Centralized Exchanges Are Still Criminals’ Favorite Crypto Money Laundering Tool – CoinDesk

Report on Illicit Financial Flows in the Cryptocurrency Sector and Alignment with SDG 16

Introduction: Regulatory Priorities and Their Impact on Sustainable Development

A recent U.S. federal court conviction of a co-founder of the crypto mixer Tornado Cash has been presented as a significant step in combating financial crime. However, this focus on privacy-enhancing tools may misdirect regulatory resources from the primary channels of illicit financial flows, thereby impeding progress toward Sustainable Development Goal 16 (Peace, Justice and Strong Institutions). Specifically, this approach fails to adequately address SDG Target 16.4, which calls for a significant reduction in illicit financial flows and the combating of all forms of organized crime. An analysis of fund movement indicates that the core of the problem lies not with mixers, but with systemic vulnerabilities in centralized, regulated financial platforms.

Analysis of Centralized Exchanges as Primary Conduits for Illicit Financial Flows

The Role of Exchanges in Contravening SDG Target 16.4

Data indicates that centralized exchanges are the principal destination for illicit cryptocurrency funds. A 2025 Chainalysis report confirms that throughout 2024, the majority of these funds were channeled through such platforms. These exchanges function as the critical infrastructure for organized crime by converting illicit digital assets into fiat currency, directly undermining the global effort to curtail illicit financial flows as mandated by SDG Target 16.4. Criminal entities leverage these platforms for the same attributes sought by legitimate users:

• Deep liquidity for large-volume transactions.
• High-speed execution of trades.
• Direct integration with the global banking system for fiat conversion.

While mixers can obscure the origin of funds, only centralized exchanges provide the necessary on- and off-ramps to the traditional financial system. This makes them an indispensable component of modern money laundering schemes. The persistence of this activity points to significant gaps in institutional strength and regulatory enforcement, key pillars of SDG 16.

Case Studies: Systemic Failures in Major Exchange Platforms

High-profile enforcement actions reveal that compliance failures are not isolated incidents but systemic problems. These cases demonstrate a failure to build the effective, accountable, and transparent institutions required by SDG 16.

• Binance: A 2023 settlement with the U.S. Justice Department exposed the processing of transactions linked to ransomware attacks, darknet markets, and sanctioned entities, highlighting severe deficiencies in its anti-money laundering (AML) controls.
• BitMEX: The exchange was fined $100 million for violations of the Bank Secrecy Act, with its executives pleading guilty to failing to establish and maintain an adequate AML program.

These examples underscore that focusing on peripheral tools while major financial gateways remain vulnerable is an ineffective strategy for achieving global security and justice objectives.

Critique of Current “Know Your Customer” (KYC) Protocols

The Inadequacy of KYC in Preventing Illicit Financial Flows

Know Your Customer (KYC) regulations are the foundation of financial compliance, yet their practical application often fails to prevent illicit activity, representing a superficial barrier rather than a robust institutional safeguard. This weakness allows criminal networks to exploit the financial system, hindering progress on SDG 16. Common failures include:

• Acceptance of low-quality or fraudulent identity documents.
• Reliance on automated systems vulnerable to circumvention via deepfakes or stolen data.
• Use of money mules, straw accounts, and complex corporate structures to obscure beneficial ownership.

Structural Flaws in Detection

The fundamental design of KYC is to vet individual accounts, a method ill-suited to detecting sophisticated, large-scale money laundering patterns. Organized criminal groups do not operate through single, easily identifiable accounts. Instead, they distribute illicit funds across a network of seemingly legitimate intermediaries before consolidating them at an exchange for conversion. This layered approach often cleanses the transaction history by the time it reaches compliance review, demonstrating that current systems are reactive and easily circumvented.

