Cryptocurrencies and Money Laundering

Abstract:

This article will discuss legal issues regarding cryptocurrencies. Particularly it will focus upon the issue of money laundering due to use of cryptocurrencies. The regulatory aspects concerning to cryptocurrencies in USA and Pakistan will be highlighted and recommendations for an international approach will be provided.

Introduction:

Can there be a specific international law on cryptocurrencies in order to curb money laundering? Or should cryptocurrencies be regulated domestically? For this, we first need to understand what is cryptocurrency and the mechanism behind money laundering along with legal implications. European Central Bank (ECB) has defined cryptocurrency as “A digital representation of a value that is not issued by a central bank, credit institution or electronic money institution and that, in some cases, can be used as an alternative to money”[1]. The major issue with cryptocurrency is expressed within its definition which means that it is not a currency being controlled by a central authority. This is where legal complications with regard to cryptocurrencies step in. However, we need to understand the mechanism behind functioning of cryptocurrencies so that we can delve deep into the legal issues surrounding cryptocurrencies. Cryptocurrencies operate on blockchain technology which is a decentralized system in which transactions are recorded on a public ledger[2]. There is also a cryptographic mechanism followed in cryptocurrency which is cryptography which helps to secure transactions and prevent any fraud[3]. Furthermore, the first cryptocurrency was developed by Satoshi Nakamoto which was named as Bitcoin. There are also other cryptocurrencies like Ethereum, Binance coin, USDC, etc.

Mechanism behind Money Laundering through cryptocurrency:

Money laundering is the process in which original transaction is concealed so that criminal transactions which are conducted are considered as legitimate[4]. It has also been mentioned that money laundering through cryptocurrencies occur in the normal three stages of money laundering which are placement(funds placed in the system), layering(transaction hidden through layered transactions) and integration(funds used for legal transactions)[5]. However, there is one difference with conventional money laundering which is that in crypto money laundering block chain platform is used due to which complicated technologies are used while doing money laundering through cryptocurrency. This makes it difficult to trace the criminals involved in money laundering. For example, at the layering stage cryptocurrency is sent to other digital wallets which becomes very hard to trace as blockchain technology in cryptocurrency obscure’s identity of the actual user committing the crime[6]. This shows that even though cryptocurrencies have advantages in terms of the swiftness and convenience it provides however the anonymous transactions with cryptocurrencies lead to one of the bigger challenges associated with it which is money laundering as explained above. A study was also carried out by Fanusie and Robinson (2018) which stated that almost 1% of transactions conducted when transferring Bitcoin are done illegally. These difficulties are due to which there is still a legal gap while making laws on curbing money laundering done through cryptocurrencies.

Different types of services for money laundering:

These different types of services are vital in understanding the legal mechanism which could be introduced in order to curb money laundering through cryptocurrencies. The following two are one of the most important services for money laundering:

1. Tumblers (Mixers):

These are services in which fee is given which allows criminal actors to launder their digital currencies which they have obtained through illegal activities. This process involves mixing illegal cryptocurrencies with legitimate ones which allows to create numerous portfolios[7]. This can lead to anonymity of transactions of cryptocurrencies which can help hide the identity of the illegal actor by bypassing traditional mechanisms of controlling money laundering.

2. Markets available on dark internet:

Dark internet is different than normal internet as on dark internet there is a decentralized network structure called the Tor network which ensures that transactions remain anonymous which allows illegal activities to be conducted easily[8]. Tor based websites anonymize the traffic on that site by hiding internet protocol(IP) address of that traffic[9]. Moreover, on dark internet the content is not publicly available and it is not accessible for normal users[10]. This introduces a vital role of financial institutions which should be vigilant and report such activities to relevant legal institutions so that money laundered on dark internet is not integrated into the legal system. However, as per Chainalysis[11] report, when cryptocurrency is obtained illegally on dark internet then criminals convert this currency at the layering stage by replacing coins which could be done through mixers as explained above. Nonetheless, this can also help investigators of financial institutions to find any illicit activity with cryptocurrency. This is because of the transparency involved in transactions on block chain which also involves cryptocurrency. The main issue is that these dark internet sites use domain names which are considered as legal like .onion due to which people can easily access those sites and can illegally conduct transactions. Therefore, due to the anonymity of transactions involved on those sites it is not easy for investigators to trace the criminals and this legal gap needs to be addressed.  A 2016 study done by Terbium labs which is a research firm pointed out that more than half of the domains involved in the study which ended with .onion were legal[12]. This study shows the importance of regulating such sites in order to eradicate money laundering which is done through cryptocurrencies. Moreover, one of the most prominent recent cases with regard to this issue is United States v Larry Dean Harmon (D DC, 2020). In this case, Larry Dean was given a sentence to prison for 3 years as he was involved in laundering over $300 million Bitcoin through darknet markets[13]. Bitcoin fog is one of the famous examples which handled $400 million of transactions from 2011 till 2021. It was a cryptocurrency mixer site however its operator was sentenced in March 2024.

