When a major cryptocurrency hack occurs, it's not uncommon to see a sudden spike in activity involving privacy coins like Monero (XMR) and Zcash (ZEC). But is this a sign that hackers have a preference for these assets, or simply a tactical move to evade detection?

The answer lies in the complex process of crypto laundering, which involves multiple stages to obscure the trail and slow down investigators. After a hack, scammers don't send stolen assets directly to an exchange for immediate liquidation; instead, they follow a deliberate, multi-stage process:

• Consolidation: Funds from multiple victim addresses are transferred to a smaller number of wallets.
• Obfuscation: Assets are shuffled through chains of intermediary crypto wallets, often with the help of crypto mixers.
• Chain-hopping: Funds are bridged or swapped to different blockchains, breaking continuity within any single network's tracking tools.
• Privacy layer: A portion of funds is converted into privacy-focused assets or routed through privacy-preserving protocols.
• Cash-out: Assets are eventually exchanged for more liquid cryptocurrencies or fiat through centralized exchanges, OTC desks, or P2P channels.

Privacy coins typically enter the stage in steps four or five, blurring the traceability of lost funds even further after earlier stages have already complicated the on-chain history.

The sudden drop in visibility is particularly valuable in the critical days after theft when monitoring is most intense. Scammers tend not to move directly from hacked assets into privacy coins; instead, they use multiple techniques, swaps, cross-chain bridges, and intermediary wallets before introducing a privacy layer. This multi-step approach makes it significantly harder to connect the final output back to the original hack.

Privacy coins act more as a strategic firebreak in the attribution process than as a standalone laundering tool. They reduce on-chain visibility, delay blacklisting, and help break attribution links. Enforcement actions against mixers and other laundering tools often shift illicit flows toward alternative routes, including privacy coins.

The perception of hackers preferring privacy coins may be due to their effectiveness immediately after a hack. However, this is only one link in a longer laundering chain that includes swaps, bridges, and off-ramps. By understanding the process of crypto laundering, we can see why privacy coins are a crucial component in the scammers' arsenal.

The use of informal OTC brokers or P2P traders who operate outside extensively regulated exchanges further complicates the tracking of illicit funds. Privacy-enhanced assets reduce the information counterparties have about the funds' origin, simplifying negotiations and improving the attacker's leverage in less transparent markets.

Did you know that several early ransomware groups originally demanded payment in Bitcoin (BTC) but later switched to privacy coins only after exchanges began cooperating more closely with law enforcement on address blacklisting?

The mixer squeeze and evolving methods of laundering have created a dynamic where illicit funds simply move to other channels when one route is perceived as risky. This shift results in the diversification of laundering routes across various blockchains, swapping platforms, and privacy-focused networks.

While privacy coins offer inherent transaction obfuscation, independent of third-party services, they are not foolproof. Large-scale hacks still involve extensive use of BTC, Ether (ETH), and stablecoins at later stages due to liquidity and exit options. Scammers use privacy coins briefly before reverting to more liquid assets prior to final withdrawal.

The integration of privacy-enhancing tools with high-liquidity assets is crucial for successful laundering. Some darknet marketplaces now list prices in Monero by default, even if they still accept Bitcoin, because vendors prefer not to reveal their income patterns or customer volume.

Blockchain analysts generally identify several high-level "red flags" in illicit fund flows:

• Layering and consolidation: Rapid dispersal of assets across a vast network of wallets, followed by strategic reaggregation to simplify the final exit.
• Chain hopping: Moving assets across multiple blockchains to break the deterministic link of a single ledger, often sandwiching privacy-enhancing protocols.
• Strategic latency: Allowing funds to remain dormant for extended periods to bypass the window of heightened public and regulatory scrutiny.
• Direct-to-fiat workarounds: Preferring OTC brokers for the final liquidation to avoid the robust monitoring systems of major exchanges.
• Hybrid privacy: Using privacy-centric coins as a specialized tool within a broader laundering strategy, rather than as a total replacement for mainstream assets.

Despite the hurdles created by privacy-preserving technologies, investigators continue to secure wins by targeting the edges of the ecosystem. Progress is typically made through:

• Regulated gateways: Forcing interactions with exchanges that mandate rigorous identity verification.
• Human networks: Targeting the physical infrastructure of money-mule syndicates and OTC desks.
• Off-chain intelligence: Leveraging traditional surveillance, confidential informants, and Suspicious Activity Reports (SARs).
• Operational friction: Exploiting mistakes made by the perpetrator that link their digital footprint to a real-world identity.

Privacy coins increase the complexity and cost of an investigation, but they cannot fully insulate scammers from the combined pressure of forensic analysis and traditional law enforcement. Blockchain analytics firms often focus less on privacy coins themselves and more on tracing how funds enter and exit them since those boundary points offer the most reliable investigative signals.

It's essential to distinguish between the technology itself and its potential criminal applications. Privacy-focused financial tools serve valid purposes, including:

• Safeguarding confidentiality: Protecting trade secrets or competitive business dealings.
• Shielding individuals: Reducing surveillance or monitoring in hostile environments.
• Risk reduction: Limiting public visibility of personal wealth to prevent targeted theft.

Regulatory scrutiny isn't triggered by the mere existence of privacy features, but when they are used for illicit activity. Broad prohibitions risk curtailing lawful financial privacy for ordinary users and businesses while often failing to halt criminal networks that shift to alternative methods.

Cryptocurrency exchanges must enhance transaction monitoring and risk assessment to strengthen compliance with cross-border Travel Rule requirements and other jurisdictional standards. Policymakers face a persistent challenge: Criminal actors adapt more quickly than rigid regulations can evolve, making efforts to crack down on one tool often displace activity to others.

The recurring appearance of privacy coins in post-hack laundering flows intensifies the need for effective policymaking that balances innovation with the need to curb laundering. By understanding the complex process of crypto laundering and the role of privacy coins within it, we can better address this dynamic challenge.