Crypto’s Grey and Black Markets: Illicit Use and Sanctions Impact

Cryptocurrencies offer unprecedented financial freedom, enabling borderless transactions, pseudonymity, and decentralized control. However, these same features make crypto attractive for illicit uses—from money laundering and tax evasion to circumventing sanctions and funding organized crime. As regulators struggle to keep pace, grey and black market activity has become a critical flashpoint for global financial watchdogs.

This article explores the murky landscape of crypto’s grey and black markets in 2025, identifies how and why bad actors use cryptocurrencies, and examines whether international sanctions can meaningfully curtail these activities.

Defining the Grey and Black Markets in Crypto

Understanding the distinction between the grey and black markets is essential before diving into how crypto facilitates illicit finance.

Grey Market: Legally Ambiguous

• Definition: The grey market includes activities that aren’t outright illegal but operate in legal loopholes or unregulated territories.
  
• Examples in Crypto:
  
  • Using decentralized exchanges (DEXs) in jurisdictions with no crypto laws.
    
  • Operating offshore wallets not declared to tax authorities.
    
  • Trading privacy coins in regions with weak AML oversight.
    

Black Market: Directly Criminal

• Definition: The black market involves activities that are explicitly illegal under national or international law.
  
• Examples in Crypto:
  
  • Ransomware payments in BTC or XMR.
    
  • Drug sales on dark web platforms like Hydra or its successors.
    
  • Terrorism financing via anonymous crypto wallets.
    

Methods of Hiding Illicit Wealth in Crypto

Mixing Services (Tumblers)

Mixers combine multiple transactions to obscure the origin and destination of funds. While originally designed to enhance privacy, they are often used for laundering illicit proceeds.

• Example: Tornado Cash, sanctioned by the U.S. Treasury in 2022, processed billions in suspicious transactions before being blacklisted.
  

Privacy Coins

Coins like Monero (XMR), Zcash (ZEC), and Dash prioritize anonymity, making it nearly impossible to trace transactions.

• Risk: These coins are frequently used for ransom payments and dark market purchases.
  
• Response: Several exchanges have delisted privacy coins due to regulatory pressure.
  

Cross-Chain Bridges

Bridges allow users to move assets across different blockchains, complicating tracking and compliance.

• Abuse Case: Criminals can convert ETH to BTC via wrapped tokens, masking the trail of funds.
  

Decentralized Exchanges (DEXs)

DEXs enable peer-to-peer crypto trading without KYC, becoming a tool for moving funds outside regulated environments.

• Concern: DEXs don’t store user data, making forensic tracing extremely difficult.
  

Who Uses Crypto for Illicit Purposes?

While the overwhelming majority of crypto use is legitimate, bad actors continue to exploit the technology for financial crimes.

“The pseudonymous nature of crypto doesn’t mean it’s anonymous. But bad actors are always evolving faster than enforcement.”
— Chainalysis, 2024 Crime Report

Case Studies — Illicit Use of Crypto

The Hydra Darknet Marketplace

• Background: Once the largest Russian-language darknet market.
  
• Crypto Use: Primarily Monero and Bitcoin for drug trafficking.
  
• Impact: Processed over $5 billion before being shut down in 2022 by a U.S.–German operation.
  

North Korea’s Lazarus Group

• Method: State-sponsored hackers stealing crypto via DeFi exploits and ransomware.
  
• Sanctions Avoidance: Converting stolen crypto into fiat through multiple laundering steps.
  
• Scale: Estimated $1.2 billion in crypto thefts by 2025 [Source: UN Panel of Experts].
  

How Effective Are Global Sanctions Against Crypto Crime?

Sanctions are a traditional tool to combat financial crime and geopolitical threats, but how well do they work in a decentralized system?

Blockchain Surveillance

Agencies like Chainalysis and Elliptic offer tools to trace blockchain activity, linking addresses to known criminals or sanctioned entities.

• Limitation: Criminals adopt more sophisticated laundering methods to stay ahead.
  

Exchange Cooperation

Many centralized exchanges now comply with global sanctions and AML requirements.

• Actions Taken:
  
  • Freezing wallets linked to sanctioned persons.
    
