Consumer confidence in crypto markets has been on a rollercoaster ride, and calls to step-up consumer protection continue to be made. Fraud and scamming offenses targeting crypto investors are common, and they are being investigated, uncovered, and reported. However, anti-financial crime standards and know your customer due diligence processes are being established by individual crypto companies, as regulation in the space evolves.
Hardly a day goes by without a crypto news story. The items grabbing headlines concern scandals and crashes, and it has been a period of volatility for many crypto companies and their investors. Transactions build, confidence grows, there’s an emergency, government intervention, and another surge in confidence.
One reason for volatility in the crypto space are the criminal practices that have been found centering around the sector. Blockchain analytics firm, Chainalysis, reported that illicit use of cryptocurrencies hit a record $20.1 billion in 2022. Financial criminals have been early adopters of crypto technology, and consumers are perhaps playing catch up, which can leave them vulnerable.
However, it’s important to note that crypto transactions, in principle, are transparent because of the blockchain. According to a Moody’s Analytics white paper “…digital ledgers capture each transaction, which can be traced back to a wallet address. Transactions are time-stamped and immutable because to alter something in a ledger every single block in the chain, across all its distributed versions, would need to be altered.”
Providers of crypto exchanges and wallets to businesses and individuals should aim to have an accurate and perpetual KYC record of who they are onboarding and servicing, to prevent financial crime and also because if something illegal happens, the action should be traceable to its source.
According to Chainalysis’ crypto crime report, released in February 2022, “total transaction volumes grew to $15.8 trillion in 2021”, perhaps it’s no surprise therefore that crypto attracts criminal attention, the sums being transacted are a serious temptation.
While it appears the biggest growth area for crypto crime is in scams, it is also being used as a vehicle for stolen funds and sanctions evasion. And due to its decentralized and distributed nature, crypto can be more difficult to trace, which has been put to effect in ransomware attacks.
In February 2023, the German Regional Police and the Ukrainian National Police, Europol, the Dutch Police, and the FBI came together to target core members of a criminal group suspected as being responsible for large-scale cyberattacks with the DoppelPaymer ransomware that had extracted millions in Bitcoin from victims globally.
While scams and examples of criminal behavior have dented its reputation and consumer confidence, there continues to be evidence of crypto becoming more mainstream, and there are legitimate economic benefits to decentralized cryptocurrencies.
There are instances where human rights activists, living under authoritarian regimes, have used crypto because they cannot participate in the traditional financial system. Last year activists from 20 countries penned an open letter to US Congress in support of a “responsible crypto policy”. The letter cited Bitcoin and Stablecoins as essential tools in aiding democracy for millions of people.
Cross-border payments can be costly, slow, and opaque. International payments using crypto can be made very quickly and at a low-cost, which is attractive to consumers. While blockchain allows transactions to be tracked and verified transparently and immutably, which has the potential to reduce the risk of fraud.
Consumers continue to make their own decisions about engaging in crypto markets. While regulation is operational in some jurisdictions it’s still not the case universally, which means consumer protection measures continue to be debated.
While anti-money laundering (AML) processes and know your customer (KYC) checks are required by compliance regulation for crypto exchanges in many countries, it’s not ubiquitous. Firms operating in the space have often taken control of setting their own standards, with wallet and exchange companies choosing to establish best practices to prevent money laundering and mitigate risk.
A new method to mitigate exposure to sanctions risk, for example, is monitoring the IP address and location of organizations and individuals applying for products. Crypto companies are using geolocation and IP address sanctions screening. Firms are also choosing a process of perpetual KYC (pKYC), so they can be alerted to new and emerging fraud typologies.
As criminals often engage in repeat activities that they have found successful in the past, such as a particular scam, artificial intelligence (AI), which is good at finding repeat patterns, can be used as a means of identifying suspicious patterns of behavior.
These anti-financial crime methods, combined with automated data checks, help maintain compliance with existing regulation and set best practice standards for customer due diligence.
Moody’s Analytics KYC is transforming risk and compliance; creating a world where risk is understood so decisions can be made with confidence.
Our customers build their own unique AML and KYC eco-system using our workflow orchestration platform, global datasets, analytical insights, and integrations with global providers to create automated risk management solutions.
Harnessing AI capability, innovative technology, and industry expertise, Moody’s Analytics automates screening and builds risk profiles for individuals, entities, and third-party suppliers for onboarding. Then supports perpetual monitoring of counterparty risk across a business network in near real-time.
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