Cryptocurrency Money Laundering Charges and Investigations: Federal Statutes and Defense Strategies
Cryptocurrency did not invent money laundering. It changed the mechanics of proof.
In federal practice, “crypto money laundering” prosecutions are rarely about a single transaction. Instead, these cases are built as narratives: a graph of on-chain movements, a set of off-chain decision points (exchanges, OTC desks, hosted wallets, fiat rails), and a theory of intent (concealment, promotion, or willful operation of a transmission business without required compliance). The statutes are familiar: 18 U.S.C. §§ 1956, 1957, and 1960. But the evidence is newer: blockchain analytics, KYC/AML records, API logs, device extractions for encrypted or ephemeral messages, and social-media, platform communications (Discord, Telegram, etc.).
This post explains how the government charges cryptocurrency “money laundering” cases, what prosecutors must prove, and the defense strategies that matter.
Key Takeaways
Most “crypto money laundering” cases are charged as (1) money laundering (18 U.S.C. § 1956), (2) spending criminal proceeds (18 U.S.C. § 1957), (3) unlicensed money transmitting (18 U.S.C. § 1960), and (4) conspiracy to commit these substantive offenses and others.
The central battleground is usually mens rea: knowledge of criminal proceeds and intent to conceal or promote. The fact that certain tokens moved is generally not in dispute. The dispute is what to make of the movements and who is responsible for those movements.
Defense strategy should be built around the critical issues in the government’s proof: control, knowledge of the underlying illegality, tracing reliability and attribution, jurisdiction, and suppression.
What Prosecutors Mean by “Crypto Money Laundering”
In classic laundering cases, the government tries to prove that a defendant moved “dirty money” in a way designed to:
Conceal the nature, source, ownership, or control of the proceeds;
Promote the underlying crime; or
Spend or transfer criminal proceeds above statutory thresholds.
With cryptocurrency cases, prosecutors argue that certain technical steps, to include the use of mixing or tumbler services, chain-hopping, bridges, rapid conversions, peel chains, nested services, are modern “concealment” tools.
Sometimes that theory is persuasive. Often, it is overreach. A privacy-oriented transaction pattern is not automatically laundering. The legal question is intent, and the factual question is what the defendant knew and controlled.
The Core Statutes in Crypto Laundering Prosecutions
18 U.S.C. § 1956: Money Laundering
Section 1956 is the marquee money laundering statute. In crypto cases, prosecutors most often charge:
§ 1956(a)(1): conducting a “financial transaction” with proceeds of a “specified unlawful activity” (SUA) with intent to:
promote the SUA, or
conceal/disguise the nature, location, source, ownership, or control of the proceeds.
§ 1956(h): conspiracy to commit money laundering.
Where cases are won and lost: Was the asset actually proceeds of an SUA? Did the defendant know it? How can the government prove attribution (i.e., a specific defendant took a specific step)? Was the transaction designed to conceal or promote, or was it simply a transfer, investment, or routine operation?
In crypto matters involving platforms or tools, the defense often focuses on whether the defendant actually “conducted” qualifying transactions or instead provided software, infrastructure, or services used by third parties. Where a platform has both legitimate and illegitimate uses, proving that a defendant knew that a platform or tool was being used illegitimately can be an uphill battle for prosecutors.
18 U.S.C. § 1957: Spending Criminal Proceeds
Section 1957 criminalizes certain “monetary transactions” over $10,000 involving criminally derived property.
Section 1957 can function as a fallback when prosecutors worry that § 1956’s “concealment” or “promotion” intent will be contested at trial.
Defense focus: whether the government can prove the funds are traceable to criminal proceeds at the relevant threshold, and whether the transaction qualifies under the statute’s framework in the particular fact pattern.
18 U.S.C. § 1960: Unlicensed Money Transmitting
Section 1960 targets operating an unlicensed money transmitting business. It is often the government’s most pragmatic theory in crypto investigations involving exchanges, OTC desks, and high-volume intermediaries. DOJ has recently announced a new crypto policy that has put this statute on the back burner unless there is heightened proof of intentional, wrongful conduct. This approach is in response to what DOJ saw as overreach in charging this statute against crypto platforms.
What Counts as “Proceeds” and “Specified Unlawful Activity” in Crypto Cases
Money laundering statutes do not criminalize movement of money in the abstract. These statutes criminalize movement of proceeds from a specified unlawful activity.
Common predicate offenses in crypto laundering indictments include:
wire fraud and investment fraud (including “pig butchering” schemes),
social-engineering exploits or hacks,
investment fraud, such as “crypto investment” fraud schemes,
ransomware extortion and cyber-enabled theft, such as SIM swaps,
darknet marketplace proceeds,
sanctions-related conduct and export-control adjacency,
narcotics trafficking.
