Law enforcement and fights against crime are often a race between the criminals and the enforcers. The race may require more tactics for the other party to win or outrun the other. For instance, too many restrictions in one jurisdiction may prompt criminals to shift their operations to another jurisdiction, referred to as ‘Crime displacement.’
This is common in physical crimes. However, it has now proven to be more rampant in the crypto ecosystem as criminals are shifting from the mixers, after the US-led enforcement actions and sanctions, to cross-chain solutions to advance their money laundering activities.
Cross-chain crime: The new form of crypto crime
According to Elliptic, almost all stolen crypto was laundered on cross-chain bridges in June and July, indicating a complete shift from 2022, where mixers were mainly used. For instance, the Lazarus group, a cyberhacking organization with strong links to North Korea for its notorious activities in the crypto ecosystem, was recently ascertained to have stolen $240 million in digital assets from four entities and a suspected hack on CoinEX.
The group was known to use the Mixer Tornado Cash to advance their activities. The group has now shifted to the Avalanche Bridge after the Tornado Cash crackdown by the US government.
US sanctions and crackdowns on non-compliant exchanges, primarily based in Russia, have caused most offenders to shift to cross-chain crime, which entails swapping assets across blockchains to hide their trails. It has escalated immensely since 2021 with the rise of decentralized finance. A cross-chain bridge is a DeFi protocol where launderers can swap assets without the Know Your Customer requirements, making it almost impossible for them to trace.
The sudden shift can be traced to the Tornado cash mixer crackdown between July and September 2022, followed by a brief shift back to mixers after the RenBridge shutdown, which the collapsed Alameda Research financed along FTX.
According to data by Eliptic, the Ren Bridge was used to launder over $500 million worth of crypto assets at the time of its operation. Criminals then shifted to cross-chain bridges in February 2023 after the EUROPOL-led seizure of Bitcoin ChipMixer.After the seizure, Mixer use in crypto laundering has significantly decreased as more criminals now prefer cross-chain bridges.
Why criminals are shifting to cross-chain activity
Criminals prefer using cross-chain bridges for several reasons. The first obvious one is due to the enforcement imposed on Mixers by the US government, making cross-chain solutions their method of choice in furtherance of crime.
The second is due to the fact that criminals are also aware that blockchain analytics solutions do not have a way to track illegal activity across blockchains in a scalable and programmatic manner. Cross-bridge solutions are mainly designed with a single asset mind, such as Ether, making them the crime displacement option of choice for their activities.
The other reason is crypto crime is now shifting to newer assets, such as DeFi protocol-specific assets, which can only be exchanged on these cross-chain solutions. Decentralized exchanges, coin swap services, and cross-chain bridges do not also require the KYC requirements, making them more suitable for advancing crypto crimes as users can conceal their identity.
Cross-chain crime is rising ahead of projections and is likely to dominate in money laundering due to the increased crime displacement effect.
All is not lost, as there are still several solutions law enforcement officers can use to track cross-chain crimes at scale. Holistic blockchain analysis is one method compliance professionals can utilize; numerous companies have already begun developing solutions that law enforcement officers can use to curb these crimes. These solutions can identify crypto assets on numerous blockchains simultaneously in just a few clicks.
