Anti Money Laundering (AML) is a rising concern in the cryptocurrency market as the mainstream adoption of crypto is ramping up at an exponential pace. A report by CipherTrace revealed that over $3.5 billion worth of BTC was transacted by criminally associated bitcoin addresses. These addresses are controlled by hackers, dark market users, fraudsters, and even ransomware actors. These funds will eventually need to be laundered into the system using the three stages of money laundering, placement, hiding, and integration.
Evidently, a portion of these criminally transacted funds are being laundered into the system. The report further revealed that exchanges in the United States alone have received over $8.4 million worth of BTC directly from criminal addresses and have sent $41.2 million worth of bitcoin directly to criminally associated BTC addresses. Considering the report has only tracked the flagship cryptocurrency asset Bitcoin in the United States the number of funds laundered globally across all the cryptocurrencies could be mind-numbing to say the least.
With more retail and institutional investors rushing towards Bitcoin adoption and investing due to the meteoric rise of the asset to the current levels of $60,000, it is highly essential that there are safeguards available to these investors to learn more about the origin of funds transferred to their wallets and investigate the wallets where the funds were transferred from. As blockchain technology offers a public ledger transparent to all, this aspect helps to identify financial crime and related transactions.
To aid users with this, a division of Corporation Limited called AMLBot has created an AML screening platform just for cryptocurrencies and associated crypto wallets. This platform helps to ensure that enterprises and investors alike are associated with safe and legitimate crypto funds and wallets, thus, complying to a high standard of their AML Compliance Policy defines. Their automated AMLBot based on an algorithm, checks crypto wallets to identify the source of the funds in the wallets and segregates it into different categories namely, trusted exchanges, Miners, dark market, illegal service, dark service,etc.
The platform facilitates the online scoring of crypto addresses created by a team of financial technology specialists in line with global anti money laundering (AML) requirements. Their algorithm analyzes more than 10,000 open sources and 2,500 plus scam addresses in real time to give results in just above 30 seconds. Their API integration facilitates users to save time on this activity, allowing it to run in the background while users continue other activities. Any user could log on to their platform and get the wallet analysed without having the need to install or download any files. The platform has acquired the certifications they needed to operate in the AML and KYC domain.
Just a couple of weeks ago AMLBot together with the strategic partner Hacken has launched the smart contract PureFi. The protocol is using the zero-knowledge-proof method to assign the score and allowing users to be sure they are not involved in the trail of “dirty” money flows.
Here we interview the CEO of AMLBot, Vyacheslav Demchuk, to understand more about the AML issues in crypto and what AMLBot does to solve them:
Q1. Vyacheslav, please explain how significant of an issue is AML for crypto exchanges, institutions, and investors alike at this point?
The regulators around the world are showing their concern regarding the risks of money laundering through the crypto exchanges, despite the fact that the “dirty” money has made only 2% of the total transaction volume. VASPs transfer money, and for them the AML has become the core pillar of their business operations, as there are under more scrutiny than the regular banks right now.
Q2. Does the exponential increase in crypto adoption also mean that more scrupulous and criminal entities are increasing to prey on unsuspecting new investors in the market?
The widespread adoption of cryptocurrency and the recent bull market attracts attention not only from honest investors but also criminals. The good thing is that blockchain technology has endless capabilities and applications. The smart contract PureFi can help ordinary investors as well as professional organizations to shield themselves from criminal money and protect them from an investigation by the authorities.
Q3. Can enterprises and investors be subject to huge fines by regulators for dealing with criminal entities?
Yes, of course. The law is the law, and if you deal with criminal entities, you are not only subject to large fines, but also may face criminal charges. Some countries, like Turkey, have already added cryptocurrency being subject to the AML laws, but even if there are no definite rules yet, any company or person might get into the spotlight of the FinCEN (U.S. Financial Crimes Enforcement Network). The most recent news, that has shaken the prices of Bitcoin and other altcoins is the U.S. authorities’ investigation of the largest cryptocurrency exchange Binance and its possible connection to money laundering.
