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Crypto exchanges fighting cybercrime with AML/KYC data insights

Cryptocurrency and cybercrime

February 24, 2021  

Cryptocurrency and cybercrime

Decentralized finance — “DeFi,” as it’s commonly known — emerged from the Ethereum crypto developer community. It enables innovations like code-based smart contracts that exist as internet programs, executing certain trades and payments free of intermediaries like big banks.

The benefits of bypassing large financial institutions (FIs) include immediacy and transparency, which is attracting everyone from Elon Musk to anonymous day traders, all trying to profit from Bitcoin’s price fluctuations. Disadvantages include the fact that cybercriminals are also drawn to cryptocurrencies, and blockchain in general, as a greenfield for new forms of financial crime.

The February AML/KYC Tracker,® developed by PYMNTS in collaboration with Trulioo, notes that:

2019 saw $2.8 billion laundered through cryptocurrency exchanges — up from $1 billion the year prior. These exchanges largely lack the AML/KYC procedures that keep money launderers away from more established financial institutions, with a recent study finding that 56% of all exchanges had weak or no KYC processes at all.

Considering the uses of laundered money — drug or human trafficking, tax evasion, financing acts of terror and more — world governments are tightening down on crypto exchanges. As cryptocurrencies and exchanges rapidly become more mainstream, knowledge and preparation are key to ensuring that effective AML/KYC monitoring is implemented and enforced.

Unregulated markets work for good actors (and bad)

Lack of unified regulatory frameworks is very inviting to cyberthieves, who can take the slightest bit of marketplace confusion and exploit the smallest gaps to access ill-gotten gains.

From the February 2021 AML/KYC Tracker®, “It was not until 2019 that FinCEN, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) issued a joint statement that defined cryptocurrency exchanges as money service businesses (MSBs), thus making them subject to AML and KYC regulations under the Bank Secrecy Act.”

Legitimate players enjoy sparsely regulated markets, too, and some may lose interest once the law solidifies and the most volatile crypto products stabilize or disappear. The February Tracker points out that Poloniex, one of the largest exchanges in the U.S., announced in 2019 that it would stop accepting U.S. users after FinCEN included crypto within the guidelines of the Bank Secrecy Act.

“KYC is new to the cryptocurrency world, and exchanges often deploy it differently compared to their traditional FI counterparts. Most KYC checks are done after the fact, for example, instead of during onboarding, as is the case for most traditional banks,” the Tracker states.

Illustrating the problem this creates, the new Tracker adds that, “While many [exchanges] require an uploaded ID document and a photograph, they are permitted to begin trading immediately and are only stopped if the KYC check brings up something suspicious.”

Global regulatory changes indicate the future for crypto exchanges

Looking globally gives a hint of the shape of things to come regarding oversight of crypto exchanges and the AML/KYC tests they must be able to pass.

In the Netherlands, for example, the central bank is getting ahead of the matter by introducing more stringent measures than are found in other EU member countries.

According to the AML/KYC Tracker®, “Cryptocurrency exchange Bitstamp recently announced that it would implement stricter KYC protocols for users in the Netherlands due to new regulations from De Nederlandsche Bank, the country’s central FI. “Dutch users are no longer allowed to withdraw funds directly to third parties, and are instead required to move cryptocurrencies to their individual wallets first, after which they can transfer funds wherever they desire.”

Trulioo has seen 200% growth in the number of crypto customers onboarded since 2018 and a whopping 719% growth in transaction volume since August 2020.

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