Tracking ‘dirty’ cryptocurrency: Does Monero still work?

Cryptocurrency holders often encounter dirty coins firsthand. What are they and why are such assets becoming easier to track?

Anyone who does not follow the so-called “dirty” cryptocurrencies can receive these marked assets in their wallets. Many major platforms have blocked such wallets, and proving innocence can sometimes be difficult.

Analytical systems experts can manipulate data on cryptocurrency addresses to link funds to illegal activities, even if a significant amount of time has passed since the funds were received.

Large centralized exchanges (CEX) are one of the most law-abiding players in the market. They generally follow recommendations from the Financial Action Task Force (FATF), an intergovernmental organization aimed at combating money laundering, terrorist financing and other threats. They also use special analytical tools to check the purity of cryptocurrency at the entry stage, which eliminates the possibility of acquiring “dirty” assets on such platforms.

However, the risk arises if the exchange is subject to sanctions and all funds involved may be marked as sanctioned.

In contrast, decentralized services (DEX) may operate in an unlicensed, gray area and may not comply with anti-money laundering (AML) requirements, increasing the likelihood of receiving “dirty” cryptocurrency.

How can ‘dirty’ money end up in a wallet?

Regulated trading platforms and exchanges closely monitor the circulation of cryptocurrencies linked to criminal activities. They record entities involved in illegal transactions.

Scammers use a variety of schemes to disguise their actions and “clear” cryptocurrencies, including crypto mixers, splitting transactions into small amounts, unregulated platforms, gambling, prepaid cards, and crypto ATMs.

As a result, “dirty” cryptocurrencies can find their way into the wallets of even the most law-abiding users. Purchasing such assets from regulated exchanges and exchanges operating under KYC/AML requirements is impossible as they cannot be purchased from their platforms.

However, users can easily purchase digital assets on an unregulated platform or a dubious exchange or accept them as payment.

How to track ‘dirty’ coins

Regulated exchanges carefully monitor the circulation of compromised coins, following regulators’ requirements. Since January 2020, the EU’s Fifth Anti-Money Laundering Directive has been in effect, requiring platforms to monitor users’ crypto transactions, keep records, share data, and report suspicious transactions to authorities.

Large platforms have special units responsible for monitoring suspicious transactions. Bots, automatic reporting systems and manual checks detect “dirty” money. Exchanges use jammers, programs and services to anonymize transactions and launder funds, which can lead to account blocking. The changes do not care what the user uses the mixer for.

Source: Chainaliz

International AML standards do not ban mixers, but exchanges are being cautious. They generally do not block accounts where coins are detected passing through a mixer. Still, such wallets are subject to additional oversight.

Exchanges often use external solutions to optimize AML processes to monitor suspicious transactions. The most popular solutions are Chainaliz, CipherTrace, and Elliptic, used by regulated exchanges, exchangers, and law enforcement.

CipherTrace, for example, tracks the majority of all digital assets. Its system tracks crypto transactions and assigns wallets a risk level on a ten-point scale depending on whether the funds are used in fraudulent projects, mixers, dark web purchases, hacker attacks, extortion, drug trafficking and terrorist financing.

All compromised wallets and coins are added to a blacklist accessible by trading platforms using the CipherTrace solution. From now on, exchange systems are only required to block “dirty” funds and close accounts found to be in violation of AML requirements.

Anonymous cryptocurrency

Designed to provide high privacy and anonymity, anonymous cryptocurrencies implement technologies created primarily to ensure anonymity and confidentiality of transactions without external crypto mixers.

One of the most famous anonymous cryptocurrencies is Monero (XMR). The principle of Monero is that each transferred token is mixed with many other transactions, so it is impossible to track who sent Monero to whom.

But in reality, XMR’s anonymity is often questioned. Monero’s anonymity issues were particularly noticeable as far back as February 2017, but the developers later fixed the code. Thus, all transactions made before this time can be tracked; Moreover, even after the code change, some loopholes remain through which it is possible to track transaction senders; Experts from Princeton University, Carnegie Mellon University, Boston University, Massachusetts Institute of Technology and the University of Illinois at Urbana-Champaign revealed this.

“Monero mixes are sampled in such a way that they can be easily distinguished from real coins based on their age distribution; In short, the real input is usually the newest input.”

Empirical analysis of traceability on the Monero blockchain

Monero’s anonymity was also established relatively recently; In 2024, there were several known cases of tracking of so-called anonymous cryptocurrency.

For example, in January, the Finnish National Bureau of Investigation reported that XMR associated with hacker Julius Kivimäki was being tracked.

A video leak by analytics firm Chainalytic in late September led us to believe that XMR transactions could be tracked.

The company uploaded the video by mistake and immediately deleted it. However, users downloaded the material and re-uploaded it to YouTube. The video was created in August 2023.

Uploading this, right here!
So everyone can see it. It's actually a pretty good advertisement for Monero.
Quite well done presentation. Shows the downsides of ring signatures, but through this you can see how FCMP will fully stump their tracing efforts. https://t.co/ciMG3x56iQ pic.twitter.com/8iBu1wc4zH

— tuxsudo 🐧 (@tuxpizza) September 6, 2024

Chainalytics has launched many nodes from different geographical locations and uses various Internet providers to capture transaction IP addresses and timestamps.

This method potentially reduces the privacy of Monero and allows the location of wallets interacting with the “malicious” node to be tracked.

Anonymity: myth or illusion?

Despite the initial idea that cryptocurrencies were anonymous money, today it is clear that this is not entirely true. At least due to the 16-year existence of digital money, states, companies, and individuals have been able to adapt to decentralized realities and introduce new surveillance tools.

In any case, complete anonymity will always remain a utopia for fans of decentralization.