If the predicate offense is weak, the laundering case is weak. A rigorous defense treats the predicate offense as a first-class issue, not a footnote.
How DOJ Builds Crypto Laundering Cases: The Evidence Playbook
Blockchain Analytics and Attribution
A target of a crypto money laundering case should expect the prosecutors are collecting evidence in the form of:
clustering and wallet attribution,
tracing across hops, chains, and bridges,
exchange deposit mapping,
“known bad” service tagging.
Defense pressure points: assumptions and errors in the tracing, attribution gaps (wallet ≠ person), commingling and alternative custody explanations, and the jump from “likely” to “beyond a reasonable doubt.”
Exchange and Platform Records
In many prosecutions, the chain is the map, but the exchange records are the proof:
KYC files,
IP logs and device fingerprints,
withdrawals and bank wires, and
customer support communications.
Devices, Messaging Apps, and Cloud Accounts
A high percentage of these cases are decided on:
warrant scope and particularity,
over-collection from cloud providers,
use of parallel investigations,
intent language in chats, internal messages (Signal, WhatsApp), and social media platforms (Discord and Telegram).
Suppression litigation and expert-driven analysis of digital artifacts are often the most critical issue for the successful defense of a crypto money laundering case.
Typical Charging Patterns
Even across different fact patterns, prosecutions tend to cluster into a few categories.
Federal Crime + Money Laundering
These cases target the defendant both for committing the underlying offense (wire fraud, wire fraud conspiracy) and him or herself using crypto tools in an attempt to conceal the proceeds of that underlying offense. In this way, prosecutors seek to charge both the underlying offense and the after-the-fact efforts to hide the proceeds.
Cash-Out and Professional Laundering Services
These cases target alleged intermediaries who convert illicit crypto into spendable assets, sometimes marketing “no questions asked” services or structuring operations to avoid scrutiny.
Mixing / Obfuscation Allegations
These cases often turn into a battle over what the tool is, what the defendant controlled, what the defendant intended, and whether the government is criminalizing privacy-oriented technology rather than laundering conduct.
Crypto ATM / Cash-to-Crypto Seam Cases
Crypto or Bitcoin ATM businesses sit at the seam where cash becomes crypto. That seam is a natural enforcement target because it is where identity can be obscured, structuring risk increases, and compliance expectations can be straightforward.
Defense Strategy: What Works in Crypto Laundering Matters
1) Put Knowledge and Intent at the Center
Most cases rise or fall on what the government can prove about knowledge and intent. Effective defenses force prosecutors to prove both of these critical elements.
2) Separate Privacy From Concealment
Prosecutors often argue that privacy features or obfuscation steps are inherently criminal. That argument is myopic and one-sided. Defense attorneys should push back on that argument. The defense should develop legitimate explanations for privacy and operational security and attack “laundering-by-label” theories.
3) Challenge Traceability and Attribution
If the government’s tracing depends on analytics shortcuts, commingling assumptions, or incomplete exchange records, a defense will have leverage to exploit through expert challenges and clear cross-examination of government witnesses.
4) Litigate Control and Custody: Attribution
Who controlled the keys? Who initiated transactions? Those questions matter. If the defendant did not control the relevant wallet, or if the system was non-custodial or materially autonomous, that counter narrative should be developed with precision and evidence.
5) Press Jurisdiction and Venue
Crypto cases are geographically elastic. Examine the U.S. nexus for each count and whether venue of a case is vulnerable.
6) Defend Early
A sophisticated defense plan includes trial themes and expert needs, suppression posture, a realistic sentencing map if the government prevails, to include collateral consequences (licensing, banking access, immigration, security clearance).
What To Do If You Learn You’re Under Investigation
Do not self-narrate. Avoid explaining transactions to agents, platforms, or counterparties without counsel.
Preserve evidence immediately. Exchange logs, API records, compliance tickets, device images, and governance materials are often decisive.
Engage counsel early. The first 30 days can determine whether the case narrows or expands.
FAQs: Crypto Money Laundering Charges and Defense
Is using a crypto mixer automatically money laundering?
No. A mixer or privacy tool is not automatically criminal. Prosecutors typically must prove the transaction involved criminal proceeds and was conducted with the required intent (for example, intent to conceal). The outcome is usually driven by facts, communications, and control issues.
What is the difference between 18 U.S.C. § 1956 and § 1957?
Section 1956 focuses on transactions with criminal proceeds and specific intent (concealment or promotion). Section 1957 generally targets certain transactions over $10,000 involving criminally derived property. Section 1957 is often called the “spending statute” and criminalizes the mere spending of criminally derived proceeds.
