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Chain Analysis is running Monero nodes in order to try and track money laundering operations. Money launderers are increasingly using Monero to launder the proceeds of crime. This is the primary reason Monero has been delisted from most crypto exchanges around the world.

Launderers receive cash from criminals (say drug money), lodge the cash into US bank accounts using a network of money mules, transfer the cash to KYC custodial exchanges using money mules who are instructed to buy USDT, swap USDT to Monero wallets, move the Monero to another set of Monro wallets, transfer the Monero to a Russian crypto exchange that supports Monero, cash out to Russian roubles in a Russian bank account then covert to US dollars via a Russian bank account denominated in US dollars.

Criminal US$ in cash ==> Money launderer US$ in cash ==> money mules with US bank accounts ==> USDT on KYC exchange ==> Swap to one or more Monero wallets => send to one or more Monero wallets ==> Russian crypto exchange ==> cash out into Russian bank account ==> convert roubles to US dollars.

Some criminals are now taking payment for drugs in Monero in order to avoid paying money laundering fees which can be expensive if large numbers of money mules are involved. The Monero is transferred straight to a Russian crypto exchange like Garantex and then cashed out into a Russian US dollar account.

The Russian Government is desperate for foreign currency because of the economic sanctions in force due to the war with Ukraine and is turning a blind eye to dirty crypto flowing into the country. Russian financial institutions are loaning the US$ to the Russian Government and paying the US$ account holders high rates of interest.

Most KYC exchanges, apart from Coinbase, do not have the sophisticated fraud detection software used by the banks to identify suspicious transactions. Governments are putting pressure on exchanges to monitor transactions in real time so agencies can trace bank to KYC exchange to crypto transactions as they happen. The exchanges are being asked to develop the ability to automatically freeze all crypto and fiat in an exchange account on receiving an alert that the source of the funds transferred to the account is from a suspicious bank account. Exchange account holders will not be able to access fiat and crypto held on an exchange if one or more of their bank accounts used to fund crypto transactions is flagged as suspicious because of suspected money laundering.

The essence of the Chain Analysis approach is to identify the owner of an exchange hosted wallet, that is a wallet generated by the exchange and linked to an account holder, through transaction pattern analysis.

Wallets generated as part of the blockchain node creation process or a native blockchain client wallet creation process cannot be linked to the owner unless there is a wallet IP address leak or law enforcement engage in old fashioned subterfuge such as selling drugs for crypto, recording the receiving address and then putting a tracker in the bags to see where the drugs end up.

Another approach is to plant Trojans in wallet software so as to broadcast the IP address of the wallet client and export the transactions or to set up a software development company to develop a wallet client with the same features. Could Exodus be a front for the FBI?

Chain Analysis has been engaged by several US government agencies to devise ways of tracking Monero transfers and identifying source and destination addresses. They started by connecting Monero wallets to their own Monero node running on their own network and tracing the transactions on the single node.They then expanded the number of nodes and traced the transactions on their own network. The sending and receiving addresses were known. The purpose of the exercise was to determine whether any pattern could be identified apart from the obvious pattern of the timing and the sending amount and receiving amount being the same when viewed in the wallet, less the transaction fee. The FBI wanted to know whether it was possible to trace the IP address of the sending wallet by intercepting traffic to a node and trace the IP address of the receiving wallet by intercepting traffic from a node. The IP addresses are used to identify the owners of the wallets and the timing is used to identify the transaction. The FBI wanted enough information for warrants to seize phones with Monero wallets so they could get hold of the private view and transaction keys.

Wallets are considered the Achilles Heel of the Monero ecosystem and the easiest part of platform to crack.

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For currently we can say like hoax for xmr tracing but somehow if we closely monitor and collaborated with exchanges then some how track down will be possible.

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