Recommendations for Strengthening Regulatory Frameworks to Achieve SDG 16

A Systemic Approach to Hardening Centralized Exchanges

To make substantive progress on SDG Target 16.4 and build the strong institutions envisioned in SDG 16, regulatory efforts must shift to reinforcing the structural integrity of centralized exchanges. This requires moving beyond symbolic compliance checks toward a holistic system designed to detect and prevent illicit financial flows in real time. Key recommendations include:

1. Resource and Empower Compliance Functions: Regulatory bodies must mandate that compliance teams are adequately funded and staffed to match the scale and transaction volume of the platforms they oversee.
2. Eliminate Jurisdictional Loopholes: International cooperation, in the spirit of SDG 17 (Partnerships for the Goals), is needed to close legal loopholes that allow exchanges to operate from permissive jurisdictions while serving high-risk markets.
3. Enforce Executive Accountability: Hold corporate leadership personally accountable for systemic compliance failures and fraud, ensuring that the responsibility for maintaining institutional integrity is clearly established.
4. Mandate Intelligence Sharing: Require exchanges to share actionable intelligence with one another and with law enforcement agencies to create a unified front against financial crime, preventing criminals from moving between platforms undetected.

Conclusion: Aligning Crypto Regulation with Global Goals for Peace and Justice

Targeting crypto mixers addresses a symptom of money laundering, not its cause. A meaningful reduction in illicit financial flows can only be achieved by hardening the primary gateways between the crypto and fiat economies. Until the regulatory framework focuses on the systemic vulnerabilities within centralized exchanges, billions in illicit funds will continue to undermine global economic stability and the pursuit of peace, justice, and strong institutions as outlined in the Sustainable Development Goals.

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 16: Peace, Justice and Strong Institutions

  The article directly addresses the core principles of SDG 16 by focusing on the fight against financial crime, specifically crypto money laundering. It discusses the failure of existing regulatory frameworks and institutions (centralized exchanges, compliance teams) to prevent illicit financial flows and calls for stronger, more accountable, and effective systems to ensure justice and combat organized crime in the digital finance sector.

2. What specific targets under those SDGs can be identified based on the article’s content?

• Target 16.4: By 2030, significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organized crime.

  The article’s central theme is the laundering of “illicit crypto funds” and “dirty crypto” through centralized exchanges. It explicitly discusses how these platforms have become the “primary on and off-ramps for dirty crypto,” directly relating to the goal of reducing illicit financial flows. The entire analysis is geared towards finding a more effective way to combat this form of organized financial crime.

• Target 16.5: Substantially reduce corruption and bribery in all their forms.

  The article highlights systemic weaknesses and failures that facilitate crime. It describes how centralized exchanges, despite appearing regulated, “allow criminal activity to fester” due to “under-resourced, poorly enforced, or undermined by permissive jurisdictional rules.” This points to a form of institutional failure and negligence that enables illicit activities, which is related to the broader goal of reducing corruption and creating robust systems that are not “easy to game.”

• Target 16.6: Develop effective, accountable and transparent institutions at all levels.

  The article critiques the ineffectiveness of current compliance systems, calling Know Your Customer (KYC) rules a “thin veneer of diligence.” It advocates for strengthening institutions by “resourcing compliance teams,” closing “legal loopholes,” and “holding executives personally accountable for fraud when controls fail.” This is a direct call to develop more effective, accountable, and transparent regulatory and corporate governance structures within the crypto industry.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

• Indicator for Target 16.4: Total value of inward and outward illicit financial flows (Indicator 16.4.1).

  The article implies this indicator by stating that “the majority of illicit crypto funds were routed to centralized exchanges” and warning that “billions in illicit funds will keep slipping through the gates.” Measuring the volume of these funds laundered through exchanges would be a direct way to track progress on this target.

• Indicator for Target 16.5: Number of enforcement actions and fines against non-compliant institutions.

  The article provides concrete examples that can serve as indicators of enforcement against systemic failures. It mentions the “U.S. Justice Department’s 2023 settlement with Binance” and how “BitMEX was similarly sentenced to a $100 million fine after it pleaded guilty to Bank Secrecy Act violations.” Tracking the frequency and scale of such enforcement actions measures the effort to reduce institutional complicity in financial crime.

• Indicator for Target 16.6: Number of individuals and businesses held accountable for financial crimes.

  The article begins with a specific example of accountability: “Roman Storm, the co-founder of infamous crypto mixer Tornado Cash, was convicted in New York federal court.” This conviction serves as a direct measure of institutional effectiveness in prosecuting individuals. The call to “hold executives personally accountable” further reinforces that tracking prosecutions and convictions is a key metric for measuring the development of accountable institutions.

4. Create a table with three columns titled ‘SDGs, Targets and Indicators’ to present the findings from analyzing the article.

Source: coindesk.com