  • Sharing data with Interpol and FATF.
    
  • Delisting privacy coins.
    

Smart Contract Sanctions

In a 2022 first, the U.S. sanctioned a smart contract (Tornado Cash). This opens a precedent for targeting decentralized code.

• Challenge: Enforcement remains complex since smart contracts can’t be shut down like traditional companies.
  

Regional Dynamics of Grey and Black Crypto Markets

Illicit crypto use doesn’t occur in a vacuum. Regional laws, economic instability, enforcement capabilities, and geopolitical tensions heavily influence how these markets evolve across the globe.

United States and Canada

• Regulation Strength: Very high. Strong KYC/AML enforcement, active SEC and FinCEN participation.
  
• Key Risks:
  
  • Domestic ransomware operations.
    
  • Crypto frauds like pump-and-dumps or Ponzi schemes.
    
• Mitigation Efforts:
  
  • Strict exchange licensing and sanctions enforcement.
    
  • DOJ-led takedowns of laundering operations (e.g., Bitzlato in 2023).
    

European Union

• Regulation Strength: High but fragmented.
  
• Initiatives: MiCA (Markets in Crypto-Assets Regulation) aims to unify crypto laws across all EU states.
  
• Key Issues:
  
  • Use of privacy coins in high-tax regions.
    
  • Russian-affiliated entities using European exchanges for laundering.
    
• Sanctions:
  
  • Strong alignment with U.S. crypto sanctions targeting Russian wallets.
    

Russia and Eastern Europe

• Regulation Strength: Medium to weak.
  
• Key Risks:
  
  • Russia-linked darknet markets (e.g., Hydra).
    
  • Heavy use of BTC and privacy coins for cross-border operations.
    
• Sanctions Evasion:
  
  • Reports indicate state-linked actors using stablecoins like USDT to bypass banking restrictions.
    

China

• Regulation Strength: Extremely high domestically.
  
• Contradiction: While crypto is banned for retail, it thrives underground and via offshore platforms.
  
• Black Market Tools:
  
  • OTC traders convert crypto into yuan off-record.
    
  • Use of intermediaries and shell companies in Hong Kong.
    

Middle East and North Africa

• Hotspots: Iran, Lebanon, parts of North Africa.
  
• Use Cases:
  
  • Oil trade circumvention using BTC and stablecoins.
    
  • Terrorist financing through unregistered wallets.
    
• Response:
  
  • Some states actively mine crypto (e.g., Iran) to monetize oil under sanctions.
    

Crypto Asset Risk Rankings Based on Illicit Activity (2025)

“While criminals still prefer Bitcoin due to liquidity, stablecoins like USDT are rapidly becoming the go-to tool for sanctions evasion.”
— Elliptic 2025 Crypto Threat Report

International Coordination: Can It Actually Work?

Sanctions and crypto regulations must be cross-border by nature to be effective, but they often fall short due to inconsistent enforcement and legal differences.

FATF and the Travel Rule

The Financial Action Task Force (FATF) Travel Rule mandates that exchanges share sender/recipient information for transfers above $1,000.

• Adoption: Slow in developing countries.
  
• Loopholes: DEXs and P2P trades remain exempt or non-compliant.
  

Interpol and Cross-Border Arrests

• Increasing number of crypto-related criminals being flagged on Interpol’s Red Notices.
  
• Examples: Arrests of wallet owners linked to North Korean Lazarus hacks in Singapore and Malaysia.
  

The Role of SWIFT and Central Banks

• Trend: Some central banks are exploring crypto tracking partnerships.
  
• Example: The ECB’s AMLScope initiative ties crypto addresses to fiat bank flows.
  

The Arms Race: Criminal Innovation vs. Regulation

There’s a constant cat-and-mouse dynamic between crypto regulators and criminals. As regulators close loopholes, new tools emerge:

The Future of Crypto Sanctions and Illicit Finance

Cryptocurrencies have reached a point of critical mass. Regulatory bodies can no longer afford to view them as a fringe concern. The future of crypto and illicit finance will depend on several key developments, each with the potential to reshape how criminals operate—and how regulators respond.