How cryptocurrencies can be incorporated into legal systems?

The regulation of cryptocurrencies varies from region to region which itself shows that it is difficult to set a clear international law on cryptocurrencies which is primarily because of the anonymity of transactions involved in cryptocurrencies as discussed above. Nonetheless, in order to consider anti money laundering regulations being adopted by different countries we need to understand different regulatory frameworks adopted by various countries around the world

For this, we need to first identify that whether cryptocurrency is money, goods or just a small part of a financial system. Money can be considered as store of value, unit of account or medium of exchange[14]. However, it needs to be evaluated that whether cryptocurrencies can serve three of these functions altogether or not. Alniacik(2019) has mentioned that Bitcoin(type of cryptocurrency) cannot be considered as store of value as this requires a financial security guarantee from a financial institution which is not seemingly possible with Bitcoin. Nonetheless, there are different jurisdictions around the world which confer different rights upon individuals which leads to uncertainty with regard to an international regulatory framework in relation to cryptocurrencies. This signifies the explosion of money laundering through cryptocurrencies as explained above.

USA:

However, the US has made significant advancements in regulating cryptocurrency through CLARITY Act and GENIUS Act. The CLARITY Act is very significant as it properly gives clear definitions that whether a cryptocurrency is a commodity, security or is it anything else. However, it needs to be mentioned that CLARITY Act has not yet been passed into law but a bill has just been made in the congress. Nonetheless, a counter bill has also been passed in the congress due to which future of CLARITY Act is at stake[15]. This shows that it is difficult to incorporate cryptocurrency laws in a strong jurisdiction like USA which is also one of the main reasons due to which money laundering through cryptocurrency is prevalent all over the world.

Nonetheless, the GENIUS Act has been a major step towards regulating the rules regarding the issuance of stable coins(a type of cryptocurrency) which will also integrate anti money laundering regulations with it[16]. This means that regulating issuance of stable coins which involves pegging to the US dollars will also lead to more compliance with anti money laundering regulations as the combination of CLARITY Act if passed through the senate and GENIUS Act will also lead to a federal oversight of cryptocurrency regulations and anti-money laundering regulations which will lead to a uniform application of laws.

In the US, there is also an issue regarding usage of Central Bank digital currencies (CBDCs). It has been argued that CBDCs can be used to curb money laundering activities particularly with cryptocurrencies. As CBDC is issued by the state so it will help legal enforcement officers to trace origin of transactions. International Monetary Fund (IMF) and Financial Action Task Force (FATF) have also noted that CBDCs could reduce the misuse of cryptocurrencies in criminal activities particularly in cross-border transactions. However, Anti CBDC Surveillance Act has recently been enacted and it has changed the landscape regarding anti money laundering (AML) framework in USA. Before Anti CBDC Act there was no proper centralized monitoring of transactions especially in relation to digital currencies as it was dependent on financial institutions under Bank Secrecy Act[17] but after CBDC act the monitoring has been centralized. Moreover, jurisdictions like China with adoption of digital yuan have also implemented CBDC for strong legal enforcement of AML framework[18]. The combination of anti CBDC Act along with Genius and Clarity Act will help eradicate the issue of money laundering from USA. This will also pave the way for an international legal framework in order to curb money laundering through cryptocurrencies.

