AML and KYC Solutions: A Short Guide to Procedures That Keeps Your Crypto Assets Safe | HackerNoon


Cryptocurrency has become a big target for money laundering due to its anonymous nature and wide availability. Underground exchanges have even been set up to avoid detection by authorities and give fraudsters a place to enjoy the fruits of their crimes without worrying that they might be exposed.

But as governments increase their efforts to curb money laundering and terrorist financing, it is time to take a wider look at the solutions they use.

AML for Blockchain: Market Report

The annual amount of money laundered is hard to determine, as this practice is typically hidden from public view. However, the United Nations Office on Drugs and Crime (UNODC) research estimates that it may range from $0.8 to $2 trillion. Generally speaking, this amounts to 2-5% of global GDP.

The shift to the digital lifestyle, caused by the impact of COVID-19, has multiplied this value. Because of government restrictions, many people have given up cash and switched to a digital lifestyle. As a result, according to IMF research, the crypto asset market capitalization, which represented about 0.4 percent of the total U.S. stock market capitalization in early 2019, rose to nearly 5 percent in September 2021.

At the same time, the number of cryptocurrencies in the world climbed from 2,817 to 7,557 between November 2019 and November 2021. More than +250% growth was achieved.

The level of fraud was growing simultaneously. For example, the leading Immunefi “bug bounty platform” announced that according to its research, investors already lost more than $1.22 billion to hackers in the first three months of this year. That’s nearly eight times the amount lost in the first quarter of 2021 ($154 million).

Considering this, it is not surprising that the struggle against fraud is costly for worldwide organizations. In 2021, more than $213.9 billion were spent on these objectives. Mid-to-large financial agencies in the EMEA regions with the greatest spending attempt to tackle money laundering as well by regularly spending $45-48 million to guarantee that the standards are met.

As regulations tighten, virtual asset service providers (VASPs) have increasingly embraced compliance as a way to demonstrate their commitment to safeguarding clients’ assets. To ensure that regulatory obligations are met and navigate a complex regulatory landscape, virtual asset platforms (VASPs) use specific AML compliance tools and services.

AML and KYC — Two Heavyweights in the Fight Against Money Laundering

Although the notions AML and KYC are often used interchangeably, they have radically different meanings.

Anti-money laundering refers to practices designed to counter money laundering, combating terrorism financing (CFT), and prevent offenders from converting illicit funds into legitimate income. After AML rules were extended to the crypto industry entities in 2014, various virtual asset entities, or VASPs, were required to implement a risk-based approach to their strategies, and track client’s suspicious activity.

These VASPs include:

  • The exchanges itself;
  • Stablecoin issuers;
  • Certain Defi protocols;
  • Non-fungible token trading platforms.

Since a single subject can have multiple wallets and create an infinite number of transactions, once the AML program algorithm detects suspicious activity and assigns a label to the subject, it begins to track him and label all associated addresses and transactions. Then crypto exchanges and other large crypto services freeze these funds while they await regulatory review.

Know Your Customer is one of the approaches accessible to financial firms for completing their AML requirements. Since the approach entails reviewing new clients’ data, it decreases the risk of collaboration with money launderers and other criminals.

Exchanges can determine their internal verification processes independently. However, as a rule, they seek the following details at the very beginning:

  • [ ]Full name;
  • [ ]Date of birth;
  • [ ]Email address;
  • [ ]Phone number;
  • [ ]Place of residence;
  • [ ]ID (passport, license).

This list can be expanded, depending on how much money the client wants to enter the exchange with. The more info, the more info must be provided. For example, a centralized crypto exchange FREE2EX demands to pass four levels of verification. However, for 90% of clients, two verification steps are enough. But a 2014 study found that identity verification principles, guidance, and practices are often bureaucratic and ineffective.

A drawback of Know Your Customer (KYC) is that it does not provide insight into clients’ activities or transactions. This is where Know Your Transaction (KYT) comes in – a constituent component of crypto AML.

KYT plays a crucial role in blockchain, where the focus is on payment flows passing through addresses rather than individuals. To execute KYT processes alongside the regular KYC procedures for monitoring crypto transactions, crypto services employ a compliance software solution that identifies and analyzes the risks of blockchain transactions. Such solutions can also be used by individual investors.

Frozen Funds and How to Deal with Them

The asset freeze and bankruptcy of the centralized exchange is something that would make any crypto investor wake up in a cold sweat. We can only sympathize with those who put all their savings into Voyager Digital. This popular centralized exchange recently filed for bankruptcy because of the plunge in crypto markets.

Voyager Digital has disabled the ability to withdraw funds for all 3.5 million clients, which means that about $5.9 billion in cryptocurrency assets were locked down and inaccessible.

User access to accounts on an exchange might be restricted for a variety of reasons. However, if users are not breaching the terms and conditions of the exchange, and its activity is not suspended, it is likely caused by unusual activity.

Overseeing Actions

To protect virtual assets from money laundering and fraud, exchanges monitor their clients’ funds for fraudulent activity. In particular, they use AML compliance tools to identify potentially risky transactions that involve prohibited regions or entities — like those used for ransomware and malware. Once the account is labeled by the tool, the user’s funds are held pending validation by the regulators.

If an account has been frozen, the holder should contact the exchange’s customer support service for details. Once the support service provides an answer, the user is expected to be asked to prove the source of their assets.

While the reasons for a suspension may vary, it could take weeks or months for users to get their accounts back. And even if users manage to recover the account, it could be terminated again in the future for several reasons. In the worst case, the account could be frozen, and the personal information details of its holder may be passed on to the law enforcement authorities if it was found to have handled illicit funds. The crypto assets will be seized by the exchange in that case.

Overcoming Challenges

To avoid such scenarios, users should check transaction and wallet risk before transferring funds to an exchange. One solution that allows crypto investors to check wallet addresses in just a few clicks is the AMLSafe Wallet. AMLSafe is a cryptocurrency wallet that provides various cryptocurrency pairings and rapid AML verifications. Alongside the basic functionality for buying, selling, exchanging, sending, and receiving crypto assets, it has several premium features that increase security and make it a convenient tool for working with digital assets.

By applying AML/CFT, the AMLSafe cryptocurrency wallet labels high-risk transactions or those that are potentially fraudulent. For example, a user can view the whole chain of the cryptocurrency’s connections, or check its counterparty’s wallet to see how risky it is to interact with.

The app includes a number of useful features, such as the ability to create and set up new wallets quickly and easily, buy and sell the largest cryptocurrencies by market cap (Bitcoin, Ethereum, Tether) with fiat pairs, and use a seed phrase for generating multiple coin addresses.

Key Takeaways

Every year, the authorities demand that crypto asset entities implement more effective and complex AML procedures to prevent money laundering and terrorist funding. VASPs are reacting by building internal rules and processes backed with specific tools, but this is clearly not enough. Users who believe they can carry out operations safely using cryptocurrencies must realize that the full brunt of handling security is often their responsibility.

Solutions like the AMLSafe Wallet or exchanges with stringent security measures are the go-to applications for risk-averse users who wish to steer clear of possible confrontations with the authorities, or having their accounts locked for unclear reasons.

Disclaimer: This material is not sponsored by any organization mentioned in the article.


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