Money laundering is one of the major charges leveled by the Enforcement Directorate (ED) against crypto exchange WazirX. Despite the inherent property of blockchain’s traceability, ED is not the first agency to make such allegations against the crypto platform. Mint explains.
Can blockchain be traced?
Transactions are always traceable on the blockchain. Most courts and law enforcement bodies around the world recognize its immutable nature and accept blockchain records as legal proof of transaction history. However, crypto transactions can sometimes happen “off-chain”, or other methods can be used to disrupt the flow of funds. Furthermore, blockchains are like conveyor belts, facilitating the flow of crypto from one wallet to another. The identity of the person holding that wallet must be traced by the wallet service provider and this is often not done to protect user privacy.
How do they hide traces of transactions?
One of the most common methods used by hackers and criminals is called mixing or Tumblr. As each crypto token can be traced, Tumblr breaks up and mixes multiple tokens from different blockchains. They then transfer the principal amount to the owner, but through multiple transactions and from multiple wallets, obscuring the traces. Illegal users also transfer traceable tokens to privacy-focused blockchains such as Monero, which hide wallet addresses and details. There are also over-the-counter brokers that accept payment in any form, including cash, and transfer the same amount in crypto to the user’s wallet.
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What has the ED accused Binance and WazirX?
Among other things, the ED claims that WazirX’s holding company, Zanmai Labs Pvt. Ltd is giving “contradictory and ambiguous answers” regarding crypto-to-crypto transactions conducted on WazirX. The ED said that WazirX has failed to provide data and show transactions on its blockchain for purchases made by several under-investigation fintech firms.
How do off-chain transactions work?
When users withdraw crypto from an exchange, they enter a wallet address and the token is transferred, a record maintained on the blockchain. However, they also have to pay a gas fee, which is used to pay miners on the blockchain. To avoid this fee, the two platforms can integrate with each other and allow users to transfer crypto without using the blockchain. Such transactions may raise questions regarding the discovery of funds, as records are not maintained on the blockchain.
How can exchanges prevent laundering?
Industry stakeholders said exchanges could adopt a resolution on KYC data and maintain transaction logs on the blockchain for eight to 10 years. Uttar Pradesh Police Superintendent of Police, Cyber Crime Triveni Singh said the use of KYC-compliant wallets can help add a layer of traceability. However, KYC norms for wallets maintained on platforms outside India may differ from those in India. Some blockchain research firms are also working on machine learning-based tools that can flag illegal accounts.
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