Why Crypto Is Not the Money Laundering Culprit Policymakers Think It Is

The global war on money laundering has long fixated on cryptocurrencies as a disruptive force, yet the data paints a more nuanced picture. While crypto’s pseudonymous and borderless nature introduces unique risks, traditional finance (TradFi) remains the dominant vector for illicit activity. Policymakers risk misallocating resources by treating crypto as the primary threat, when systemic vulnerabilities in legacy systems—coupled with their sheer scale—make them a far greater concern.

The Scale of the Problem

In 2023, $22.2 billion in cryptocurrencies were laundered, a figure that pales in comparison to the estimated $800 billion to $2 trillion laundered annually through traditional channels [1]. This disparity is not merely quantitative but qualitative. Traditional laundering often involves complex schemes like shell companies and layered bank transfers, which, while detectable, exploit gaps in cross-border cooperation and enforcement [3]. By contrast, crypto’s risks are concentrated in its ability to facilitate rapid, irreversible transactions and evade jurisdictional boundaries—a problem that is novel but not yet systemic.

Consider the case of North Korea, which has stolen over $1.34 billion in crypto since 2024, allegedly to fund its nuclear program [4]. While alarming, this pales against the $1.5 trillion in illicit financial flows estimated to pass through traditional banking systems annually [1]. The difference lies in visibility: traditional systems, despite their flaws, operate within a framework of audits, KYC checks, and international agreements like the FATF’s Travel Rule. Crypto, by design, resists such oversight.

Systemic Vulnerabilities in TradFi

Traditional finance’s systemic risks stem from its reliance on centralized intermediaries. For instance, the 2008 financial crisis exposed how opaque lending practices and lax oversight in banks could enable massive fraud and money laundering. Even today, shell companies and trade-based laundering remain pervasive. A 2024 report found that 70% of global money laundering occurs through real estate and luxury goods, sectors tightly linked to traditional banking [3].

Cryptocurrencies, meanwhile, are often criticized for enabling “dark patterns” like privacy coins (e.g., Monero) and mixers. Yet these tools account for less than 5% of total crypto transactions [2]. The broader ecosystem—stablecoins, DeFi, and cross-border remittances—operates under increasingly stringent AML frameworks. For example, the EU’s Markets in Crypto-Assets (MiCA) regulation, set to take effect in 2025, mandates real-time transaction monitoring for Virtual Asset Service Providers (VASPs) [5].

Regulatory Realities and Technological Adaptation

Policymakers have responded to crypto’s risks with a mix of innovation and overreach. The U.S. and EU have invested heavily in blockchain analytics and AI-driven monitoring, with 90% of financial institutions now using machine learning for AML compliance [2]. These tools have proven effective in tracking illicit flows, even in decentralized environments. However, enforcement remains uneven. For instance, 69% of crypto exchanges were noncompliant with the FATF’s Travel Rule in 2025, highlighting gaps in implementation [2].

Traditional finance, by contrast, benefits from decades of regulatory infrastructure. The U.S. Bank Secrecy Act and the EU’s 6th Anti-Money Laundering Directive (6AMLD) mandate stringent KYC protocols and beneficial ownership transparency [5]. Yet these systems are not foolproof. A 2024 study found that 40% of suspicious activity reports (SARs) filed by banks were never acted upon, underscoring systemic complacency [3].

The Path Forward

The solution lies not in demonizing crypto but in addressing the asymmetry of risk. Policymakers must:
1. Harmonize global AML standards to close jurisdictional loopholes in both TradFi and crypto.
2. Invest in RegTech to scale AI and blockchain analytics across all financial systems.
3. Avoid regulatory overkill that stifles innovation in crypto while neglecting entrenched risks in legacy systems.

Cryptocurrencies are not a panacea for money laundering, but they are not the existential threat some claim. As the UK’s Economic Crime and Corporate Transparency Act (2023) demonstrates, modernizing AML frameworks to address both centralized and decentralized finance is the only viable path forward [5].

Source:
[1] Regulating Crypto Money Laundering: An Assessment of ... [https://stanford-jblp.pubpub.org/pub/crypto-laundering]
[2] Cryptocurrency Anti Money Laundering (AML) Statistics 2025 [https://coinlaw.io/cryptocurrency-anti-money-laundering-statistics/]
[3] Comparative Analysis of Anti-Money Laundering (AML) Policies for Cryptocurrency in Developed and Developing Countries [https://www.researchgate.net/publication/394471481_Comparative_Analysis_of_Anti-Money_Laundering_AML_Policies_for_Cryptocurrency_in_Developed_and_Developing_Countries]
[4] 2025 Crypto Crime Mid-Year Update [https://www.chainalysis.com/blog/2025-crypto-crime-mid-year-update/]
[5] AML in 2025: How are AI, real-time monitoring, and global regulation reshaping compliance? [https://www.moodys.com/web/en/us/kyc/resources/insights/aml-in-2025.html]