Gray and black funds are rampant, and the anonymous OTC market is exposed to enormous risks.

Rampant Gray and Black Funds Pose Enormous Risks in the Exposed Anonymous OTC Market

Anonymity is the political correctness of our industry, from anonymous blockchain addresses to mixing platforms that erase transaction paths, from decentralized privacy protocols to privacy solutions at the public chain level. Web3 users, while ensuring their privacy, also have to bear the higher risks associated with it.

Cryptocurrency over-the-counter (OTC) trading is at the forefront, and our research shows that OTC markets with higher anonymity have a higher proportion of risky crypto funds flowing in. Interacting with these types of addresses carries a greater address risk. This article will explain this risk by disclosing some of the OTC market funding data.

Dangerous OTC Trading

OTC trading is an important way for cryptocurrency users to enter and exit funds. In addition to the OTC business area of centralized exchanges and compliant cryptocurrency acceptance institutions, certain cryptocurrency payment platforms, acceptance merchant user groups, investor network groups, and other places also provide over-the-counter trading services to investors. However, due to differences in the implementation of KYC mechanisms, the risks of encrypted funds associated with these platforms vary.

Mainstream centralized exchanges and compliant cryptocurrency acceptance institutions conduct careful investigations of user identities to ensure that platform accounts are not abused. They are also more willing to cooperate with global law enforcement/regulatory agencies to combat or regulate illegal crypto activities, leading to the displacement of some related risk funds from these trading markets to strongly anonymous trading environments, thereby bringing greater fund contamination risks to other trading users in the latter.

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Bitrace has conducted funding analysis on Tron addresses with obvious OTC business characteristics outside of centralized trading platforms, compliant crypto acceptance platforms, and large-scale money laundering establishments. The data shows that in the past 24 months, there has been over 3.439 billion risky USDT flowing into these addresses.

Over half of the incoming USDT funds are medium to high-risk funds, including 14.7% associated with online gambling, 20.1% associated with gray/black industry, and 19.4% associated with money laundering.

This indicates that receiving USDT from these types of addresses and their associated addresses has a high probability of contaminating the addresses, making it easier for centralized platforms to implement risk controls on the addresses, and even subjecting the investors themselves to investigation by law enforcement agencies.

Example of OTC Address Contamination

Earlier, Bitrace revealed a case in which a platform account was frozen and funds were confiscated by a US court due to participating in money laundering activities. This case was caused by using cryptocurrency for online gambling and inadvertently accepting fraudulent funds during the withdrawal process and transferring them to the trading platform. In fact, this is just one of many cases of fund contamination, and the risk of encrypted funds to ordinary investor groups is already very serious.

As an example in this address funds investigation process, let’s take the over-the-counter trading address TGTKDo. This address has been in operation since September 25, 2022, and as of the publication of this article on October 15, 2023, it is still active, with a cumulative trading volume of 28.8234 million USDT.

Out of all the addresses, just one has initiated 76 transfers totaling over 2.43 million USDT linked to money laundering against the audited entities. Additionally, there have been several transfers of USDT associated with online gambling. After receiving the funds, TGTKDo has not only continued to transfer funds to other business addresses but has also sent a large amount of USDT to centralized trading platforms. For accounts that directly or indirectly receive these types of USDT, there is a possibility of the platform accounts being flagged or even frozen due to risk control measures.

In conclusion

The JPEX scandal is still escalating, and several operators of local “off-exchange shops” in Hong Kong have been arrested on suspicion of assisting victims in depositing funds into JPEX. Combined with our previous audit results of the JPEX hot wallet addresses, which showed a 22.04% proportion of risky funds, these accepting companies may face further anti-money laundering investigations.

For regular cryptocurrency investors, it is important not to adopt a “it’s not my problem” attitude and to carefully choose compliant and licensed platforms for over-the-counter cryptocurrency trading to prevent contamination of their own address funds.‍

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