 Chainalysis report, nearly all of illicit crypto funds had been routed to centralized exchanges in 2024.

Centralized exchanges are the place criminals flip their soiled crypto into disposable money. They’re the ultimate step in most cash laundering schemes: the purpose at which illicit funds are exchanged for {dollars}, euros or yen and transferred to actual banks.

Criminals are attracted to those platforms for a similar causes as official merchants: liquidity, pace and international attain. A mixer like Twister Money can obfuscate funds on-chain, however can’t convert them into money and transfer them to a checking account – solely an trade with deep liquidity and fiat connections can do this. Typically, centralized exchanges depend on compliance applications which might be under-resourced, poorly enforced, or undermined by permissive jurisdictional guidelines, permitting illicit transactions to slide by the cracks.

Excessive-profile enforcement instances have proven how systemic this drawback is. The US Division of Justice’s 2023 settlement with Binance discovered that the distinguished trade had processed transactions associated to ransomware, darknet markets and sanctioned entities. The trade has since boosted compliance efforts, spending $213 million on the division in 2023. BitMEX was equally fined $100 million after pleading responsible to violations of the Financial institution Secrecy Act (BitMEX founders and former executives Arthur Hayes, Ben Delo and Samuel Reed pleaded responsible to associated fees and had been later pardoned by US President Donald Trump).

Concentrating regulatory vitality on mixers whereas permitting exchanges to stay the first fiat gateways for illicit funds is like locking the home windows and leaving the entrance door extensive open.

KYC isn’t the panacea we declare it to be

Know Your Buyer (KYC) guidelines are the cornerstone of crypto compliance. On paper, they promise to maintain unhealthy actors out by verifying identities, screening transactions and flagging suspicious exercise. In actuality, it is typically a box-ticking train, a skinny veneer of care that offers regulators the phantasm of safety whereas refined criminals discover methods round it.

Weak KYC processes are one drawback. Some exchanges settle for low-quality id paperwork or depend on automated techniques that may be tricked with deepfakes or stolen knowledge. Others outsource compliance fully, making it a contractual checkbox fairly than an lively safeguard. Even when the method works, it will not cease decided cash launderers from utilizing mules, straw accounts or shell corporations to cross preliminary checks.

However the larger mistake is structural. KYC is designed to look at particular person accounts, to not detect cash laundering patterns on a big scale. A sanctioned entity might by no means open an account in its personal title. As an alternative, it is going to unfold the transactions throughout dozens of intermediaries, funneling the funds by layers of apparently official accounts till they find yourself on an trade that converts them into fiat. By the point the funds hit the compliance staff’s radar, they’ve typically handed by so many arms that the paper path feels clear.

For this reason enforcement actions towards main exchanges preserve revealing the identical uncomfortable fact: compliance does not fail as a result of the foundations do not exist; it fails as a result of the techniques that implement them are reactive, under-resourced, and simple to recreation.

Strengthening centralized exchanges towards cash laundering

Centralized exchanges will all the time be engaging targets for cash launderers as a result of they sit on the intersection of crypto and fiat. This makes enforcement not only a matter of coverage, however of design. Actual progress means shifting past symbolic KYC checks to techniques that detect cash laundering patterns in actual time, throughout accounts and throughout jurisdictions.

This begins with deploying compliance groups that match the size of the platforms they monitor. It means closing authorized loopholes that enable exchanges to function from permissive jurisdictions and serve high-risk markets, and executives to be held personally responsible for fraud when controls fail. Regulators ought to require and confirm that exchanges share actionable info with one another and with legislation enforcement businesses in order that criminals can’t merely soar from one platform to a different unnoticed.

That is rather more troublesome than concentrating on money mixers.

None of this shall be simple, however it’s the solely approach to deal with cash laundering the place it really occurs. Till exchanges are hardened at a structural stage, enforcement actions will stay reactive and billions in illicit funds will proceed to slide by the gates.