After major crypto hacks, stolen funds often surface in privacy-focused cryptocurrencies. This has created the perception that hackers prefer privacy coins, but in reality, these assets act as a “black box” in a broader laundering process. Understanding this requires looking at how stolen funds move and why privacy coins are strategically used.
How Stolen Funds Move After a Hack
Hackers rarely cash out immediately. Instead, they follow a multi-step laundering process:
Consolidation: Combining funds from multiple victim wallets into fewer addresses.
Obfuscation: Shuffling assets across numerous wallets, sometimes using mixers.
Chain-hopping: Swapping assets across different blockchains to disrupt traceability.
Privacy layer: Converting some funds into privacy coins or routing through privacy-preserving protocols.
Cash-out: Exchanging into liquid crypto or fiat via exchanges, OTC desks, or P2P channels.
Privacy coins usually appear in steps 4 or 5, further complicating investigations after earlier obfuscation.
Why Privacy Coins Are Attractive Post-Hack
Reduced On-Chain Visibility: Unlike transparent blockchains, privacy coins hide transaction details, making automated tracking and blacklisting less effective in the critical days after theft.
Breaking Attribution Chains: Hackers often use swaps, bridges, and intermediaries before privacy coins, creating a strategic “firebreak” between the stolen funds and their final destination.
Negotiation Advantage: OTC brokers and P2P traders see less origin data with privacy coins, reducing perceived risk and simplifying illicit transactions.
Evolving Laundering Methods
When enforcement targets certain mixers, bridges, or exchanges, illicit actors adapt by shifting funds to other channels. Privacy coins benefit from this flexibility, offering obfuscation without relying on third-party services.
Limitations of Privacy Coins
Despite their advantages, privacy coins are not a perfect laundering solution:
Lower Liquidity: They often have smaller trading volumes.
Limited Exchange Listings: Converting large amounts to fiat is challenging.
Regulatory Oversight: Privacy coins attract additional scrutiny.
Consequently, scammers use them briefly before moving funds back into liquid mainstream assets like BTC, ETH, or stablecoins.
Behavioral Trends in Laundering
Common patterns include:
Layering & Consolidation: Spreading funds across wallets, then regrouping before cash-out.
Chain Hopping: Moving across blockchains with privacy coins as an intermediate.
Strategic Latency: Letting assets sit dormant to avoid scrutiny.
Direct-to-Fiat Workarounds: Using OTC desks to bypass heavily monitored exchanges.
Hybrid Privacy Strategies: Combining privacy coins with liquid mainstream assets for optimized laundering.
Traceability Remains Possible
Even with privacy coins, investigators make progress through:
Regulated exchange gateways requiring identity verification
Human intelligence targeting physical infrastructures of money-laundering networks
Off-chain surveillance and reporting systems
Exploiting operational mistakes linking crypto activity to real-world identities
Privacy coins increase complexity but do not guarantee anonymity.
Legitimate Uses of Privacy Coins
Privacy-focused technologies are not inherently criminal. They serve valid purposes, such as:
Protecting commercial trade secrets
Shielding individuals in high-risk or hostile environments
Reducing theft risk by limiting public exposure of funds
Regulations should focus on illicit use rather than banning privacy tools outright, as broad prohibitions can harm lawful users without stopping criminals.
Regulatory Balancing Act
For exchanges:
Improve monitoring and risk assessment
Reduce exposure to high-risk inflows
Comply with cross-border rules like the Travel Rule
For policymakers, the challenge is that criminals adapt faster than rigid rules. Efforts to block one laundering method often push illicit funds into another channel, making crypto money laundering a moving target.
Key Takeaway: Privacy coins are a tactical tool within a multi-step laundering process, not a standalone solution. They complicate investigations, but traditional and digital forensic methods remain effective in tracing stolen funds.