Relevance: GS Paper III – Economy (Money Laundering, Digital Finance); GS II – Governance

Source : Indian Express

Cryptocurrencies have become a major new route for money laundering as they allow anonymous, fast, and borderless movement of funds. Global estimates (FATF/UNODC) indicate that over $8 billion is laundered annually through crypto channels, with a rapid rise in the use of mixers, decentralised exchanges and privacy coins.

How Crypto Enables Laundering 

1. Placement – Bringing Illicit Money Into Crypto

• Buying crypto using cash via unregulated exchanges or P2P platforms.
• Using mule accounts or offshore platforms with weak KYC.
• Converting funds into stablecoins like USDT.

Why effective: avoids traditional banking controls.

2. Layering – Hiding the Transaction Trail

• Mixers/Tumblers: Break transaction links.
• Decentralised Exchanges (DEXs): No central authority, minimal KYC.
• Chain-hopping: Moving coins across multiple blockchains.
• Privacy Coins (Monero, Zcash): Mask sender–receiver details.

Goal: confuse investigators and conceal origin.

3. Integration – Bringing Clean Money Back

• Withdrawing via offshore exchanges into bank accounts.
• Selling crypto via P2P networks.
• Using crypto to buy assets (NFTs, real estate, luxury goods).

Outcome: money re-enters economy as “clean” trading income.

Frameworks & Measures to Counter Crypto Laundering

Global Measures

• FATF Travel Rule: Mandates sharing sender–receiver data across virtual asset providers.
• FATF Grey/Black Lists: Pressures non-compliant jurisdictions.
• International cooperation on tracing illicit crypto flows.

India’s Measures 

• PMLA (2023): Virtual Digital Asset platforms made Reporting Entities.
• Mandatory KYC, suspicious transaction reporting, and record-keeping.
• 30% tax + 1% TDS on crypto transfers to increase traceability.
• FIU and ED using blockchain analysis tools for investigations.
• FEMA compliance required for cross-border crypto flows.

UPSC Prelims Practice Question

Consider the following tools used in cryptocurrency transactions:

1. Mixers
2. Privacy coins
3. Chain-hopping

Which of the above are used to obscure the source of funds?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (d)

One-line Wrap:
Crypto has added anonymity and global speed to traditional laundering methods, prompting stronger regulatory frameworks such as the FATF Travel Rule and India’s PMLA-based controls.