Cross-chain transactions

Detection and Analysis

Cross-chain transactions

detection and analysis

By Natacha Wagner & Clement Pavue

Scorechain ,

December 2022

What are cross-chain transactions?

Cross-chain transactions, also known as atomic swaps, occur when users exchange one crypto asset from one blockchain for another crypto asset from a different blockchain. More simply put, users are moving funds across blockchains.

Cross-chain transactions are made possible with blockchain interoperability. Blockchains are designed as closed ecosystems and are not meant to communicate with each other. However, blockchain interoperability allows communication and data sharing between different blockchains.

To execute a cross-chain transaction, users need to send funds through cross-chain protocols. These protocols act as bridges between different blockchains and use smart contracts to convert the assets. For example, users deposit assets from blockchain A in the smart contract and withdraw new assets compatible with blockchain B.

Cross-chain transactions and AML/CFT

We have seen in the past that cross-chain transactions were used to transfer assets derived from criminal and illicit activities. Moving assets across blockchains is one of the many ways nefarious actors can increase the privacy of their transactions and try to cash out their illicit proceedings. 

The latest example to date would be the FTX hack. The hackers swapped some of the stolen ETH for renBTC on 1inch, a well-known decentralized exchange. They would later bridge the funds through the ren Protocol and move them to the Bitcoin blockchain.

Due to the fact that cross-chain transfers make it harder to follow the flow of funds on blockchains, Cross-chain transfers are often used in the case of illicit crypto activities precisely because they make it harder to follow the flow of funds on blockchains.  And this represents higher risks in terms of money laundering and terrorism financing.

In 2020, the Financial Action Task Force (FATF) issued the “Virtual Assets Red Flag Indicators of Money Laundering and Terrorism Financing” report. In this report, FATF considers as a red flag the action of “Depositing VAs (virtual assets) at an exchange and then often immediately converting the VAs to multiple types of VAs, again incurring additional transaction fees, but without logical business explanation (e.g., portfolio diversification)”.

In its Targeted Update on Implementation of the FATF Standards on VAs and VASPs from June 2022, FATF has identified potential illicit finance risks in decentralized finance (DeFi), particularly in chain hopping or cross-chain transfers. The report states: “DeFi protocols can be used to perform ‘chain-hopping,’ which can make the transactions more difficult to trace.” Identifying cross-chain transactions should therefore be integrated into AML/CFT policies for efficient transaction monitoring and risk management.

Analyzing cross-chain transactions

Scorechain provides a blockchain analytics platform that facilitates crypto transaction monitoring and investigation processes. A cross-chain analysis feature has been developed as part of the Cut The Cord project. The goal of the feature is to give users the missing information between blockchains and help them reconstruct the money trail in case of cross-chain transfers.

With this feature, users can identify cross-chain transactions using the WBTC protocol and the exchange of BTC to ETH through the creation of WBTC. The feature will cover more protocols soon. It can flag a transaction if it has involved a cross-chain transfer and provide more information about the transfer (e.g., addresses, protocol, amounts, and twin transaction). With this information, users can seamlessly follow the funds across blockchains.

Origin and destination of a cross-chain transaction on Scorechain Analytics

The cross-chain feature is also available in Scorechain’s Investigation Tool. It provides users with a clear visualization of cross-chain transactions and allows them to continue their investigation on the other blockchain.

Cross-chain transactions in the Investigation Tool

Analyzing cross-chain transactions

Crypto assets have been around for more than 10 years with the aim of revolutionizing financial services and bringing enhanced financial inclusion. Over the last decade, there has been a significant expansion of crypto markets and broader adoption of crypto assets. In addition, blockchain technology also improved and developed new use cases, notably with blockchain interoperability and decentralized finance (DeFi).

However, all of this brings new challenges and threats in terms of AML/CFT compliance by creating new ways for illicit actors to enhance transaction anonymity for money laundering and terrorism financing. And this includes cross-chain transactions, which obfuscate the trail of funds across blockchains.

The Cut The Cord project aims to enhance AML tools’ capabilities in Europe. It puts a strong focus on crypto assets and the inherent challenges related to their development. Scorechain’s work in the Cut The Cord project aims to provide the right tools that can help overcome these challenges by facilitating AML/CFT compliance for crypto assets.

For more information about the project, please visit: You can also join the CTC Stakeholder Community by signing up in the following link:

Skip to content