Money Laundering and Blockchain Technology: Can you Follow the Trail of Cryptocurrency Transactions?

Abstract

Money laundering is the process by which wealth from illicit sources (money, goods, other assets) is hidden, transferred to conceal its origin and subsequently reinvested in the legal economy. There is no definite quantification of this phenomenon, but according to the estimates of various institutions, its impact on the legal economy is significant and shows no signs of diminishing. Compared with the traditional financial system, measuring the extent of money laundering in the crypto market is made more complex by the tools that can be used to hide its trail. National and European regulation has therefore extended the anti-money laundering (AML) obligations to entities that provide services in crypto-assets, but decentralized supply models and some jurisdictions are still unregulated. The aim of this paper is to analyse the use of blockchain and crypto-assets for money laundering (and terrorist financing) purposes, in order to evaluate the effectiveness of new solutions based on smart contracts in intercepting anomalous operations in decentralized finance (DeFi). 

Keywords: due diligence, AML, blockchain, crypto, DeFi, DLT, money laundering, smart contracts, zero-knowledge proof

JEL Classification: G18, G23, G28