The cryptocurrency industry has experienced a boom in the past 12 months. Since 2019 started with a total market value of $ 200 billion, the explosion in Bitcoin’s value has quadrupled when it kicked off in 2020 – and digital real estate has hit $ 1 trillion at a time, according to CoinMarketCap.
As the cryptocurrency sector continues to grow and thrive, so does cryptocurrency crime. In 2019, $ 3.8 billion in virtual assets was lost due to fraud. In 2020, that number increased to nearly $ 4.9 billion.
Fraud, money laundering and terrorist financing are not limited to the cryptocurrency realm, and every financial system on earth must take steps to ensure that infrastructure is not used for illegal purposes. But regulators around the world are now stepping up their efforts to combat criminal activity – and this should affect the work of crypto service providers, many of whom remain in the shadows.
Regular media coverage of digital assets has skyrocketed in recent months, with countless columns dedicated to the current Bitcoin rally. This increase in exposure also leads to new research, especially when exchanges fall prey to high-profile violations. Fortunately, there are ways that cryptocurrencies can implement measures to protect transactions and act in the best interest of consumers in the process.
Reach the match
Amid the disruptive landscape of cryptocurrency regulation, one of the most important sets of guidelines has been developed by the Financial Action Task Force, which has 39 members, including the European Commission, Japan, the United Kingdom and the United States.
The Financial Action Task Force on Money Laundering (FATF) recently released a series of warning indicators that indicate potentially suspicious activity or possible attempts by organizations to evade law enforcement. For example, the volume and frequency of transactions can be alarming for compliance professionals, especially if such recurring payments do not reach the reporting threshold.
Other issues can arise when making deposits to bank accounts that use a name other than the one listed on the cryptocurrency exchange, where mixers and switches are used to hide the origin of BTC payments, or when potentially suspicious IP addresses are used.
At first, it may seem like a nightmare for virtual asset service providers to offer security measures that quickly spot these red flags. In a competitive marketplace, some will worry about the cost of stopping high-risk transactions in their path, as well as the disruption their business might face if confused with something more risky.
But there are platforms that can track new transactions in real time – instantly assigning a risk score to each transaction. This is by no means an easy task, since the large volume of transactions that go through the blockchain every day means that the analysis must be performed continuously and without interruption.
The speed with which attackers can execute transactions also means that compliance systems must act quickly – by identifying centers of suspicious activity and establishing meaningful links with other wallets where potentially illegal funds are being distributed. Past data can also be used to predict future events, which means exchanges can be alerted to impending risky activity even if the transaction has not yet been confirmed.
The benefits associated with this type of program are not hypothetical. In late September, KuCoin announced that about $ 280 million had been stolen from the exchange as a result of a security breach. Analytics tools allowed the company to track this money and freeze it so that it could not be laundered in the future – 84% of the confiscated assets were subsequently returned.
The technical nature of blockchain – along with the proliferation of cryptocurrency scams – has caused a huge problem with Bitcoin’s public image. But despite the shortcomings of its first decade of existence, aspects of blockchain design are proponents of openness and security, which means that it can provide a much higher level of security than legacy economies. If $ 500,000 bills were stolen from a bank safe, it would be more difficult to trace the funds than if the same amount was taken in BTC on a secure exchange.