Over the past 6 years, only through identified cryptocurrency addresses related to illegal activities (proceeds from darknet sites, ransomware, fraud, terrorism ...) passed about 60 billion dollars. Some of these funds went through the process of "laundering" through exchanges, mixers, and ordinary users' accounts.
Ordinary users like you and me sometimes don't even realize that funds received from an exchange or other participant may have a "dark" origin and later face blocking on an exchange or other service. To mitigate these risks, it is important to know the origin history of the funds in your crypto wallet and also understand the risk score for each of your counterparties. This approach is prescribed by AML regulations.
AML (Anti-Money Laundering) procedures are a set of measures taken by financial and other market participants (including in the crypto world) to detect and prevent attempts to obtain and legalize funds originating from illegal activities.
Understanding the risks involved, the importance of AML checks on transactions and crypto wallets, and following security guidelines will help you protect your own assets.
What is AML Cryptocurrency Verification
At the moment, the cryptocurrency market has an impressive size - 425 million users. The market capitalization of tokens is more than $1 trillion.
The governments of many countries can no longer remain aloof from such a significant market. They realize the importance of defining the legal status of cryptocurrencies, addressing taxation issues, creating a favorable climate to attract blockchain specialists, encouraging the development of companies in this industry and, ultimately, ensuring the digital sovereignty of their country.
Along with the opportunities presented by blockchain technology and cryptocurrencies, there are also certain risks. For example, cryptocurrencies can be used as a tool to legalize illegally obtained funds. Often the attraction of cryptocurrencies for criminals lies in their relative anonymity.
Ordinary users are strongly advised to AML-check their counterparties and the transactions they receive for links to illegal activity. There are services for this purpose: Btrace, AML bot, GetBlock. By doing so, you are not only being vigilant, reducing the risk of having your funds blocked or coming under suspicion, but also preventing the legalization of illegal funds through your account.
AML verification is analyzing the sources of funds flowing into a crypto address and evaluating the risk-score. The risk-score is a percentage risk score ranging from 0 to 100. It takes into account a cryptocurrency address's revenue history, the likelihood of its association with illicit activity, user behavioral patterns, and available information about the address itself, its associated clusters, and the owner.
Let's explain by example. Before sending cryptocurrency to an unknown user, it is recommended to check their crypto address. If the analysis shows an elevated risk (between 70 and 100 risk-score) or a meaningful connection to authorized exchanges and mixers, it is worth reconsidering the transaction. This can prevent contact with scammers and save you from possible future blocking on exchanges that follow AML procedures.
AML principles in cryptocurrencies
There is an intergovernmental organization FATF, which fights against money laundering. It has issued a "Travel Rule" document for crypto companies. There are other international and local guidelines such as 6AMLD, AML/CFT, etc. that market professionals should follow.
In essence, these guidelines boil down to two principles:
KYC - an abbreviation of the English phrase "know your customer/client", or "know your customer". The essence of the principle is that before providing any services, an exchange or crypto-exchange must establish the identity of the person who interacts with them through the platform.
KYT - know your transaction. Companies need to know how the money appeared on a particular wallet. This is the only way to be sure that crypto is not linked to illegal activity.
How criminals launder dirty crypto
There are many methods for laundering dubious cryptocurrency, and the methods are getting trickier every year. Here are some of the most popular ones:
Use of mixers* and anonymity tools. Doubtful funds are entered into mixers or wallets that utilize technologies such as CoinJoin - such as Tornado Cash, Wasabi, and Samourai. Next, funds that cannot be reliably linked to the original user are withdrawn from the general pool. As a consequence, the funds are partially whitened and easier to legalize.
The use of transit addresses and exchange accounts registered to droppers. Scammers create many intermediate addresses and conduct many transactions to make it difficult to trace. Often added to this is the transfer of tokens from one network to another via DEX** (decentralized exchanges). After that, the funds are deposited into exchange accounts registered to dropships.
Withdrawal via crypto exchanges without KYC, KYT. Despite stricter regulation, some crypto exchanges still do not comply with AML standards. Fraudsters identify such platforms and convert funds through them, shifting all responsibility to the exchangers.
Secured transactions via smart contracts. Smart contracts are software codes that specify all the terms of the transaction. For example, pledged bitcoin - received USDT or any other cryptocurrency according to the contract. In the case of financial fraud: pledged criminal assets - received clean money, which can be safely disposed of. Of course, no one comes back for the collateral.
NFT issuance. The attacker issues NFTs and buys them from himself with dirty crypto. Thanks to this process, has a net income at the end. If law enforcement agencies are interested in this citizen, he will calmly say that he earned dirty crypto on the sale of the collection. Where the money came from - he doesn't know.
*Mixers - are services designed to provide transaction anonymity by mixing cryptocurrency from different users to make it harder to trace the origin of funds. The idea is behind the desire to provide greater privacy and confidentiality for users, in the context that many cryptocurrency transactions are public and transparent to all. As mixers have grown in popularity, regulators have paid more attention to them. Many governments and anti-crime agencies see them as a tool for money laundering and other illegal activities. Some mixers have been shut down and their operators arrested.
**DEX are decentralized exchanges that allow people to trade cryptocurrency with each other without having to trust a centralized party or intermediary. They are based on smart contracts.
Is there AML on Dex
Decentralized exchanges (DEXs) by their very nature allow users to conduct transactions without intermediaries and without centralized control. However, due to growing concerns about money laundering and terrorist financing, a number of countries have begun to consider applying AML rules to DEXs.
By default, DEXs do not require KYC (know your customer) procedures and have no centralized control over who uses their platform. This makes it difficult or impossible to directly implement traditional AML procedures.
Some countries are considering introducing regulatory requirements for DEXs to comply with AML standards. However, the implementation of such regulation is complicated by the decentralized nature of these platforms. AML in DEX is a subject of debate and consideration in the context of global cryptocurrency regulation.
It is important to understand - in the process of legalizing "dirty" cryptocurrency, attackers do not see DEX as an end point. DEX, unlike CEX and P2P transactions, does not allow for the exchange of cryptocurrency into fiat. For cybercriminals, it is only a tool to obfuscate their tracks;
How to minimize the risks of interacting with "dirty" crypto
Always verify the cryptocurrency addresses of your counterparties, whether they are senders or receivers. Before making transactions, check this address on AML services for risk-score.
If you have no way of knowing the cryptocurrency address of the counterparty, use a precautionary tactic: accept funds to a new, previously unused address. After receiving the funds, analyze their origin. If the funds are impeccable, safely transfer them to your main crypto address or exchange. If the risk is high, soon gather all the circumstances of the transaction to be able to explain the source of the funds.
It is recommended to change your cryptocurrency address regularly. The risk-score of your previous counterparties may change, which in turn may negatively affect your risk-score.