Pakistan:

 The State Bank of Pakistan which is a regulatory authority of banks all over Pakistan announced in 2018 that cryptocurrencies like Bitcoin, Pakcoin, Litecoin will not be considered as a legal tender issued by government of Pakistan[19]. Later on in 2020, in the case of Waqar Zaka v Federation of Pakistan & Others, 2019, the circular ban in 2018 was lifted. This means that there is uncertainty in Pakistan regarding cryptocurrencies regulation.  Despite this, there has been a surge in adoption of cryptocurrencies in Pakistan in the recent years as the Global Crypto Adoption Index for 2020-2021 placed Pakistan at 3^rd position.  Therefore, the lack of regulations on cryptocurrencies will result in practices like money laundering to become more prevalent because over the period of time traditional method of lending will become obsolete and cryptocurrencies will get hold of the market in Pakistan due to which people will take advantage of lack of regulation of cryptocurrencies in Pakistan will promote money laundering practices. Moreover, data shows that rates of money laundering cases of cryptocurrencies in Pakistan increased by 134.6% from 2021 to 2024 and there was a further increase in the amount involved in these cases during the same years by 244.8%[20]. Bitcoin has also been considered the widely used currency in Pakistan in money laundering cases involved in 42.3% of cases[21]. However, it might be difficult for Pakistan on its own to establish a regulatory framework for cryptocurrencies as it also has to comply with FATF rules as recently Pakistan was also put on grey list of FATF. Moreover, there are no taxation rules in Pakistan regarding cryptocurrencies due to which data regarding cryptocurrency holders cannot be put together which is vital in curbing practices of money laundering done in Pakistan through cryptocurrencies. Nonetheless, Financial Action Task Force(FATF) has suggested Pakistan to adopt a proper framework for cryptocurrency regulation in order to counter terrorist financing which includes money laundering. Nonetheless, in recent years Pakistan Crypto Council has been established and a Virtual Assets Ordinance was also passed in 2025 in line with FATF standards which shows that in future there might be a proper regulatory framework in Pakistan for cryptocurrencies.

Recommendations:

The different approaches toward regulations of cryptocurrencies makes it necessary to have a proper international regulatory framework for cryptocurrencies because an international regulatory framework will be more efficient in solving the crimes like money laundering which are on the rise in recent years due to a surge in the use of cryptocurrencies. The Vienna International Convention for the Prevention of the laundering of Money[22] was the first of its kind convention which criminalized money laundering related to drug trafficking which indirectly could also curb money laundering done through cryptocurrencies. FATF, as an international regulatory organisation has also started to take the issue of money laundering done through cryptocurrency very seriously as it also took into account new recommendations to deal with money laundering done through cryptocurrencies. However, the discrepancies in regulations in different countries signifies that a new framework in the form of convention is required specifically to curb money laundering done through cryptocurrencies as convention is a binding legal instrument. This will ensure that all countries abide by an international convention and the regulatory framework is streamlined rather than being varied one between different countries. Nonetheless, there is a Genocide convention already present but still some countries are not abiding by this convention. Therefore, it does not seem like that only producing an international convention to curb money laundering done through cryptocurrencies will seal the deal rather there should be proper enforcement of that convention with a specific court established for it which has jurisdiction and powers in every country in the world.

Conclusion:

Cryptocurrencies are emerging currencies nowadays in the world and in fact it is going to become the new norm. But there are serious concerns regarding money laundering with the help of cryptocurrencies as it is relatively easy to do money laundering through cryptocurrency. Moreover, there are different approaches adopted by different jurisdictions with regard to cryptocurrencies. Therefore, it is vital to adopt an international regulatory framework which should be binding in order to address the issue of cryptocurrencies especially in case of money laundering.

Reference(S):

