What is money laundering? Why has USDT become a focus of regulation?

When we talk about “what is money laundering,” we are essentially discussing a global financial crime issue. Money laundering refers to the process of disguising illegally obtained funds as legitimate income through various methods, with the core purpose of concealing the true source of the funds and legitimizing black money. As cryptocurrencies become more widespread, this problem has become more complex and challenging in the crypto space.

How Money Laundering Works — Analyzing the Three-Stage Model

Understanding “what is money laundering” hinges on recognizing its operational process. Money laundering typically occurs in three stages:

Placement Stage - Criminals inject illegal proceeds into the financial system, such as depositing into banks or purchasing assets. This is the most dangerous phase because large cash deposits are easily monitored by banks.

Layering Stage - Funds are dispersed through multiple transactions, cross-border transfers, or virtual assets to sever ties with their illegal origins. This stage involves complex transfer routes designed to create confusion in the transaction trail, making it difficult to trace the source of funds.

Integration Stage - The “cleaned” funds are reintroduced into the legitimate economy, such as purchasing real estate, investing in businesses, or other formal investments. At this point, the funds appear legitimate and are difficult to identify as illicit.

Why USDT Has Become a Tool for Money Laundering

As the most widely used stablecoin in the crypto space, USDT (Tether) has become the “preferred tool” for illegal actors due to its unique characteristics. This is not accidental but determined by its features.

The risk characteristics of USDT mainly manifest in five aspects:

High Liquidity Advantage - USDT is widely used on global exchanges, allowing rapid conversion to other assets or fiat currency. Compared to the lengthy processes of traditional banking systems, USDT’s cross-border transfers bypass traditional financial restrictions, making it ideal for quick and discreet fund transfers.

Difficult-to-Trace Anonymity - USDT addresses are generally unlinked to real identities unless users complete identity verification (KYC) on regulated exchanges. The existence of mixing tools further complicates transaction paths, making law enforcement tracing extremely difficult.

Regulatory and Enforcement Gaps - Some exchanges have lax KYC and AML policies, with limited enforcement. Peer-to-peer (P2P) transactions completely bypass exchange regulation, increasing the concealment of money laundering activities.

Massive Transaction Volume as Cover - Daily USDT trading volumes in the hundreds of millions of dollars provide a “cover” for illegal transfers. Abnormal transactions can be easily overlooked amid massive trading activity, with launderers splitting large transfers into smaller withdrawals to further obscure the source.

Cross-Border Features for Evasion - USDT offers a channel to bypass foreign exchange controls. Traditional banking systems find it difficult to effectively monitor blockchain transactions, and this “regulatory vacuum” is fully exploited by illegal actors.

Common Money Laundering Techniques Used by Criminals

Understanding the specific operational methods of “what is money laundering” helps improve vigilance. The most common techniques in practice include:

Cross-Border Transfer Mode - Converting illegal funds into USDT, sending them via cross-border transactions to another country, then cashing out in local fiat. This method exploits regulatory differences between countries to achieve “money laundering.”

Over-the-Counter (OTC) Evasion - Using OTC platforms to exchange large amounts of USDT for cash or assets, completely bypassing regulatory scrutiny. The decentralized nature of OTC markets makes tracking especially difficult.

Asset Diversification Strategy - Using USDT to buy altcoins or NFTs, then conducting multiple transactions to disperse funds. Each conversion increases tracking difficulty, ultimately achieving “money laundering.”

Circular Trading Deception - Repeatedly transferring funds between multiple accounts to create false transaction records, fabricating trading volume and activity to conceal the true source of funds.

Cautionary Cases from Law Enforcement

Real cases are the most convincing. These incidents clearly illustrate the dangers of “what is money laundering”:

2024 Lanzhou Scam Case - In May 2024, Lanzhou Public Security Bureau successfully cracked a scam involving USDT laundering. Victim Ms. Liao was lured by a “boyfriend” to exchange 2 million RMB into USDT and transfer it to a fake financial platform. Fifteen suspects were arrested, with the case involving over 35 million RMB. This case highlights the risk of USDT being misused for scams and money laundering.

2022 National Police Crackdown - In April 2022, the Ministry of Public Security pointed out that criminals used “runnning platforms” to convert illegal funds into USDT, then layered transactions to obscure the source. Multiple large-scale cases involving hundreds of millions of RMB were cracked down, indicating that USDT money laundering has become a key focus for regulators.

Outlook: Improved Regulation and Industry Self-Discipline

As global regulation of cryptocurrencies intensifies, anti-money laundering measures for USDT and other digital assets are gradually improving. Many mainstream exchanges have strengthened KYC procedures, and blockchain analysis tools are advancing, making illicit fund flows more transparent.

In the future, understanding “what is money laundering” is not only necessary for risk prevention but also a fundamental knowledge for everyone involved in the crypto market. Only through a collective effort—regulators, exchanges, and users working together—can we effectively curb money laundering activities and protect financial order and industry health.