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For Bitcoin (BTC) creator Satoshi Nakamoto, the motivation for creating a new payments ecosystem from scratch in 2009 was the banking sector’s over-enthusiastic and risky lending practices, accompanied by the bursting of the housing bubble. stemmed from the economic turmoil caused by in many countries at the time.
And after the fallout, who do you think picked up the debris? Taxpayers, of course, Durgham Mushtaha, business development manager at blockchain analytics firm Coinfirm, said in an exclusive interview with Cointelegraph.
Satoshi recognized the need for a new monetary system based on fairness and equity. This is a system that puts power back in people’s hands. An untrusted system with anonymous participants, peer-to-peer trading, and no need for a central entity.
However, the ensuing market downturn made the crypto industry aware of the need to build credibility, authority and trust by actively working with regulators and legislators. Enter Anti-Money Laundering (AML) and Know Your Customer (KYC) procedures.
Mushtaha emphasized that unlike fiat currencies, transactions of coins and tokens built on blockchain technology are much easier to track using on-chain analytics and AML tools. started a discussion. Additionally, his KYC procedures for identifying and legitimizing users across major cryptocurrency exchanges have resulted in a much more robust financial system, reducing the impact of money laundering and other illegal activity. It has become difficult to receive
As a result, the image of the sector has been effectively strengthened and more people have come to trust their hard-earned money in the market. The next bull market will be a watershed moment, with fears fading and the public jumping into crypto as the sector grows exponentially, he said.
Early discussions and implementation of global AML and KYC laws date back 50 years, marked by the Bank Secrecy Act (BSA) of 1970 and the establishment of the Global Financial Action Task Force (FATF) in 1989. Traditional finance over the last 50 years has been adopted by crypto and niche sectors of the industry, including decentralized finance, Mushtaha added.
Where we differ from traditional finance is the on-chain analytical process. There is no blockchain in traditional finance, so the blockchain sector is not siloed, so a big part of the jigsaw puzzle is missing. increase.”
Sharing insights on what today’s KYC and AML implementations look like from a provider’s perspective, Mushtaha said that Coinfirm has a number of potential threats such as money laundering, terrorism financing, sanctions, drug trafficking, ransomware, fraud, investment fraud, and more. revealed that it has over 350 risk scenario indicators covering
As AML becomes more sophisticated in the decentralized finance (DeFi) space, it becomes increasingly difficult to determine whether your wallet is directly related to illicit activity, or whether your wallet is at risk from another address by receiving assets from illicit gains. In addition, technology has evolved with the cryptocurrency ecosystem to provide risk profiles for wallet addresses and transactions based on on-chain analytics.
Each year there are numerous reports of Confirmed The use of money laundering has consistently declined, with transactions containing fraudulent addresses representing just 0.15% of cryptocurrency transaction volume in 2021. Mushtaha thinks the findings make sense.
Those involved in illegal activities are wise to avoid blockchain-related assets and stick to the tried and tested dollar. The US dollar remains the most used and favored currency for money laundering. He added that in cryptocurrencies, there is little criminals can do once a wallet address is identified as holding assets obtained through illegal activity.
99.85% of activity on blockchain is not criminal. Keep this in mind as you consider your next tough regulation proposal.
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Crypto Crime Trends in 2022: Illegal Trading Activity Hits All-Time Low in Share of All Cryptocurrency Activity https://t.co/94VB7FiyZbSten Tamkivi (@seikatsu) January 16, 2022
Current regulatory scrutiny to ensure crypto exchanges are KYC compliant makes it difficult for bad actors to turn crypto assets into fiat currency or use them on the open market notice. Mushtah said of the various methods most commonly used to transfer illegal funds:
Certainly, they can try to make use of anonymization technologies such as mixers, tumblers and privacy coins, but their assets will be flagged and tainted for using them.
As cryptocurrencies become more accepted and pervasive globally, criminals are turning to the black market to sell their ill-gotten assets. Given the availability of markets where money can be spent without KYC, future law enforcement agencies will crack down on such sites.
KYC and AML tools can now associate IP addresses with wallet addresses, and clustering algorithms do an amazing job at identifying associated addresses. Such measures are difficult to launder through cross-border exchanges, even for national-level actors. The Office of Foreign Assets Control (OFAC) has a list of identified addresses belonging to sanctioned persons and entities. Assets at these addresses are too hot for anyone to handle, Mushtah said.
Central bank digital currencies (CBDCs) have the potential to give central banks a level of control not seen in fiat currencies. Imagine all the problems with fiat money, including government manipulation and inflation. A CBDC would allow for more scrutiny of users’ spending habits, allowing the central bank to freeze, limit and set expiration dates on holdings, automatically tax all transactions, and even decide what can and cannot be purchased. make it possible. All merchants, financial institutions and retail customers must also comply with KYC, which discourages money laundering, Mushtaha said.