1. Commission de Surveillance du Sector Financier (CSSF), “Warning on virtual currencies”, 14 March 2018
2. Sneha Solanki, Cryptocurrency laws, Thomson Reuters, (Sep. 21, 2025, 8:00 PM), https://legal.thomsonreuters.com/blog/cryptocurrency-laws/#what-is-cryptocurrency
3. OECD, Ending abusive financial arrangements: Curbing intermediaries who promote tax crimes and white-collar crime, OECD, 2021, Paris, p21
4. The French legislature is one of the few to have defined the clandestine internet in the vocabulary of information technology and the internet (list of terms, expressions and definitions adopted), text No 110, Journal officiel de la République française (JORF), No 0225, 26 September 2017(Sep 21, 2025, 7:30 PM), https://www.legifrance.gouv.fr/jorf/jo/2017/09/26/0225 (19.08.2023)
5. United States v. Galarza, (2019) WL 2028710, (per Howell, C.J.) (USA)
6. The Dark connection between the Dark Web and Money Laundering, AmlUAE(Sep 21, 2025, 9:30 PM), https://amluae.com/connection-between-the-dark-web-and-money-laundering/
7. Chainalysis team, Money laundering and Cryptocurrency: Trends and New techniques for detection and investigation, Chainalysis( Sep 22, 2025, 3:30 PM), https://www.chainalysis.com/blog/money-laundering-cryptocurrency/#:~:text=Crime%20Reports%20for%20several%20years%2C,we%20refer%20to%20it%20as
8. Alexander Stefanov, Bitcoin Mixer case, CryptoDNES ( Sep 22 2025, 4:00 PM), https://cryptodnes.bg/en/bitcoin-mixer-founder-sentenced-to-3-years-for-laundering-over-300-million-in-btc/
9. Irena Asmundson & Ceyda Omer, Finance & Development, 49 FD IMF 1(2012).
10. Adrien K. Anderson et al Dale KimRashmi Seth, Eun Young Choi, David F. Freeman, Jr., James P. Bergin, Anthony Raglani, Clarifying the CLARITY Act: What To Know About the House Crypto Market Structure Bill and Its Path to Law.
11. Ait Ali Zaina, Money Laundering through Cryptocurrencies: International and National Legal Framework, XIII RLJ 1331 (2025)
12. Raheel Shahzad el at Dr. Tansif Ur Rehman, Ihsan Ali, Balancing Innovation and Risk: The Case for Cryptocurrency Regulation in Pakistan, 8 JALT (2025)

[1] Commission de Surveillance du Sector Financier (CSSF), “Warning on virtual currencies”, 14 March 2018

[2] Sneha Solanki, Cryptocurrency laws, Thomson Reuters, (Sep. 21, 2025, 8:00 PM)

[3] See Ibid 2

[4] SHS Web of Conferences 221, 03008 (2025)

[5] Terra Whisnu Murti et al. (2024)

[6] See Ibid 4

[7] OECD, Ending abusive financial arrangements: Curbing intermediaries who promote tax crimes and white-collar crime, OECD, 2021, Paris, p21

[8] The French legislature is one of the few to have defined the clandestine internet in the vocabulary of information technology and the internet (list of terms, expressions and definitions adopted), text No 110, Journal officiel de la République française (JORF), No 0225, 26 September 2017(Sep 21, 2025, 7:30 PM)

[9] United States v. Galarza , No. 18-mj-146 (RMM), 2019 WL 2028710, at *2(D.D.C.May 8, 2019)(Howell, C.J.)

[10] The Dark connection between the Dark Web and Money Laundering, AmlUAE(Sep 21, 2025, 9:30 PM)

[11] Chainalysis team, Money laundering and Cryptocurrency: Trends and New techniques for detection and investigation, Chainalysis( Sep 22, 2025, 3:30 PM)

[12] The Truth about the Dark web, a study conducted by Terbium labs

[13] Alexander Stefanov, Bitcoin Mixer case, CryptoDNES ( Sep 22 2025, 4:00 PM)

[14] Irena Asmundson & Ceyda Omer, Finance & Development, 49 FD IMF, 1(2012).

[15]  Adrien K. Anderson et al Dale Kim Rashmi Seth, Eun Young Choi, David F. Freeman, Jr., James P. Bergin, Anthony Raglani, Clarifying the CLARITY Act: What To Know About the House Crypto Market Structure Bill and Its Path to Law.

[16] David Zaslowsky, Crypto Week Was More than the GENIUS Act: What the CLARITY Act and Anti-CBDC Surveillance State Act Mean for the Future of Digital Assets, NYL Journal

[17] Bank Secrecy Act, 1970, Stat 1114 (USA)

[18] People’s Bank of China, Progress of Research & Development of E-CNY in China (2021)

[19] State Bank of Pakistan, Circular No. 03 of 2018: Prohibition on Dealing in Virtual Currencies/Tokens (Issued on 6 April 2018).

[20] Ghulam Mujtaba Malik el at Liaqat Ali, Nisar Ahmed Lund Baloch, Money Laundering through Cryptocurrencies: Tracing and Prevention Mechanisms

[21] See Ibid 20

[22] In Algeria, the fight against this traffic is regulated by Law No 23-05 of 7 May 2023, amending and supplementing Law No. 04-18 of 25 December 2004 on the prevention and suppression of the illicit use and trafficking of narcotic drugs and psychotropic substances, OJ No 32 ( May 9, 2023)