In light of recent events of Russia’s war in Ukraine and public concerns that sanctioned individuals and countries might try to use crypto to circumvent sanctions and banking restrictions, let’s take a look under the hood of cryptocurrency AML and how actually anonymous crypto transactions are.
Here’s the thing about the cryptocurrency industry — if you asked anyone who barely scratched the surface of it or just anyone who hasn’t been following it throughout its more recent developments about it, they might give you this perspective of it as a “haven” for anonymous transactions, money laundering, fraud, and other sorts of nefarious activities.
This sort of profanity has taken things one step further and has been seen as a perceived risk carried through compliance functions in banks, where account closures were common for anyone who decided to buy Bitcoin.
Think about it — how else would banks or institutions react to a technology they do not fully understand?
Let’s take a look at this from a psychological standpoint.
We all, as humans, fear something we do not fully understand or are aware of. If you don’t prepare for an exam in college, you will arrive at the exam with fear of failing because you aren’t 100% sure what to expect since you do not fully understand the subject. Some other students might decide to cheat their way out of this little debacle.
Well, this situation was quite similar within the cryptocurrency industry as well. Furthermore, I saw a lot of Bitcoin mixers in the news, which spelled even more bad news for this perception.
You see, by default, Bitcoin transactions are extremely easy to trace. The blockchain is fully transparent; anyone can access and view it. Even you can go to Blockchain Explorer right now and figure out a way to view each transaction that occurred on the Bitcoin cryptocurrency network. However, all you see are addresses, not connected to a name or an ID, for example, as would bank accounts.
A Shady History
However, despite this transparency, numerous projects known as “mixers” claim to be able to hide the link between a user’s cryptocurrency address and real-life identity.
But it’s still not a guarantee — here’s proof that on 27 April 2021, the U.S. authorities arrested the lead person behind Bitcoin Fog, a Darknet-based Bitcoin mixing service, after analyzing ten years’ worth of blockchain data.
It was a Russian-Swedish citizen Roman Sterlingov, who laundered more than 1.2 million Bitcoin worth $335 million while serving as the website’s administrator. It was estimated that 23% or more of the Bitcoin that flew through the mixing service was transferred to darknet-based narcotics marketplaces.
Or take an even more recent seizure of a crypto money laundering couple by the US Justice Department in connection to the 2016 Bitfinex hack.
Here’s my take on it. While this illegal activity did occur, in the end, after drawing enough attention to himself, the culprit was found, arrested, and the situation was eventually resolved due to the open and transparent nature of blockchains.
Mix it or not — it’s all about analytics computational power set out against you. If IRS has you in its sights — there’s a good chance crypto won’t save you.
This mindset, however, has managed to shift throughout the past few years, with Financial Crimes Enforcement Network (FinCEN), Financial Action Task Force (FATF), as well as other regulatory bodies starting to acknowledge the potential blockchain technology has. These agencies started developing frameworks that can manage the risks presented by the aspects of blockchain technology.
However, don’t get me wrong, it’s still a challenge because existing regulatory models are designed based on different assumptions about how money moves from point A to point B, respectively.
If you apply these concepts to crypto, it might make a bit of sense. Still, it all falls apart when it is implemented without many modifications to account for the differences in the technology underneath the open ledger.
However, skepticism evolved into curiosity over time, which became enthusiasm. We saw teams build robust tools with capabilities that can go beyond what is possible with traditional financial products.
Institutional Anti Money Laundering (AML)
Let me give you an example of what institutional crypto AML looks like. Take Bitfury’s Crystal Blockchain — they monitor blockchain transactions for up to 100,000 hops, so you can understand all fund flow history, follow transaction patterns, and know the sources of funds and whether it’s legal. This is even easier in the case of crypto since all transactions are on the public ledger — you need to pull the first string.
They also analyze and rank risks similar to traditional banking AML monitoring systems, notifying parties of potentially irregular activities, so you have knowledge of your incoming funds, evaluate the exposure, and can successfully mitigate risk on your crypto platform for you and your customers.
Crypto investigations and AML/CFT/KYT initiatives are no joke.
Even though many criminals are using cryptocurrencies, especially during the recent political events, e-commerce growth, and digital payments, the crypto anti-laundering technologies are here to stay.
I’m trying to say here that there are, and always will be, criminals and people who want their privacy. They are just leveraging blockchain technology. However, even with the recent rise of decentralized finance (DeFi), they will also be fended off.
Criminals have exploited traditional payment systems since they were founded and are not exclusively seen in cryptocurrencies.
The benefits of blockchain technology far outweigh the drawbacks when you consider everything cryptocurrencies have introduced in terms of alternative financial instruments.
Coinbase compiled research from different blockchain intelligence companies into a cool report with some interesting notes.
Cybercrime grew during the COVID pandemic; however, the proportion of criminals using cryptocurrencies fell from 2.1% in 2019 to less than 1% in 2020. Furthermore, more than 99% of cryptocurrency transactions run through regulated exchanges that undergo KYC and AML requirements. This means that crypto exchange platforms have information about the identity of each individual behind their wallet address.
The UN estimates that 2% to 5% of global GBP, up to $2 Trillion, is laundered through the traditional financial system annually.
A Shift in Perspective
The EU has also made plans to ban cryptocurrency anonymity in an anti-money laundering plan, where a new agency would enforce requirements for crypto providers to verify the identity of the users.
Money laundering existed long before cryptocurrencies and will exist even after the next technological leap beyond cryptocurrencies. The methodology used to catch these launderers would not have been possible before. The world is slowly adapting to crypto broadly, and new challenges are on the horizon.
What about Monero and Tor?
Is Monero 100% anonymous cryptocurrency? Short answer — no, neither Tor nor Monero will fix the problem of human stupidity, neglect, and laziness.
In the same way, Tor alone is not enough to keep you anonymous. You must have a good operation security workflow and adhere to it holistically. Tor and Monero are just tools in the shady arsenal, but they are not a guarantee of your privacy.
Monero is just an excellent tool in the privacy arsenal, and it’s by far the best we’ve got in terms of financial privacy. And it’s improving all the time.
But in no way will Monero save you if, for example, you woke up after a hangover and went online without your regular VPN/Tor routine just once. Especially on a cafe WiFi with cameras and personnel having your credit card on record.
“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” — Letter from Benjamin Franklin to French scientist Jean-Baptiste Leroy in 1789.
Suppose anyone tells you that ANY tech solution is a one-stop-shop for your 100% privacy. In that case, they just don’t understand how hard real financial privacy is against the extent of resources of a government-level adversary — assuming that is your threat model, as is the case with Putin and his lackeys being under the microscope of the entire world’s financial monitoring.