DeFi Transactions

By repeatedly swapping or staking tokens across multiple blockchains via DeFi protocols—including aggregators and liquidity pools—criminals create convoluted transaction chains that mask the original illicit funds. This deliberate complexity is a hallmark of layering, as it distances the proceeds from their criminal source and frustrates traditional AML tracing methods.

Criminals exploit the inherent anonymity and decentralized nature of DeFi protocols, where centralized compliance checks are largely absent, self-custody prevails, and KYC requirements are minimal. By repeatedly swapping, staking, and bridging tokens across multiple blockchains, they layer illicit proceeds while evading traditional AML monitoring. This is the core vulnerability exploited by this technique.

Offers real-time and historical token pricing, yield rates, and market benchmarks, helping to identify abnormal valuations or manipulated yields within DeFi transactions that may indicate illicit layering or fund obfuscation.

Contains aggregator or exchange transaction logs, user account details, and usage patterns, allowing investigators to correlate wallet addresses, detect chain-hopping events, and link suspicious DeFi activity to identifiable user accounts where possible.

Includes verified identity information, beneficial ownership data, and risk profiles. This enables financial institutions to link DeFi wallet addresses to known or unknown customers, identify self-custodial wallets lacking verification, and flag sudden suspicious activity on DeFi platforms.

Provides on-chain transaction details, such as wallet addresses, token transfers, bridging events, and liquidity pool interactions. This enables the detection of high-frequency DeFi activities, rapid token swaps, and cross-chain movements indicative of layering or attempted obfuscation.

Apply deeper scrutiny to clients actively engaged with decentralized exchanges, liquidity pools, or yield platforms by verifying the source of digital assets. Cross-check transaction histories across multiple chains for unusual layering patterns, compare declared financial profiles against actual DeFi usage, and confirm beneficial ownership of self-custodial wallets to detect hidden illicit funds.

Require detailed information about customers’ DeFi usage at account opening and during periodic reviews. Validate the economic or investment rationale for chain-hopping and identify ownership of self-custodial wallets used for staking, liquidity pooling, or yield farming to prevent misuse of anonymized or borrowed wallet addresses.

Implement specialized monitoring scenarios to flag repeated short-interval, multi-chain token swaps, the use of decentralized aggregators to chain-hop larger-value transactions, and layering through DeFi liquidity pools. Investigate transactions that lack a clear business rationale or alignment with a customer’s historical profiles, ensuring timely escalation for further review.

Leverage blockchain analytics tools to trace cross-chain movements, aggregator bridging, and yield-farming transactions. Identify patterns such as newly created self-custodial wallets used in quick succession, suspicious chain-hops, or abnormally complex flows across multiple DeFi protocols indicating potential layering attempts.

Provide targeted training on identifying DeFi-specific laundering tactics such as chain-hopping, yield-farming abuse, and aggregator-based layering. Instruct compliance teams on analyzing rapid multi-step DeFi flows, ephemeral wallet creation, and unusual token swapping patterns that may signal layering.

Cross-reference public blockchain explorers, aggregator data feeds, and known high-risk wallet lists to identify suspicious or blacklisted DeFi addresses. Investigate wallets documented in external intelligence sources for illicit activity or yield manipulation. Escalate findings for enhanced reviews or service restrictions when red flags arise.

Restrict or suspend high-risk DeFi services if customers engage in repeated chain-hopping or large-volume aggregator bridging without legitimate purposes. Impose additional verification steps, such as proof of wallet ownership or documentation of the origin of crypto assets, before permitting further DeFi-related transfers.

Continuously review DeFi transactions for changes in wallet ownership, newly created addresses, or abrupt spikes in cross-chain activity. Update customer risk ratings in real-time, focusing on complex or high-velocity bridging patterns. Escalate promptly when layering indicators in DeFi usage become more prevalent.

• Criminals leverage self-custodial wallets to exercise full control over digital assets, sidestepping regulated intermediaries.
• Creating multiple wallets in quick succession fragments the traceable flow of illicit proceeds.
• Pseudonymous addresses mask beneficial ownership, obstructing effective AML and KYC checks as funds move across DeFi protocols.

• Criminals stake illicitly obtained tokens in yield farming or liquidity pool contracts, earning rewards that appear as legitimate proceeds.
• The repeated staking process introduces layered transactions that fragment the original chain of custody.
• Protocols often obscure the source of staked tokens, making it difficult for investigators to correlate illicit input with staking rewards.

• Criminals repeatedly convert illicit funds into stablecoins to avoid price volatility during layering steps.
• They exploit high-liquidity stablecoin pairs on decentralized exchanges, intermixing tainted assets with large volumes of legitimate trades.
• Because stablecoins retain a steady fiat peg, criminals can seamlessly move funds through multiple DeFi protocols without incurring significant value shifts or drawing suspicion.

• Criminals exploit the pseudonymous, unregulated swaps of various DeFi utility tokens to disguise the origins of funds.
• Rapid token exchanges via decentralized aggregators create convoluted transaction paths, blending illicit funds with legitimate user volumes.
• Minimal identity requirements help criminals evade oversight, concealing the ultimate beneficiary behind successive trades.

• Criminals wrap assets (e.g., converting ETH to WETH) to utilize DeFi services on different chains, making it harder to correlate the original source of funds.
• Moving wrapped tokens across bridges and liquidity pools breaks the typical trace, scattering the transaction history over multiple blockchains.
• This cross-chain activity fragments data, complicating AML efforts to identify and follow illicit proceeds.

• Enable criminals to leverage automated protocols (smart contracts) for lending, borrowing, and token swaps with minimal regulatory oversight, allowing them to hide and mix illicit funds.
• Operate within pseudonymous environments with few regulated intermediaries, facilitating multi-step layering and obscuring transaction trails.

• Facilitates near-instant multi-token exchanges without the level of due diligence typically found in centralized exchanges.
• Criminals repeatedly swap tokens to break transaction links and blend with legitimate market volume, further obscuring fund origin.

• Allows criminals to transfer illicit proceeds across multiple blockchains, complicating detection by fragmenting transaction histories.
• Exploits rapid chain-hopping to dissociate funds from their original source, hindering effective investigative tracing.

• Allow self-custody and pseudonymity by enabling users to hold private keys and transact without traditional KYC processes.
• Criminals can create multiple wallets in quick succession, severing traceable links and diminishing regulated oversight.

Illicit operators use decentralized finance (DeFi) protocols to layer illicit proceeds by:

• Rapidly swapping or staking tokens across automated market makers, liquidity pools, and yield platforms to obscure transaction histories.
• Employing cross-chain bridging services and aggregators to chain-hop, fragmenting transactional trails and evading direct scrutiny.
• Relying on self-custodial wallets and pseudonymous addresses to avoid regulated intermediaries, limiting KYC data and complicating AML detection.

These tactics hamper the identification of beneficial owners, making it difficult for financial institutions to isolate suspicious activity amid high-volume DeFi transactions.