The news hit hard this summer. Roman Storm, a co-founder of the crypto mixer Tornado Cash, faced conviction in a New York federal court. The charge: conspiring to run an unlicensed money-transmitting business. Prosecutors hailed it as a major win against crypto money laundering.
- While crypto mixers like Tornado Cash are often seen as the primary tools for money laundering, the reality is more complex. The conviction of a Tornado Cash co-founder highlights regulatory focus on these mixers.
- However, the article argues that centralized exchanges, despite their regulated appearance and KYC checks, are the actual main gateways for illicit crypto funds entering the traditional financial system.
- True progress in combating crypto money laundering requires strengthening KYC rules and actively policing these centralized exchanges, which are the primary on- and off-ramps for dirty crypto.
But I’ve been on this beat for years, and I can tell you, the story runs deeper. For a long time, regulators saw mixers like Tornado Cash as the ultimate threat. They seemed built for criminals, opaque and anonymous. It was easy to believe they handled most of the dirty crypto.
The numbers, however, paint a different picture entirely. The real engines for crypto money laundering aren’t those shadowy mixers. They are the big, familiar names: centralized exchanges. These are the platforms we all know, licensed and regulated, connected directly to global banks.
They look buttoned-up, with compliance teams and “Know Your Customer” (KYC) checks. Yet, in practice, they often become breeding grounds for illicit activity. They serve as the main on- and off-ramps for dirty crypto, moving it into the traditional financial system.
To truly fight crypto money laundering, we need to shift our focus. Regulators must strengthen KYC rules and police these centralized exchanges. That’s where most of the action happens.
Centralized Exchanges: The Real Hot Spots
Think about it. Where do criminals go when they want to turn their illicit crypto into spendable cash? They head to centralized exchanges. These platforms are the final step in most laundering schemes. It’s where digital tokens become dollars, euros, or yen, ready for a bank account.
A 2025 Chainalysis report confirmed this trend. Throughout 2024, the majority of illicit crypto funds found their way to centralized exchanges. This isn’t a small side street; it’s the main highway.
Criminals flock to these platforms for the same reasons legitimate traders do. They offer deep liquidity, lightning-fast transactions, and global reach. A mixer can hide funds on the blockchain, sure. But it can’t convert them to cash and deposit them into a bank.
Only an exchange with strong fiat connections can do that. Often, these exchanges have compliance programs that are under-resourced. Or they are poorly enforced. Sometimes, permissive jurisdictional rules simply undermine them. This allows illicit transactions to slip right through the cracks.
High-profile cases show just how widespread this issue is. The U.S. Justice Department’s 2023 settlement with Binance was a wake-up call. The prominent exchange had processed transactions linked to ransomware, darknet markets, and sanctioned entities. Binance has since poured resources into compliance, spending $213 million on the division in 2023.
BitMEX faced similar consequences. It was sentenced to a $100 million fine after pleading guilty to Bank Secrecy Act violations. BitMEX’s founders, Arthur Hayes, Ben Delo, and Samuel Reed, pleaded guilty to related charges. They were later pardoned by President Trump.
It’s like locking all the windows in your house, but leaving the front door wide open. Focusing on mixers while ignoring the main gateways for illicit funds just doesn’t make sense.
The Illusion of KYC
Know Your Customer, or KYC, rules are supposed to be the bedrock of crypto compliance. On paper, they promise to keep bad actors out. They verify identities, screen transactions, and flag suspicious activity. In reality, they often become a simple box-ticking exercise.
It’s a thin layer of diligence, giving regulators a false sense of security. Meanwhile, clever criminals find ways around it. Weak KYC processes are a big part of the problem. Some exchanges accept low-quality identity documents. Others rely on automated systems easily fooled by deepfakes or stolen data.
Some even outsource their compliance entirely. It becomes a contractual checkbox, not an active defense. Even when the process works, it can’t stop determined launderers. They use mules, straw accounts, or shell companies to pass those initial checks.
But the bigger issue is structural. KYC is designed to vet individual accounts. It’s not built to spot laundering patterns at scale. A sanctioned entity might never open an account in its own name. Instead, it spreads transactions across dozens of intermediaries.
Funds flow through layers of seemingly legitimate accounts. Eventually, they land at an exchange that converts them into fiat. By the time the funds hit a compliance team’s radar, they’ve often passed through so many hands that the paper trail looks clean.
This is why enforcement actions against major exchanges keep revealing the same uncomfortable truth. Compliance isn’t failing because the rules don’t exist. It’s failing because the systems enforcing them are reactive, under-resourced, and simply too easy to game.
Hardening the Gates
Centralized exchanges will always be attractive targets for launderers. They sit right at the intersection of crypto and traditional money. This means enforcement isn’t just about policy; it’s about fundamental design.
Real progress means moving beyond those symbolic KYC checks. We need systems that detect laundering patterns in real time. These systems must work across many accounts and across different jurisdictions.
This starts with giving compliance teams the resources they need. Their tools and staff must match the sheer scale of the platforms they monitor. It also means closing legal loopholes. Some exchanges operate from permissive jurisdictions while serving high-risk markets. That needs to stop.
Executives must also face personal accountability for fraud when controls fail. Regulators need to demand, and then verify, that exchanges share actionable intelligence. They must share this information with each other and with law enforcement. This way, criminals can’t just hop from one platform to another without being noticed.
I won’t pretend this will be easy. It’s much harder than simply targeting cash mixers. But it’s the only way to tackle money laundering where it truly happens.
Until exchanges are hardened at a structural level, enforcement actions will remain reactive. Billions in illicit funds will continue to slip through the gates, year after year.
