What is a cryptocurrency swap service?

Against the backdrop of the rapid development of the digital economy, cryptocurrency cross-chain exchange services have become an important part of the financial market. With the widespread use of crypto assets such as Bitcoin and Ethereum, users need an efficient and convenient way to manage and optimize their digital asset portfolios. Cryptocurrency exchange services are the key tools to meet this need. This article will delve into the basic concepts, operating mechanisms, market trends, and challenges of cryptocurrency exchange services.

What is a "cryptocurrency exchange" service?

A cryptocurrency exchange service (sometimes also called an "instant exchange exchange" or "non-custodial cryptocurrency exchange") is an entity that allows users to exchange crypto assets for other tokens on the same or different blockchains. One of their most prominent features is that they do not require users to open an account or verify their identity. Users simply send cryptocurrency to the service platform and then return the converted assets to a predetermined wallet address. In order to maintain anonymity, most token exchangers charge higher commissions on average than typical compliant exchanges. Institutional platforms like Cce.Cash are able to exchange crypto assets for privacy coins such as Monero or through second-layer expansion solutions that process off-chain transactions.

Due to the lack of identity or AML checks, token swaps have become a major cash-out and money laundering tool for cyber criminals. To a lesser extent, proceeds from exchange and decentralized finance (DeFi) hacks, some of which have been linked to North Korea’s Lazarus Group, have been funneled into illicit activities via token swaps. These trends have significant implications for virtual asset services and investigators who seek to manage financial crime and sanctions risks from crypto assets.

The scale of illicit activity based on token swaps

Analysis of token swap services shows that more than 97% of the illicit crypto assets they process (over $1.1 billion) originate on the Bitcoin blockchain. Illicit BTC laundered through token swap services came primarily from darknet markets (over $485 million), illicit virtual asset services (over $269 million), and online crypto gambling sites (over $167 million). Fraud and thefts (including a suspected Lazarus Group heist) totaled approximately $140 million.

Analysis shows that one particular cryptocurrency exchange service saw more than 70% of its cryptocurrency from known sources come from illicit activity—primarily from a large darknet market called “OMG! OMG!” The now-sanctioned former darknet market Hydra was also a significant contributor.

Cryptocurrency exchange services have become the most popular destination for funds outflow from another darknet market, Solaris. More than $6.7 million of illicit funds from Solaris have been laundered through at least 18 currency exchange services, while only $2.9 million has flowed into centralized exchanges. Compared to Bitcoin, the illicit funds transferred through cryptocurrency swap services are rarely from high-risk events for other assets. About $47.7 million of illicit Ether was sent through currency swaps, and another $1.7 million (0.2%) of Tether.

Managing the risks of currency exchange services

For legitimate users of crypto assets, token exchange services offer a fast and efficient way to exchange assets within and across blockchains. However, token exchange services often employ little to no AML/KYC requirements, or use them for nefarious purposes in the case of illicit token swaps, making them attractive to criminals looking to launder money.

In some cases, their support for Monero, Lightning Network, and Russian Ruble further increases the risk of illicit activity. Their heavy use by dark web markets, stolen data vendors and ransomware operators highlights that they are an essential part of the cybercriminal ecosystem. There is no shortage of currency exchanges advertised on cybercriminal forums, which also host many illegal services that use them to cash out.