Can I be convicted if I didn’t know the crypto came from a crime?
Knowledge is frequently the core issue of any crypto money laundering case. The government may try to prove knowledge through “red flags,” willful blindness, communications, or patterns of conduct. A strong defense focuses on legitimate explanations, compliance steps taken, and the absence of proof of actual knowledge.
How does the government trace “dirty” crypto?
Typically through blockchain analytics combined with off-chain records (exchange KYC, IP logs, bank records, device evidence). Tracing can be contested, especially where attribution is probabilistic or commingling creates uncertainty.
What should I do if my exchange account is frozen or assets are seized?
Treat it as urgent. Asset restraint and forfeiture can move quickly, sometimes before formal charges. Counsel can evaluate forfeiture posture, tracing issues, and options for challenging restraints or negotiating limited releases where available.
Are stablecoins (like USDT or USDC) treated differently?
Usually not. Stablecoins are generally analyzed under the same laundering and transmission frameworks, but they can make tracing and seizure operationally easier in practice.
Can a software developer be charged for user conduct?
It depends on control, intent, and the government’s theory. The line between building tools and participating in laundering is fact-driven and often turns on communications, operational involvement, and whether the defendant is alleged to have agreed to facilitate unlawful activity.
How long do crypto laundering investigations usually take?
Often months to years. They may involve subpoenas to exchanges and cloud providers, foreign evidence requests, and extended tracing analysis. That timeline creates opportunities to narrow issues early, but also allows cases to broaden if not managed strategically.
What agencies investigate cryptocurrency money laundering?
Cryptocurrency money laundering investigations are typically multi-agency efforts led by the U.S. Department of Justice (DOJ), often through U.S. Attorney’s Offices and specialized components such as the Money Laundering and Asset Recovery Section (MLARS) and the Computer Crime and Intellectual Property Section (CCIPS).
On the investigative side, the most common lead agencies include FBI, Homeland Security Investigations (HSI), and IRS–Criminal Investigation (IRS-CI), each of which has dedicated crypto and blockchain analysis capabilities. Depending on the facts, investigations may also involve FinCEN (for Bank Secrecy Act and MSB issues), OFAC (for sanctions-related conduct), DEA (when narcotics proceeds are alleged), and Secret Service (particularly in fraud and cyber-enabled financial crime cases).
In many matters, these agencies operate jointly through task forces. In practice, this cooperation means that defendants often face parallel criminal, regulatory, and forfeiture exposure even before formal charges are filed.
How does the government collect evidence in cryptocurrency money laundering investigations?
In cryptocurrency money laundering investigations, the government typically builds its case by combining on-chain blockchain analysis with off-chain records obtained through subpoenas, search warrants, and international legal process. Investigators often begin with blockchain analytics to trace transactions, identify clusters of related wallet addresses, and follow funds through exchanges, bridges, and other intermediaries.
Once a transaction touches a centralized exchange or service, agents commonly obtain KYC files, IP logs, device fingerprints, account communications, and withdrawal records. Search warrants are also used to seize phones, laptops, cloud accounts, and encrypted messaging applications, which prosecutors frequently rely on to establish knowledge, intent, and control over wallets or transactions.
In larger cases, the government may supplement domestic evidence with foreign records obtained through MLAT requests, undercover operations, confidential informants, or controlled transactions. Because these investigations are evidence-dense and often unfold over months or years, early defense scrutiny of search warrants, tracing methodologies, and attribution assumptions can be critical.
Conclusion
Cryptocurrency money laundering cases are not decided by the blockchain alone. These cases turn on intent, control, and proof. In practice, these issues are decided based on how prosecutors translate technical activity into traditional criminal statutes. Federal cases increasingly rely on blockchain analytics, compliance records, and device evidence.
For individuals and businesses in the digital asset space, the risk of criminal charges is rarely limited to a single count or statute. Investigations often involve wide ranging parallel criminal and regulatory or civil action.
A strong defense in these cases require more than general white-collar experience. It requires fluency in how 18 U.S.C. §§ 1956, 1957, and 1960 are being applied to cryptocurrency activity, how agencies investigate and attribute on-chain conduct, and how early decisions affect charging, resolution, and success at trial.
Questions? Contact Scott Armstrong, a federal defense attorney in Washington DC and former DOJ Fraud Section senior supervisor. Scott Armstrong defends cryptocurrency fraud cases and cryptocurrency money laundering cases involving charges of 18 U.S.C. §§ 1956, 1957, and 1960. He provides a strategic defense based on his years of experience in high profile cryptocurrency fraud and money laundering cases and defends individuals with an eye towards defending a case at trial.
