Use of DeFi Protocols for Money Laundering Grew in 2021
Decentralized Finance (DeFi) protocols are fast becoming an alternate channel for money laundering, according to a new report by crypto forensics firm Chainalysis.Illicit wallets sent 17% of all their funds through DeFi protocols in 2021, an increase of 1,964% from 2020 levels, the report states.
DeFi protocols are communication standards used between services, generally DeFi platforms, operating in a distributed network. While the use of such protocols for money laundering surged during the pandemic, centralized cryptocurrency exchanges remained the favored conduit and accounted for 47% of all funds laundered using cryptocurrencies. Other popular methods in the cryptocurrency ecosystem used for money laundering include mining pools, high-risk exchanges, and cryptocurrency mixers.
On an overall basis, there was a 30% increase in money laundering activity to $8.6 billion last year. Despite the rise, money laundering was just 0.05% of the total transaction volume in cryptocurrency in 2021. Trading accounted for an overwhelming majority as investors, retail and institutional, poured money into risky assets in a pandemic environment characterized by low interest rates and stimulus money.
The increasing share of DeFi protocols in money laundering has occurred in parallel with a mainstreaming of cryptocurrency exchanges. The pandemic proved to be a watershed moment in crypto fortunes, and the popularity of these exchanges exploded. An increase in customer numbers, however, has been accompanied by greater regulatory scrutiny and spotlight, making it difficult for criminals to use them to siphon funds across geographies.
DeFi protocols, which aim to decentralize financial transactions by removing third-party intermediaries,
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