Centralized Exchanges Are Still Criminals’ Favorite Crypto Money Laundering Tool

Focusing regulatory vigor connected mixers portion letting exchanges stay the superior fiat gateways for illicit funds is similar locking the windows portion leaving the beforehand doorway wide open, argues Dr. Jan Philipp Fritsche, managing manager of Oak Security.

Oct 20, 2025, 6:00 p.m.

This summer, Roman Storm, the co-founder of infamous crypto mixer Tornado Cash, was convicted successful New York national tribunal of conspiring to run an unlicensed money-transmitting business.

Prosecutors celebrated Storm’s condemnation arsenic a large triumph successful the combat against crypto wealth laundering, but the world is much complicated.

For years, regulators person treated mixers similar Tornado Cash arsenic the eventual wealth laundering threat. Anonymous, opaque, and seemingly tailor-made for criminals, it’s casual to judge these tools are driving the bulk of crypto wealth laundering. But the numbers archer a antithetic story.

The astir fashionable crypto wealth laundering engines aren’t currency mixers, they’re centralized exchanges: big, brand-name trading platforms that are licensed, regulated, and openly connected to the planetary banking system. These exchanges look highly regulated and good supervised, touting compliance teams and “Know Your Customer” (KYC) verification checks; however, successful practice, they let transgression enactment to fester, functioning arsenic the superior connected and off-ramps for soiled crypto.

To genuinely combat crypto wealth laundering, regulators request to absorption their efforts connected bolstering KYC requirements, and policing the centralized exchanges wherever astir wealth laundering takes place.

Centralized exchanges are laundering hubs

Throughout 2024, the bulk of illicit crypto funds were routed to centralized exchanges, according to a 2025 Chainalysis report.

Centralized exchanges are wherever criminals crook to person their soiled crypto into spendable cash. They are the last measurement successful astir laundering schemes: the constituent wherever illicit funds are swapped for dollars, euros, oregon yen and moved into existent banks.

Criminals gravitate to these platforms for the aforesaid crushed morganatic traders do: liquidity, speed, and planetary reach. A mixer similar Tornado Cash tin obfuscate funds on-chain, but it can’t crook them into currency and determination them into a slope relationship — lone an speech with heavy liquidity and fiat connections tin bash that. Often, centralized exchanges trust connected compliance programs that are under-resourced, poorly enforced, oregon undermined by permissive jurisdictional rules, allowing illicit transactions to gaffe done the cracks.

High-profile enforcement cases person exposed conscionable however systemic this occupation is. The U.S. Justice Department’s 2023 colony with Binance revealed that the salient speech had processed transactions tied to ransomware, darknet markets, and sanctioned entities. The speech has since boosted compliance efforts, spending $213 cardinal connected the part successful 2023. BitMEX was likewise sentenced to a $100 cardinal good aft it pleaded blameworthy to Bank Secrecy Act violations (BitMEX's founders and erstwhile executives Arthur Hayes, Ben Delo and Samuel Reed pleaded blameworthy to related charges and were aboriginal pardoned by U.S. President Donald Trump.).

Focusing regulatory vigor connected mixers portion letting exchanges stay the superior fiat gateways for illicit funds is similar locking the windows portion leaving the beforehand doorway wide open.

KYC isn’t the metallic slug we unreal it is

Know Your Customer (KYC) rules are the cornerstone of crypto compliance. On paper, they committedness to support atrocious actors retired by verifying identities, screening transactions, and flagging suspicious activity. In reality, they’re often a box-ticking exercise, a bladed veneer of diligence that gives regulators the illusion of information portion blase criminals find ways astir it.

Weak KYC processes are 1 problem. Some exchanges judge low-quality individuality documents oregon trust connected automated systems that tin beryllium tricked with deepfakes oregon stolen data. Others outsource their compliance entirely, turning it into a contractual checkbox alternatively than an progressive safeguard. Even erstwhile the process works, it can’t halt determined launderers from utilizing mules, straw accounts, oregon ammunition companies to walk archetypal checks.

But the bigger flaw is structural. KYC is designed to vet idiosyncratic accounts, not to observe laundering patterns astatine scale. A sanctioned entity mightiness ne'er unfastened an relationship successful its ain name. Instead, it volition dispersed transactions crossed dozens of intermediaries, routing funds done layers of seemingly morganatic accounts until they onshore astatine an speech that converts them into fiat. By the clip the funds deed the compliance team’s radar, they’ve often passed done truthful galore hands that the insubstantial way feels clean.

This is wherefore enforcement actions against large exchanges support revealing the aforesaid uncomfortable truth: compliance isn’t failing due to the fact that the rules don’t exist; it’s failing due to the fact that the systems enforcing them are reactive, under-resourced, and casual to game.

Hardening centralized exchanges against wealth laundering

Centralized exchanges volition ever beryllium charismatic targets for launderers due to the fact that they beryllium astatine the junction of crypto and fiat. That makes enforcement not conscionable a substance of policy, but of design. Real advancement means moving beyond symbolic KYC checks to systems that observe laundering patterns successful existent time, crossed accounts, and crossed jurisdictions.

That starts with resourcing compliance teams to lucifer the standard of the platforms they monitor. It means closing ineligible loopholes that fto exchanges run from permissive jurisdictions portion serving high-risk markets, and holding executives personally accountable for fraud erstwhile controls fail. Regulators indispensable demand, and verify, that exchanges stock actionable quality with each different and with instrumentality enforcement, truthful criminals can’t simply hop from 1 level to different undetected.

This is overmuch harder than targeting cash-mixers.

None of this volition beryllium easy, but it’s the lone mode to tackle laundering wherever it really happens. Until exchanges are hardened astatine the structural level, enforcement actions volition stay reactive, and billions successful illicit funds volition support slipping done the gates.

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If a quantum machine ever broke a blockchain, the full crypto manufacture mightiness arsenic good adjacent down shop, argues Kostas Chalkias, main cryptographer astatine Mysten Labs.