Pink, the leader of the crypto wallet drainer known as Pink Drainer, which siphoned $85 million from crypto retail users over the past year, meticulously converted his ill-gotten gains into the DAI stablecoin.
On the day Pink announced their “retirement” from the wallet drainer scene, they staked all 18.1 million DAI on Spark.
This move was no surprise to crypto money laundering experts, as DAI, the stablecoin from MakerDAO — a decentralized stablecoin platform — is the preferred choice among crypto criminals, according to blockchain security company Elliptic.
So, why DAI has become the go-to stablecoin for illicit activities, while Tether, despite being the world’s largest stablecoin, is often shunned by criminals?
Discover the answer in today’s article!
There is one main reason why a crypto criminal would want to swap the funds they just acquired from an exploit into a stablecoin, as Pink did: to avoid the price volatility of the crypto market, especially if they intend to let their funds sit in an EOA address for a long period of time — often months, sometimes years.
DAI, in these cases, becomes particularly useful for criminals because it is a decentralized stablecoin that shields their funds from asset freezing and blacklisting, unlike Tether (USDT).
DAI: A Decentralized And Unfreezable Stablecoin
In 2014, Rune Christensen founded the Maker Foundation, which later launched the DAI stablecoin in 2017. DAI is created and managed by smart contracts on the Ethereum blockchain, functioning in a decentralized manner without any central authority. It is so because over time, control transitioned from the Maker Foundation to MakerDAO, a fully decentralized autonomous organization.
DAI is now based on a community-driven governance model, so it does not have a central point of compliance. This makes DAI more resistant to regulatory pressures that could impact its usability for illicit activities.
Due to its decentralized nature, DAI does not have a central authority that can freeze assets or blacklist addresses.
Once DAI is in circulation, it is controlled entirely by the holders of the tokens, and no central entity can intervene in transactions.
USDT is on the complete opposite side of the spectrum.
USDT is issued by Tether Limited, a centralized company that controls the issuance and redemption of the token. This centralization introduces points of failure and regulatory scrutiny.
As a centralized entity, Tether Limited is subject to regulatory oversight and must comply with various legal and financial regulations.
Tether Limited has the ability to freeze USDT tokens on certain addresses, and blacklist addresses entirely.USDT banned addresses — Source: Dune
This ability has been used in the past to comply with law enforcement requests and regulatory requirements. Tether has even redoubled its efforts to avoid punitive actions by regulatory bodies over the past year.
Source: Dune
In December 2023, they even launched a new wallet-freezing policy to combat cybercrime and sanctioned wallets, leading to the immediate freezing of 161 wallets at that time. Similarly, in April 2024, Tether froze Venezuelan wallets being used to evade US sanctions on oil exports.
Obviously, the threat of having an account frozen or assets seized is the most powerful deterrent to those engaged in illicit crypto activities.
Elliptic’s research on the crypto money laundering landscape uncovered that: “The majority of exploiters swap any stolen USDT in minutes, rather than hours.” As well as that “[…] criminals stealing USDT or USDC typically swap these assets to decentralized stablecoins such as DAI to evade the risk of their proceeds being frozen.”
The decentralized nature of DAI offers greater privacy, security, and resistance to regulatory and censorship actions, making it the obvious choice of stablecoin for criminals in the crypto space.
However, DAI also has limitations that make Ethereum the true go-to cryptocurrency for illicit purposes.
Source: Elliptic
The Limits of DAI as a Money Laundering Tool
DAI: an Obstacle to Banking Out?
As we do not yet live in an era where you can freely pay rent and groceries with crypto, crypto criminals need to cash out the assets they have stolen.
Before 2021, crypto criminals would simply go from the scene of the crypto crime to their local centralized exchange (CEX) to convert cryptocurrencies into fiat money.
However, the significant regulatory crackdown on crypto that began globally in 2019–2020 has completely disrupted the crypto money laundering landscape. CEXs are no longer a safe place to cash out stolen funds.
Source: Chainalysis
Now, it has become imperative for criminals to obfuscate the tracks of illicitly acquired assets as much as possible.
And that’s where DAI stops being useful and can become a burden when attempting to use privacy tools like mixers.
Mixers promise to obscure a transaction on the blockchain by sending it through a ‘complex, semi-random series of dummy transactions’ and by commingling one payment with others.
As a result, it would become unclear to whom funds are being directed, and challenging to trace funds back to a source.
Mixers turn the very transparent blockchain technology into a murky black box, making them an obvious choice for crypto criminals.
But for a mixer or the likes to be efficient in hiding away the stolen funds, the mixer and the cryptocurrency used must see high level of transactions.
Tornado Cash, which is considered the pinnacle of crypto mixers and attracted the largest influx of funds and transactions worldwide before and even after the August 2022 OFAC ban, only offers low levels of usage through its DAI contract. According to Elliptic, ‘this lack of widespread use lowered the anonymity of DAI-based mixing, making it a less attractive use case for money laundering schemes.’
Oppositely, Ethereum is the most used currency in and out of privacy tools, so it’s much easier to hide stolen funds through Ethereum than through DAI.
In the current context, when DAI is used by crypto criminals, it will not be used as a “swap and go” technique post-crime because most CEXs are now off-limits.
Rather, it will be used as a first step to secure the stolen funds. For example, criminals may simply let the DAI funds lie dormant while they devise a proper escape plan, likely involving a new swap from DAI into a cryptocurrency they can use to obfuscate their tracks through privacy tools and ultimately convert to fiat
DAI’s New Collateral: The Beginning of DAI Instability?
The issuance and backing of DAI are transparent and governed by smart contracts. Anyone can verify the collateral backing DAI by inspecting the MakerDAO protocol’s smart contracts. In direct opposition to USDT unverifiable and unaudited claims.
While USDT claims to be backed 1:1 by reserves, primarily in fiat currencies, DAI is backed by a diversified pool of collateral assets locked in smart contracts, including various stablecoins and cryptocurrencies like USD Coin (USDC), Pax Dollar (USDP) and ETH to ensure its stability.
Despite some notable depegging events based mainly on its over-reliance on USDC, trust in DAI has been maintained by non-criminal crypto investors and builders, as well as by crypto criminals.
However, DAI’s latest move is endangering its reputation as a “stable” stablecoin, making it a higher-risk strategy for money launderers, especially those who intend to keep their stolen funds in the form of DAI in the medium to long term.
The issue is that MakerDAO is set to back $1 billion DAI with USDe. USDe is Ethena Labs’ “synthetic dollar” that has been making waves and seeing massive adoption since its debut on the crypto stage in February 2024.
This move is considered absolutely reckless, as USDe’s massive adoption stems from the promise of airdrops but even more so from its astronomical yield, which reached 67% in March 2024 and is now situated around the 20% mark.
The wound inflicted by the latest “stablecoin” with a ponzinomic yield is still fresh.
The fear that DAI will crash if USDe follows the Terra/Luna meltdown path is shared by many.
Although our latest study debunk the idea that share the same traits as Terra/Luna, strong risks exist.
Ethena’s USDe Explained: No Terra-Luna, but Major Risks Exist
Under these circumstances, DAI may no longer be the sturdy safe haven for stolen funds that it once was for crypto criminals.
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Why DAI is Favored Over USDT for Crypto Money Laundering was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.