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Crypto Transactions: A Recipe for Anonymity and Illicit Activity
In a world where cryptocurrency transactions are increasingly difficult to trace, alarm bells should be ringing loudly. While Bitcoin’s public ledger provides a unique opportunity to develop a profile or “hygiene rating” of transactions, other enhanced anonymity coins pose significant risks.
The Growth of Decentralized Finance (DeFi)
The growth of DeFi protocols has brought new opportunities for asset swapping and bridging between different assets. However, this also represents a major risk, as illicit assets can be easily laundered through these protocols.
To assess the risk profile of a transaction, it’s essential to understand the nature of the crypto involved, its traceability, and the rationale behind its use. This requires a deep dive into the world of crypto entities, including exchanges, custodians, wallet providers, issuers, ATM operators, and miners.
Crypto Entities: A Hidden World
Exchanges allow parties to buy and sell crypto for other forms of crypto or fiat currency. Custodians hold crypto on behalf of third parties, similar to traditional banking. Wallet providers offer self-custody options, while issuers create new cryptocurrencies with specific features.
However, two classes of entities warrant special attention: crypto ATM operators and miners. ATMs allow physical cash to be exchanged for crypto, with strict regulatory frameworks in place to capture identity and verification information. Miners provide computing power to run the crypto network, generating new or untainted crypto in the process.
Regulatory Status: A Moving Target
The regulatory status of crypto varies country by country, making it essential to understand the specific laws and regulations governing a particular crypto or entity. However, simply relying on regulatory stamps of approval is insufficient.
It’s crucial to request information from entities, such as MLRO reports and regulatory filings, to identify potential concerns or issues. A comprehensive understanding of the regulatory perimeter is necessary to detect and remove gaps that can facilitate financial crime.
Conclusion
The increasing use of crypto in traditional finance poses significant risks if not managed properly. Our survey highlights the lack of understanding among companies regarding the financial crime risks associated with cryptocurrencies.
As central banks adopt similar forms of technology, it’s essential to develop sophisticated frameworks to monitor and detect illicit activity. The advent of AI tools that can automate the transfer of crypto and obfuscate its use for illicit activities underscores the need for ubiquitous monitoring and detection systems.
References
- CoinMarketCap.com