How to Avoid Problems with “Dirty” Cryptocurrencies

A Quppy Step-by-Step Guide on securing your Digital Funds and Digital Wallets

Cryptocurrency wallets of users can be compromised with bitcoins and other coins tainted by criminal activities. In such cases, all assets in the wallet end up on the blacklist on regulated platforms. Here’s how to mitigate such risks.

“Dirty” coins refer to digital assets stolen from exchanges or used for illicit purposes. Practically any type of coin can become “dirty”: Bitcoin, Ethereum, Bitcoin Cash, Litecoin, stablecoins, or ERC-20 tokens. While crypto platforms primarily focus on monitoring the “cleanliness” of BTC and ETH, the tightening of AML (Anti-Money Laundering) requirements means they will increasingly scrutinize other cryptocurrencies as well.

In 2023, the landscape of cryptocurrency crime experienced some notable changes. According to the 2024 Crypto Crime Report from Chainalysis, the total amount of cryptocurrency laundered dropped significantly to approximately $22.2 billion, marking a near 30% decrease from the previous year’s $31.5 billion. This reduction is attributed to a decline in the use of traditional laundering methods such as mixers, with funds sent to mixers from illicit addresses halving from $1 billion in 2022 to $504.3 million in 2023.

Moreover, there has been a shift in the patterns of money laundering, with increased funds being channeled through cross-chain bridges and gambling platforms, especially by ransomware groups. These tactics demonstrate the evolving sophistication of crypto criminals in response to regulatory pressures and the changing digital asset landscape.

Despite the overall reduction in illicit transaction volumes, certain types of crypto crime like ransomware and transactions involving sanctioned entities have seen increases. Sanctioned entities alone accounted for $14.9 billion or 61.5% of all illicit transaction volume in 2023. This indicates that while the absolute volume of crypto crime may be decreasing, its nature is diversifying with significant impacts still felt in specific areas.

These findings highlight the ongoing challenges and adaptations within the sphere of cryptocurrency crimes, underlining the importance of enhanced regulatory and monitoring efforts to keep pace with the advanced techniques used by criminals.

How “Dirty” Coins Can End Up in Your Wallet

Regulated trading platforms and exchanges meticulously track the circulation of “dirty” coins. They flag assets involved in unlawful activities.

To obscure their trails and “clean” the coins, criminals put “dirty” assets through several rounds. They use crypto mixers, split transactions into smaller amounts, utilize unregulated platforms, gambling platforms, prepaid cards, and cryptocurrency ATMs. Often, compromised assets are sold at a significant discount.

As a result, “dirty” crypto assets might end up in the wallet of a law-abiding user. It’s impossible to buy “tainted” assets on regulated exchanges and exchanges adhering to KYC/AML policies — such coins simply don’t make it to their wallets, as platforms block them. However, a user can easily purchase “dirty” coins through an unregulated exchange, on a dubious exchange, or receive them as payment.

Consequences of Receiving “Dirty” Coins

Scenario	Potential Consequences
“Dirty” coins received in personal wallet	Entire wallet may be blacklisted; regulated platforms will reject transfers from it.
“Dirty” coins received in exchange wallet	Wallet is frozen; user must verify identity and explain source of funds.
Attempt to resell tainted coins	Buyers may refuse or demand steep discounts; difficult to offload assets.
Use of mixers (even for privacy)	Raises red flags; wallet may be monitored or blocked.
Lack of transaction records	Difficult to prove innocence in case of investigation; higher risk of losing funds.

How Platforms Track “Dirty” Coins

Regulated exchanges and exchanges closely monitor the use of compromised coins. This is a requirement from regulators: the Fifth Anti-Money Laundering Directive (AMLD5) took effect in January 2020, mandating platforms to track users’ crypto transactions, maintain their records, exchange data with each other, and report suspicious activities to authorities. National laws are often no less stringent, and FATF members also follow the organization’s recommendations on cryptocurrency regulation formulated last June.

Large platforms have a dedicated department for tracking suspicious transactions. “Dirty” coins are detected using bots, automatic alert systems, and manual checks.

The use of mixers — programs and services for transaction anonymization — is also perceived by regulated platforms as an attempt to launder funds and is a reason for account blocking. The exchange doesn’t care why the user used the mixer. According to Chainalysis statistics, 90% of mixer users utilize them for privacy, not illegal activities. Mixers aren’t prohibited by international AML directives, but exchanges err on the side of caution. They may not necessarily block an account noticed using coins that have gone through a mixer, but such a wallet will definitely be monitored.

To track suspicious transactions, exchanges primarily use third-party solutions to optimize AML processes. Solutions from Chainalysis, CipherTrace, and Elliptic are most popular. They are used by regulated exchanges and exchanges, as well as law enforcement agencies.

What to Do If Your Wallet Is Blocked

If a platform blocks a wallet for compromised coins, it’s crucial to cooperate fully with support. First and foremost, complete full verification (if not done previously): provide photos or scans of documents verifying identity and the source of the funds in the account.

Proving innocence can be done in several ways. For example, provide screenshots showing the transfer or purchase of “dirty” coins. It’s easier for the exchange to check if “dirty” coins were bought with a bank card or through an electronic wallet. Cash purchases are impossible to track.

Arguing is ineffective — threats won’t convince the security service of innocence. But a transaction screenshot might.

Each case is individually reviewed by the platform’s AML officer. If the user’s innocence is proven, compromised assets will be returned to the original wallet or another address of the user.

How Not to Become an Owner of “Dirty” Coins

There are several ways to reduce the likelihood of accidentally receiving “dirty” coins in your wallet:

• Check the origin of coins through special services and applications.
• Use Quppy’s AML Bot to automatically scan and alert on incoming transactions.
• Purchase digital assets only on regulated trading platforms.
• Use two wallets: one for “clean” coins, another for coins from unreliable sources.
• Check the transactions of senders and buy assets in parts.
• Keep transaction records (time, amount, platform, recipient).

Thus, while the threats posed by “dirty” coins persist, innovative solutions like the AML Quppy Bot provide effective tools for users to safeguard their assets. By staying informed and utilizing these advanced protective measures, users can navigate the complexities of the cryptocurrency market with greater confidence and security.