Libra, a permissioned blockchain-based stablecoin launched by Facebook parent company Meta, failed to gain traction when it launched in 2019. As a result, mainstream conversations about Meta’s cryptographic initiatives prompted many governments to try out his CBDC, making China one of his first countries to launch. Its CBDC.
The potential for currency control is not the only motivation for the wave of government-sponsored innovation. While pointing out that the government will no longer follow the gold standard, Mushtah stressed that current inflation is a direct result of federal and central agencies printing money at will.
The United States has printed more dollars than ever before, and the result is rampant off-chart inflation.
Moreover, Mushtaha argued that raising interest rates too quickly would cause over-indebted financial institutions to collapse in a catastrophic chain reaction. As a result, CBDC stands out as a solution for central banks, adding, “For the first time, central banks can not only create a currency, but also destroy it.”
Based on extensive experience in the AML/KYC sector, Mushtaha says technology should adapt to evolving regulations, not the other way around. Startup trading platforms that decide to integrate AML tools have the option to apply for a Virtual Asset Service Provider (VASP) and securities license. Being compliant means enormous opportunities open up for you. Funding in this area is only available to those who focus on compliance. As a result, AML solution providers can bridge the gap between the crypto world and a compliant financial system.
Mushtaha shared an instance of working with a startup currently developing a non-fungible token (NFT) based KYC solution using zero-knowledge proofs. The cleverness comes from the realization that the NFTs used for KYC do not have to solve the double-spending problem and can be completely decoupled from the blockchain. Stored in an NFT, zk-Proof can be sent to each platform where an individual wishes to open an account.
The solution is designed to act as a centralized entity for storing NFT information, but “most often on a permissioned (and not publicly accessible) chain” where NFTs are digitized next. 10 years to serve KYC use cases, Mushtaha asserts it is a step in the right direction. It continues to permeate the industry.
When it comes to AML, the pace of innovation is accelerating, so new tools and advancements are coming out every month. According to Mushtaha, Coinfirm can use internal tools to analyze every wallet address that contributes assets to a liquidity pool controlled by smart contracts, giving him the “risk of tens of thousands of addresses at a time.” You can,” he adds.
A key trend will be AI innovation focused on algorithmically generated, transaction-based user behavior pattern recognition. Blockchains hold a wealth of behavioral data that can be used to analyze money laundering patterns, allowing us to estimate the risk profile of wallet addresses that operate in these ways, he said. explains Mr.
Machine learning tools, which have collected massive datasets over the years in the cryptocurrency world, are also utilized to predict potential trading outcomes.
The FATF issued revised guidance last October labeling all crypto assets that protect privacy or do not require an intermediary of some kind as high risk. is to eliminate “any threat to the integrity of the international financial system”. Therefore, with the introduction of the Travel Rule in 2019, all VASPs are required to pass certain information to the next financial institution in a transaction.
However, when the rule applies to non-hosted wallet addresses held by individuals, the FATF has decided that if peer-to-peer transactions are likely to increase in the next few years, the It seems to be laying the groundwork, violating privacy rights,” Mushtaha said.
A more prudent approach, Mushtaha said, would be to make cross-border transactions easier and harmonize the largely fragmented implementation approach of existing travel rules across jurisdictions, while also focusing on VASP compliance. is.
Given the availability of off-the-shelf AML solutions designed to each VASP’s specific requirements, Mushtaha believes there is “no more excuse” for ignoring compliance. VASPs also have an obligation to produce comprehensive educational materials for their users as the world prepares for frictionless mass adoption.
#binance is working closely with regulators around the world to push Web3 into the mainstream.
Hear from Binance VP, Global Marketing, James Rothwell as he discusses the importance of regulation in establishing the world of Web3. pic.twitter.com/ZaJfLQPX35
Binance (@binance) August 2, 2022
Mushtaha believes crypto entrepreneurs are uniquely positioned to help create the next chapter of the global financial system, understanding that AML compliance is a catalyst, not an obstacle to success. need to do it. Most retail investors want to navigate this space safely while managing their risks while trading, he recommended. And giving these investors peace of mind should be a VASP priority.
KYC and AML are a necessary part of today’s macroeconomy and a crucial part of the crypto space. Mushtaha disagrees with the notion that regulation undermines anonymity.
While regulation will drive large-scale adoption, players in the space have an obligation to proactively propose regulatory frameworks that encourage innovation while curbing illegal activity. There has to be a balance that allows you to monitor money laundering, these are not mutually exclusive goals, you can have both.
And Mushtah recommended to investors the age-old adage, “Do your own research.”
