Methods to Combat Money Laundering Through Bitcoins

The Bitcoin cryptocurrency, which has gained popularity among the masses, has often been associated with illegal transactions, money laundering, and the purchase of prohibited goods. Attempts by anti-money laundering authorities to change the situation are bearing fruit: bitcoins have become less involved in shadow operations. But this is not enough to make the crypto market more transparent. As an additional measure, EU and US lawmakers adopted acts requiring financial institutions (including legally operating exchanges) to verify the origin of bitcoins in the same way as AML banking standards.

Illegal use of cryptocurrencies

The first and most famous story that gave Bitcoin a bad reputation was the Silk Road darknet site exposure, the latter happened in 2013. The FBI closed it due to illicit drugs trade and illegal goods trafficking, the payments for which were carried out in the Bitcoin cryptocurrency.

The next unpleasant event occurred in the winter of 2014. The management of the Mt.Gox exchange announced the theft of nearly 850,000 bitcoins, the lion’s share of which belonged to ordinary users.

There have been too many such stories for the short existence of the digital currency. In addition to paying for prohibited goods, cryptocurrency began to appear in other types of fraud, for example, in raising funds for personal needs, which was carried out under the cover of ICO.

According to the FBI, only in 2017–2018, about 1.2 billion dollars were laundered using cryptocurrencies. Assistants in laundering — casinos and slot machines accepting cryptocurrency, as well as crypto mixers.

Combating money laundering through bitcoins

Is there any solution?

Japan was the first country that stated the need to resolve the issue of money laundering and illegal operations involving cryptocurrency. Other countries joined the solution to the problem, and in 2018 the problem was transferred to FATF, an organisation fighting money laundering.

Some states have taken action by adopting laws to regulate cryptocurrency assets. For example, in 2017, the BILL S.1241 (USA) was created, according to which digital currencies are equated to financial instruments.

The Council of the European Union has adopted the Fifth Anti-Money Laundering Directive, which takes into account the specifics of digital currencies and supplements the Fourth Directive.

Fifth Anti-Money Laundering Directive: main rules

Fifth Anti-Money Laundering Directive was suggested in 2018. The following rules are spelt out:

  • Expanding the sphere of influence of AMLD5 on cryptocurrency exchange platforms, banks and MFIs that work with bitcoins or other digital coins, on crypto wallet providers;

  • Increasing ‘transparency’ (and, in fact, reducing anonymity) when conducting operations with cryptocurrency;

  • Unhindered receipt by national financial intelligence units of information about the owner of the crypto wallet in case of suspicious actions on his part (with the help of providers).

In addition, the Directive defines the concepts of ‘digital currency’ and ‘custodian wallet provider’ and gives cryptocurrencies legal status.

Thus, as conceived by the Council of the EU, at the beginning of 2020, cryptocurrencies may lose some of their anonymity, but, in contrast, ordinary users will be better protected from fraudulent activities.

KYT — a new word in the fight against money laundering

If the concept of KYC (“Know Your Customer”) has been known for a long time and helps cryptocurrency exchanges to fight crime through verification of identity, then the term KYT is relatively new and means “Know Your Transaction”. It began to be implemented by companies providing compliance in the cryptocurrency field.

The KYT procedure was created to track and analyse transactions and determine their involvement in criminal actions. It is considered an improved version of KYC, although it does not replace, but supplements it. It is gradually being introduced on the largest crypto exchanges, and it will soon appear with us.

Regarding that AML is constantly being improved, new ways of tracking transactions are being created, transparency is being strengthened, and authoritative organisations and governmental establishments are accumulating forces to combat money laundering, crypto enthusiasts can not worry about the purity of acquired bitcoins. Especially if the coins are obtained from a reliable source, for example, an officially working cryptocurrency exchange.

Traceer — a new bitcoin checking service

Cryptocurrency compliance services, which take steps to identify compromised transactions, help minimise the circulation of dirty coins. A service for quick verification of bitcoin transactions by KYT has already appeared on the B2C market. Previously, such a solution was available only in the B2B segment, which was used by large crypto exchanges. Now any private recipient can instantly check the address from which he/she received the coins, or the transaction itself.

Using the Traceer application, you can check bitcoins for purity of origin and make sure that you have not become an involuntary participant in shadow operations. Following AMLD5 requirements and FATF recommendations will avoid the risk of blocking your main cryptocurrency asset.

Traceer application