Crypto Forensics: You May Never Find Your Lost Funds Again

Crypto forensics firm Elliptic believes that investigators are unprepared to deal with the emerging illicit cross-chain movement.

Crypto Forensics: You May Never Find Your Lost Funds Again

Elliptic has released a new report outlining the current landscape of crypto-driven money laundering, which has become an increasing concern for regulators worldwide.

"The state of cross-chain crime," a report published by the company, describes how criminals are increasingly adept at concealing the flow of illicit crypto funds by exploiting decentralized exchanges, cross-chain bridges, and coin swap services. These three facilities have been used to conceal over $4 billion in illegal funds.

Recent exploits include the Axie Infinity Ronin sidechain hack, in which over $500 million was stolen, and the $100 million Horizon Bridge attack.

Often, criminals pilfer centralized digital assets such as Circle (USDC) and Tether (USDT) using decentralized exchanges (DEXs) like Uniswap in exchange for non-centralized cryptocurrencies such as Ethereum.

Taking this step is imperative for the bad actors since centralized crypto issuers can freeze stolen assets or the stolen assets' prices can fall, leaving them with almost nothing. The criminals then transfer funds through mixers such as TornadoCash and or bridge the exchanged tokens onto another blockchain using a cross-chain bridge such as RenBridge. Overall, stolen funds totaling at $1.2 billion have been processed through DEXs by criminals to date.

As a result of cross-chain bridges and mixing services, criminals have been able to increase the anonymity of their transactions and throw authorities off balance. Elliptic reports that over $750 million has been transported across different blockchains through bridges, with RenBridge being one of the most popular ones. Using RenBridge, criminals can convert renBTC to Bitcoin before passing the funds through a bitcoin mixer, further obscuring their digital footprint. Law enforcement and Treasury officials are challenged by this level of obfuscation since there is no centralized entity that can shut down such services.

Customers can swap tokens anonymously for a fee using CoinSwap services. It is not uncommon for illegitimate versions of such services to originate from Russia or Iran. Some crypto exchanges may even provide users with the option of exchanging crypto assets for fiat currency, such as the Russian ruble, which could constitute a violation of sanctions.

U.K., Canada, and the U.S. have implemented rigorous anti-money laundering regulations that have made it more difficult for crypto firms to register officially. In spite of the fact that these controls are crucial to ensuring that users transacting on crypto platforms will not be sanctioned individuals or criminals, they are not sufficient to prevent sanctioned users from moving funds through the exchange.

The owner of a custodial wallet may unknowingly be in violation of sanctions laws if they do not have the ability to track the origin of funds in their wallet.

Consequently, the report recommends that forensic tools be utilized in order to track the assets' journey as they pass through DEXs, mixers, and coin swap services.

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