AML and KYC Solutions: A Short Guide to the Procedures that Keep Your Crypto Assets Safe


Cryptocurrency has become a major target for money laundering due to its anonymous nature and wide availability. Clandestine exchanges have even been set up to avoid detection by authorities and give fraudsters a place to enjoy the fruits of their crimes without fear of exposure.

But as governments step up their efforts to combat money laundering and terrorist financing, it’s time to take a closer look at the solutions they use.

AML for Blockchain: Market Report

The annual amount of money laundered is difficult to determine, as this practice is usually hidden from public view. However, research from the United Nations Office on Drugs and Crime (UNODC) estimates that it can range from $0.8 billion to $2 trillion. Generally speaking, this represents 2 to 5% of the world’s GDP.

The shift to a digital lifestyle, caused by the impact of COVID-19, has multiplied this value. Due to government restrictions, many people have given up on cash and switched to a digital lifestyle. As a result, according to IMF research, the market capitalization of crypto assets, which represented around 0.4% of the total market capitalization of the United States at the start of 2019, increased to almost 5% in September 2021.

At the same time, the number of cryptocurrencies in the world increased from 2,817 to 7,557 between November 2019 and November 2021. A growth of more than +250% has been achieved.

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

Given this, it’s no surprise that fighting fraud is costly for global organizations. In 2021, more than $213.9 billion has been spent on these goals. Medium to large financial agencies in the highest spending EMEA regions are also trying to combat money laundering by routinely spending $45-48 million to ensure compliance.

As regulations tighten, Virtual Asset Service Providers (VASPs) are increasingly embracing compliance as a way to demonstrate their commitment to protecting their customers’ assets. To ensure regulatory obligations are met and navigate a complex regulatory landscape, Virtual Asset Platforms (VASPs) utilize specific AML compliance tools and services.

AML and KYC — Two heavyweights in the fight against money laundering

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

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

These VASPs include:

  • The exchanges themselves;
  • Stable coin issuers;
  • Some 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’s algorithm detects suspicious activity and assigns a tag to the subject, it starts tracking it and tagging all addresses and transactions. associated. Then crypto exchanges and other major crypto services freeze those funds pending regulatory review.

Know Your Customer is one of the approaches available to financial firms to meet their AML requirements. Since the approach involves examining new customer data, it decreases the risk of collaborating with money launderers and other criminals.

Exchanges may determine their internal verification processes independently. However, as a general rule, they look for the following details at the very beginning:

  • [ ]Full name;
  • [ ]Date of Birth;
  • [ ]E-mail address;
  • [ ]Phone number;
  • [ ]Place of residence;
  • [ ]identity document (passport, license).

This list can be extended, depending on the amount of money the client wishes to enter the exchange with. The more information there is, the more information needs to be provided. For example, a centralized crypto exchange FREE2EX requires passing four levels of verification. However, for 90% of customers, two verification steps are enough. But a 2014 study found that identity verification principles, guidance and practices are often bureaucratic and inefficient.

A disadvantage of Know Your Customer (KYC) is that it does not provide information about customer activities or transactions. This is where Know Your Transaction (KYT) comes in – a building block of AML crypto.

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

Frozen funds and how to manage them

The freezing of assets and the bankruptcy of the centralized exchange is something that would make any crypto investor wake up in cold sweats. We can only sympathize with those who put all their savings into Voyager Digital. This popular centralized exchange recently filed for bankruptcy due to falling crypto markets.

Voyager Digital disabled the ability to withdraw funds for all 3.5 million customers, meaning approximately $5.9 billion in cryptocurrency assets were locked and inaccessible.

User access to accounts on an exchange can be restricted for a variety of reasons. However, if users do not violate the terms and conditions of the exchange and its activity is not suspended, it is probably due to unusual activity.

Stock monitoring

To protect virtual assets against 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, such as those used for ransomware and malware. Once the account has been labeled by the tool, the user’s funds are held pending validation by regulators.

If an account has been frozen, the holder should contact the exchange’s customer service for further details. Once the helpdesk provides a response, it is expected that the user will be asked to prove the source of their assets.

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

Overcome Challenges

To avoid such scenarios, users should check the transaction and wallet risks before transferring funds to an exchange. One solution that allows crypto investors to verify wallet addresses with just a few clicks is the AMLSafe wallet. AMLSafe is a cryptocurrency wallet that provides various cryptocurrency pairings and fast AML verifications. Apart from the basic functionalities 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 or potentially fraudulent transactions. For example, a user can view the entire chain of cryptocurrency connections, or check their 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 capitalization (Bitcoin, Ethereum, Tether) with fiat pairs and use a seed phrase to generate multiple part addresses.

Key points to remember

Every year, authorities require crypto-asset entities to implement more effective and complex AML procedures to prevent money laundering and terrorist financing. VASPs react by building internal rules and processes supported by specific tools, but this is clearly not enough. Users who believe they can safely transact using cryptocurrencies should realize that the bulk of security management is often their responsibility.

Solutions like the AMLSafe wallet or exchanges with strict security measures are the go-to apps for risk-averse users who want to avoid possible confrontations with authorities or have their account locked for unclear reasons.

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

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