Crypto Market Tumbler Services and Exchanges Used to Launder over $80 Million



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money laundering

A crypto market investigation launched by the Wall Street Journal has revealed that almost $90 million worth of cryptocurrencies has been laundered through cryptocurrency exchanges based in the United States within the past two years.

According to the investigative article, tens of millions of dollars worth of ill-gotten Bitcoin and an assortment of other cryptocurrencies have been converted into the Monero privacy coin. This is via 46 cryptocurrency exchanges based in the United States. 2,500 crypto wallets were tracked during the course of the investigation, and their transactions dating back to 2016 scrutinized.

The crypto wallets were purportedly involved in hacks and blackmail schemes and were traced using blockchain technology. Some of the exchanges found to have been used by criminals to launder ill-gotten digital currencies include Binance, Bittrex, ShapeShift, Gemini, Bitfinex, BTC-e, Changelly, Bitstamp, KuCoin, and HitBTC.

Focusing on ShapeShift, a company that is based in Denver and backed by Pantera Capital, the FundersClub, and Access Venture Partners, the investigation revealed that shadowy characters, including North Korean agents, Ponzi scheme masterminds and credit card fraud schemers used the platform to launder crypto.

They apparently chose ShapeShift because of its loose Know Your Customer (KYC) policies that do not require the provision of Personally Identifiable Information. To make things harder for the authorities, cyber-criminals apparently carried out the transactions outside the United States’ sphere of jurisdiction, and mostly in China or Eastern European countries.

The investigation alleges that the North Korean actors who unleashed the WannaCry ransomware attack last year, while requesting payments in bitcoin, converted their illicit proceeds from bitcoin to Monero through ShapeShift.

The conversion to Monero made it virtually impossible to trace the hackers, thanks to the cryptocurrency’s robust pseudonymization features. Of the overall $89 million in illicit funds laundered through American exchanges since 2016, ShapeShift is alleged to have processed about $9 million, while Bittrex handled about $6.3 million.

ShapeShift’s CEO, Erik Voorhees, countered the allegations with a stinging rebuke of the WSJ report, dismissing it as misleading and disingenuous. Through a blog post on the company’s website, he asserted that the publication’s investigation omitted important information about the company’s efforts to combat crypto laundering.

He also stated that the investigators showed a lack of understanding on how blockchain works, explaining that the suspicious transaction cited was not sent to the exchange by cybercriminals but by another exchange. Erik argued that even if the claims were true, the illustrated volumes were abysmal and only accounted for 0.15 percent of the total volume traded by the exchange at the time.

The CEO added that ShapeShift has always complied with law-enforcement requests and has collaborated with the authorities in over 30 investigations spanning over 13 countries across the world. Voorhees reiterated his company’s commitment in stopping money laundering, saying that it uses sophisticated internal anti-money laundering and blockchain-based forensics instruments to detect suspicious accounts and transactions.

The company apparently also shares information with other exchanges to bolster AML efforts. Voorhees explained that ShapeShift only deals in crypto to crypto transactions and has no fiat exchange dealings. As such, no fiat currency can or has ever been laundered on the network.

On how the exchange maintains transparency, all transactions are made public, thereby making them traceable. The irony of the situation, according to the CEO, is that the Wall Street Journal used this public information to launch its investigation, and yet accused the crypto agency of lacking transparency.

He also fought back claims of illegal activity, stating, “ShapeShift has always been in favor of complying with the laws of the jurisdictions in which it operates, even though many of these laws are unclear, ever-changing, contradictory, and in some cases ineffective.”

The company’s chief legal officer, Veronica McGregor, told WSJ that ShapeShift had indeed received the list of suspicious accounts alluded to by the investigation, and said that the company had banned them from the exchange.

ShapeShift's CEO and Ron Paul.

ShapeShift CEO, Erik Voorhees (Left), with retired politician Ron Paul (Right).

That said, ShapeShift has announced that it will be changing its modus operandi amid the money laundering allegations, and is currently trying to pioneer a new exchange system that will ensure greater transparency.

Cyber Criminals Use Tumbler Services and Abuse Exchanges to Launder Crypto

About $266 million worth of crypto was apparently laundered last year. However, 2018 figures are much higher at $761 million, and this does not include transactions done using harder to track cryptocurrencies such as Dash, Zcash and Monero.

According to Dave Jevans, CEO of CipherTrace, a cryptocurrency firm that specializes in tracing crypto and undertaking advanced forensics, mixing services are to blame for the sharp increase in cyber crimes involving crypto. Cryptocurrency tumbler services take digital currencies from a wide range of sources and mix them together in a combined pool.

The coins are then scrambled and redistributed into different pools on the blockchain, thereby rendering them untraceable. The services effectively erase the link between the contributors and receivers. Such services reportedly operate using complex formulas written by highly skilled experts in the area, some who probably have Ph.D.s.

In the case of ShapeShift, Dave expressed that although such exchanges offer legitimate services, they can be abused by malicious actors to conceal the origin of fraudulently acquired funds. This is because clients can use such services anonymously as well as undertake cross-currency flips to switch between cryptocurrencies. This makes the digital coins untraceable.

In one case illustrated by the WSJ investigation, an online company called Starscape Capital fraudulently collected $2 million from investors, with the promise of outrageously high returns. Investors were apparently required to send payments in Ethereum. However, the website associated with the project went offline, leaving its backers in limbo.

According to the investigation, coins from the venture were soon funneled into two crypto exchanges using different streams. ShapeShift was among them. The other was KuCoin, an exchange based in Hong Kong. Some $517,000 worth of Ethereum was allegedly sent to ShapeShift and converted into the Monero privacy coin, at which point the trail went cold.

From there, the coins could be exchanged for bitcoin or fiat with no trace of their origin. And so to date, none of Starscape’s founders have ever been identified.


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