The thing is even if you are not intending to participate in the transfer of the illegal funds it is the responsibility of the exchange to ensure the AML/KYC procedures are in place to prevent it. Individuals, on the other hand, will be exempt from the investigation if they provide proof, they are not involved in the “dirty” money. The PureFi smart contract will ensure the users can prove they accepted the “clean” funds, while the exchanges can prove they did not accept any criminal money.
Q4. How important is the AML compliance policy for enterprises dealing with cryptocurrencies?
The regulation on the decentralized exchanges (DEXs) is not completely developed, however, the U.S. authorities several times have shown their interest and concern over the chance of illegal money going through the system. This does not only apply to DEXs, but the centralized exchanges are also at risk of accepting dirty money and recently the largest cryptocurrency exchange Binance is investigated for possible involvement of the laundering of the illegal funds.
Q5. What are the risks of not having a stringent AML policy in place?
Of course, the criminals who want to launder illegally earned money are not doing it very obviously. They are looking for ways to hide the trail, so the authorities are very scrupulously investigating all involved parties. So, for any enterprise and individual, it is important to show and prove they are not involved in the trafficking of illegal funds. The PureFi NFT certificate will protect any user from suspicion of their involvement in money laundering.
Q6. Where does AMLBot come into upholding the AML policy?
AMLBot has a team of blockchain developers as well as trained AML specialists. We have developed oracles that allow bringing on-chain the information that is stored off-chain, such as AML databases. Our services fully protect from the risks of getting involved in illicit fund transfer. Recently, we have developed the smart contract PureFi that will allow anyone gets the NFT certificate and the proof that they have accepted or transferred funds with a low ML score.
Q7. How does AMLBot ensure the privacy of the wallets that the algorithm is analysing and ensure that user’s confidential information is not leaked or visible to scrupulous entities?
Thanks to the PureFi smart contract, developed jointly by AMLBot and Hacken, it is impossible to leak confidential information, nor share the information that wasn’t chosen. The PureFi smart contract uses zero-knowledge-proof, a cryptography method, where no information is actually accessed. An example outside of the blockchain world is the merchant checking if there are enough funds for payment on the buyers’ account, without actually knowing the real balance.
The method is not accessing the information but tests the probabilities of different hypotheses, and when the probability is high enough, returns an answer. PureFi can allows checking the Money Laundering (ML) score of a transfer, or a wallet, without gaining any access to the identity of the market participant, nor any other data, so it is impossible to leak anything.
Q8. Are they any loopholes available for money launderers to easily exploit the system?
Various statistics and reports suggest that despite a large amount of laundered money through the cryptocurrency markets, the number of addresses associated with illicit funds is quite low. The statistics show that the largest crypto exchanges received these funds, through over-the-counter brokers (OTC) who are a large and important part of the crypto trading ecosystem, but they have very low AML mechanisms in place. It is important for regulators to ensure that these market players are subject to tough AML requirements.
Q9. Christine LaGarde has been dismissive of Bitcoin due to the “funny business” that proliferates in the market, is there something legacy system regulators can do to curb such activities with cryptocurrencies?
The European Union has finally understood, that cryptocurrency is not only becoming widely adopted but also the future. On the 24th of September 2020, the European Union has adopted the new regulation Markets in Crypto-Assets or MiCA, aiming to protect investors and consumers in the crypto industry. The primary goal of the initiative is to mitigate the risks
posed by crypto assets (fraud, cyberattacks, market manipulation). So, yes, regulators are moving in the right direction and it would be very helpful to accelerate the growth of DeFi and crypto adoption if the clear rulebook presented to market participants as soon as possible.
Q10. With the markets developing at such a rapid pace, what is AMLBot doing to keep up with this pace?
AMLBot is not just watching the rapid development of the markets, we are participating, and we are the front-runners. I can say so because we started to look into the compliance subject before the AML for decentralized exchanges was even an issue. We understood, that the decentralized exchanges, which use the liquidity pools (unlike the centralized exchanges that use an order book) are an easy victim for the “dirty” money flows. We started to provide oracles, that allowed us to check the purity of the funds.
Recently, we have developed in partnership with Hacken a revolutionary information-sharing smart contract called PureFi, allowing us to comply with the AML/KYC without giving out any data.