Detecting Money Laundering on Ethereum: Leveraging the ‘Risk-Free’ Rate After Shanghai

The recent Shanghai hard fork of Ethereum has ushered in a number of changes and improvements to the blockchain, of which one of the most consequential is the ability of users to stake and withdraw their Ether (ETH). Staking rewards allow users to make a return on their investments, making it possible for them to make money from Ethereum in a variety of ways. But the Shanghai upgrade is opening up more than just monetary opportunities: it is also providing crypto forensics professionals with a way to easily detect money laundering on the blockchain.

Detecting Unusual Behavior and Suspicious Activities

The concept of a “risk-free rate” has been around in traditional finance for a long time. This rate serves as a benchmark to assess the risk of other assets and make investment decisions accordingly. Money launderers prioritize concealing their activities, showing less concern for financial gains compared to regular investors. However, compliance professionals become attentive when individuals move money in irrational ways.

The staking rewards on the Ethereum blockchain are in essence the “risk-free rate” of the crypto world. These rewards enable investigators to identify unusual behavior and suspicious activities deviating from the benchmark rate. An example would be multiple addresses engaged in high-risk transactions but earning below the risk-free rate. This type of activity would promptly trigger an investigation.

Detecting Money Laundering in the Crypto World

Money laundering typically involves a three-step process known as placement, layering, and integration. Placement involves introducing the proceeds of crime into the financial system, while layering involves moving the money around complexly in order to obscure the audit trail. It is much easier to detect placement in the world of crypto since many money laundering cases originate from activities such as ransomware attacks or DeFi bridge hacks, meaning the perpetrator’s wallets are readily available.

Integrating illegal funds into the legal economy is much more difficult. Banks rely on conventional AML solutions to detect money laundering attempts by identifying unusual fund movements. Crypto forensics emphasizes the entity rather than the activity, aligning with a similar approach in DeFi. By analyzing networks of wallets, investigators can pinpoint dangerous transactions and isolate criminal assets.

Utilizing Benchmark Rate for Identifying Money Laundering in DeFi

Staking rewards in DeFi offer added security in detecting NFT wash trading, where trades are conducted without profit generation. With a benchmark rate in place, such activities can easily be identified. The same applies for money laundering attempts made through DeFi protocols, where detecting irrational movements will be invaluable to investigators.

Ethereum’s new hard fork is allowing users to unlock their staked ETH, and while this could create some short-term sell pressure, it is only likely to drive up the demand for staking rewards in the long term. The new staking yield in DeFi can assist compliance experts in detecting and combating money laundering activities. The Shanghai hard fork enhances investigators’ ability to detect and prevent money laundering in DeFi.

Disclaimer: Cryptocurrency trading involves significant risks and may result in the loss of your capital. You should carefully consider whether trading cryptocurrencies is right for you in light of your financial condition and ability to bear financial risks. Cryptocurrency prices are highly volatile and can fluctuate widely in a short period of time. As such, trading cryptocurrencies may not be suitable for everyone. Additionally, storing cryptocurrencies on a centralized exchange carries inherent risks, including the potential for loss due to hacking, exchange collapse, or other security breaches. We strongly advise that you seek independent professional advice before engaging in any cryptocurrency trading activities and carefully consider the security measures in place when choosing or storing your cryptocurrencies on a cryptocurrency exchange.

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Rina Giannino
Journalist venturing into blockchain, Rina has been a follower of the technology since 2019 and finally taken the plunge with a career as a journalist in the industry.