Why Privacy Coins Often Appear in Post-Hack Fund Flows

Key takeaways

• Privacy coins are just one step in a broader post-hack laundering process. They serve as a temporary black box to disrupt traceability.

• Hackers typically move funds through consolidation, obfuscation, and chain hopping, then subsequently introduce layers of secrecy before attempting to cash out.

• Privacy coins are most useful immediately after a hack because they reduce on-chain visibility, delay blacklisting, and help break attribution links.

• Enforcement actions against mixers and other laundering tools often shift illicit flows to alternative routes, including confidential coins.

After crypto hacks, fraudsters often transfer the stolen funds through privacy-focused cryptocurrencies. Although this has given the impression that hackers prefer confidential coins, these assets function as a specialized “black box” within a larger laundering pipeline. To understand why privacy coins appear after hacks, you need to consider the cryptocurrency laundering process.

This article explores how funds flow after hacking and what makes privacy coins so useful to fraudsters. It examines emerging laundering methods, the limitations of privacy coins like Monero (XMR) and Zcash (ZEC) as laundering tools, legitimate uses of privacy technologies, and why regulators need to balance innovation with the need to curb laundering.

How funds flow after a hack

Following a hack, fraudsters generally do not send stolen assets directly to an exchange for immediate liquidation; instead, they follow a deliberate, multi-step process to obscure the trail and slow down the investigation:

1. Consolidation: Funds from multiple victim addresses are transferred to a smaller number of wallets.

2. Obfuscation: Assets are mixed through chains of intermediary crypto wallets, often using crypto mixers.

3. Channel jump: Funds are bridged or exchanged across different blockchains, breaking continuity within a single network’s tracking tools.

4. Privacy layer: A portion of the funds is converted into privacy-focused assets or routed through privacy-preserving protocols.

5. Withdrawal : Assets are ultimately exchanged for more liquid cryptocurrencies or fiat currencies via centralized exchanges, over-the-counter (OTC) desks, or peer-to-peer (P2P) channels.

Privacy coins typically enter the picture at stages four or five, further confusing the traceability of lost funds after previous stages have already complicated the chain’s history.

Why Privacy Coins Are Attractive to Scammers Right After a Hack

Privacy coins offer specific benefits when fraudsters are most vulnerable, immediately after theft.

Reduced visibility on the channel

Unlike transparent blockchains, where the sender and receiver and transaction amounts remain fully verifiable, privacy-focused systems deliberately hide these details. Once funds are transferred into such networks, standard blockchain analytics lose much of their effectiveness.

Following the theft, fraudsters attempt to delay identification or evade automatic blacklisting of addresses by exchanges and services. The sudden loss of visibility is particularly valuable in the critical days following the flight, when surveillance is most intense.

Breaking attribution chains

Fraudsters tend not to go directly from hacked assets to confidential coins. They typically use multiple techniques, swaps, cross-chain bridges, and intermediate wallets before introducing a privacy layer.

This multi-step approach makes it much more difficult to connect the final output to the original hack. Privacy coins act more as a strategic firewall in the attribution process than as a standalone laundering tool.

Bargaining power in OTC and P2P markets

Many laundering rings involve informal OTC brokers or P2P traders who operate outside of widely regulated exchanges.

Using assets with higher confidentiality reduces the information available to counterparties about the origin of funds. This can simplify negotiations, reduce the perceived risk of freezing ongoing transactions, and improve attacker influence in less transparent markets.

Did you know? Several early ransomware groups initially demanded payment in Bitcoin (BTC), but then moved to privacy coins only after exchanges began to cooperate more closely with law enforcement on blacklisting addresses.

Mixing and the evolution of bleaching methods

One of the reasons why privacy coins appear more frequently in specific time frames is the pressure on other laundering tools. When law enforcement targets particular high-risk mixers, bridges, or exchanges, illicit funds simply move to other channels. This change results in a diversification of laundering routes across various blockchains, exchange platforms and privacy-focused networks.

When fraudsters perceive a laundering route as risky, alternative routes see higher volumes. Privacy coins benefit from this dynamic, as they provide inherent transaction obfuscation, independent of third-party services.

Limitations of Privacy Coins as a Laundering Tool

Despite the privacy features, most large-scale hacks still involve extensive use of BTC, Ether (ETH), and stablecoins at later stages. The reason is simple: liquidity and exit options are important.

Confidentiality documents generally have:

These factors make it difficult to convert significant amounts of cryptocurrencies into fiat currency without facing scrutiny. Therefore, fraudsters use privacy coins briefly before switching back to more liquid assets before final withdrawal.

Successful laundering involves integrating privacy-enhancing tools with high-liquidity assets, tailored to each phase of the process.

Did you know? Some darknet marketplaces now display prices in Monero by default, even if they still accept Bitcoin, because sellers prefer not to reveal their revenue patterns or customer volume.

Behavioral trends in money laundering

Although tactical specifics vary, blockchain analysts generally identify several high-level “red flags” in illicit fund flows:

• Superposition and consolidation: Rapid dispersal of assets across a broad portfolio network, followed by strategic re-aggregation to simplify final exit.

• Channel jump: 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 of time to circumvent the window of increased public and regulatory scrutiny.

• Direct workarounds to Fiat: Prefer OTC brokers for final liquidation to avoid the robust monitoring systems of large exchanges.

• Hybrid Privacy: Use privacy-centric coins as a specialized tool as part of a broader laundering strategy, rather than as a total replacement for traditional assets.

Contours of anonymity: why traceability persists

Despite the obstacles created by privacy-friendly technologies, investigators continue to achieve victories by targeting the margins of the ecosystem. Progress is generally made through:

• Regulated gateways: Force interactions with exchanges that require rigorous identity verification

• Human networks: Target the physical infrastructure of mule unions and OTC offices

• Off-chain intelligence: Leverage traditional surveillance, confidential informants and suspicious activity reports (SAR)

• Operational friction: Exploit mistakes made by the perpetrator that link their digital footprint to a real identity.

Privacy coins increase the complexity and cost of an investigation, but they cannot completely protect fraudsters from the combined pressure of forensic analysis and traditional law enforcement.

Did you know? Blockchain analytics companies often focus less on the privacy coins themselves and more on tracking how funds flow in and out of them, because these cutoff points offer the most reliable investigative signals.

Reality of legitimate use of privacy-enhancing technologies

It is essential to distinguish between the technology itself and its potential criminal applications. Privacy-focused financial tools, such as some cryptocurrencies or mixers, serve valid purposes, including:

• Protecting the confidentiality of business transactions, which includes protecting trade secrets or competitive business relationships

• Protecting individuals from surveillance or control in hostile environments

• Reduce the risk of targeted theft by limiting public visibility of personal wealth.

Regulatory scrutiny is not triggered by the mere existence of privacy features, but when they are used for illicit activities, such as ransomware payments, hack proceeds, sanctions evasion, or darknet markets.

This essential distinction makes it difficult to develop effective policies. Broad bans risk restricting the legal financial privacy of ordinary users and businesses, while often failing to stop criminal networks that turn to alternative methods.

Balancing game of regulators

For cryptocurrency exchanges, the recurring appearance of confidential coins in post-hack laundering flows intensifies the need to:

• Improve transaction monitoring and risk assessment

• Reduce exposure to high-risk inbound flows

• Strengthen compliance with cross-border travel rule requirements and other jurisdictional standards.

For policymakers, this highlights a persistent challenge: criminal actors adapt faster than rigid regulations can evolve. Efforts to crack down on one tool often shift activity to others, making money laundering a dynamic, moving target rather than a problem that can be completely eradicated.