CBDCs as a Counter-Force?

Central Bank Digital Currencies (CBDCs) offer traceability and centralized control that could deter illicit usage in domestic economies.

• China’s Digital Yuan already includes spend tracking and programmable restrictions.
  
• ECB and the U.S. Fed are exploring designs for controlled disbursement and anti-money laundering (AML) triggers.
  

Limitation: CBDCs may push illicit users further into privacy-centric or decentralized alternatives, making true suppression of crime difficult.

AI-Powered Blockchain Forensics

• Advanced clustering algorithms and AI-assisted pattern recognition are improving on-chain surveillance.
  
• Future Potential:
  
  • Linking pseudonymous addresses to identities with 90%+ confidence.
    
  • Real-time alerts on anomalous DeFi behaviors or laundering attempts.
    

“The future is about reducing the anonymity window from days to seconds.”
— CipherTrace Head of Research, 2025

Regulatory Convergence

Currently, the crypto legal landscape is highly fragmented. But a new era of regulatory convergence may emerge, with uniform standards driven by:

• FATF’s global compliance mandates
  
• IMF and World Bank recommendations for crypto taxation and AML
  
• Cross-border crypto-asset agreements (modeled on the OECD’s Common Reporting Standard)
  

Crypto’s Anonymity: Myth or Reality?

True anonymity in crypto is often overstated. Even privacy coins like Monero can be penetrated under certain conditions with enough data correlation.

Nevertheless, new privacy-preserving techniques continue to evolve:

• Zero-Knowledge Proofs (zk-SNARKs)
  
• Stealth addresses
  
• Confidential transactions
  

These tools will likely become focal points for both legitimate privacy-seeking users and illicit actors in the years ahead.

Final Thoughts: Can Crypto Be Fully Regulated?

Total control of cryptocurrencies is unlikely without undermining their core principles. Still, targeted regulation, robust surveillance, and cross-border cooperation can significantly mitigate their abuse.

What’s needed:

• Smarter enforcement (AI-based on-chain analytics)
  
• Consistent regulation across jurisdictions
  
• Improved compliance in DeFi and DEX ecosystems
  
• Increased transparency from stablecoin issuers
  

Cryptocurrency is here to stay. The battle between decentralization and control will define its relationship with the law for decades.

Conclusion

The crypto ecosystem’s potential for empowerment is vast—but so is its potential for misuse. The line between the grey and black markets is often blurry, defined more by regulation than morality. As global scrutiny increases, both regulators and criminals will continue their digital arms race. Whether crypto can thrive as both free and fair will depend on how well the world manages this balance in the years ahead.

FAQ: The Grey and Black Market of Crypto

Q1: How much crypto is used for criminal purposes?

While once estimated at up to 40% in Bitcoin’s early days, current studies (Chainalysis, 2025) suggest that only around 0.25–0.35% of all crypto activity involves illicit transactions. However, the absolute volume is growing, exceeding $20 billion in 2024 alone.

Q2: Are privacy coins like Monero illegal?

Not inherently. However, due to their anonymity features, many centralized exchanges have delisted them to avoid regulatory risk. Countries like Japan and South Korea have outright banned their trade on licensed platforms.

Q3: Can governments track wallets on the blockchain?

Yes. Most public blockchains (like Bitcoin and Ethereum) are fully transparent, allowing forensic tools to track transactions between wallets. The challenge lies in identifying wallet owners without off-chain data.

Q4: What happens if I use a mixer like Tornado Cash?

You may risk interacting with sanctioned smart contracts, particularly in the U.S., which can lead to wallet freezing, platform bans, and even legal consequences if funds are traced to illicit origins.

Q5: Are stablecoins being used for crime?

Yes. Coins like Tether (USDT) are increasingly used for cross-border money laundering and sanctions evasion, especially in regions like Russia, Venezuela, and Iran. Regulators are pushing stablecoin issuers to increase KYC/AML compliance.

Q6: Can sanctions really work against decentralized crypto?

Not entirely. While sanctions can effectively pressure centralized exchanges and known wallet addresses, they are less effective against DEXs, mixers, and privacy coins, which operate without intermediaries or formal identities.