What Is Cryptocurrency Compliance And Anti-Money Laundering?

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For the past decade, the cryptocurrency industry has emerged and expanded to significant levels. Cryptocurrencies are a completely new form of the digital asset. Governments of most countries are still debating on how to treat cryptocurrencies, while the financial industry has to act. Most conservative financial institutions try to ignore and refuse to work with crypto-related businesses. However, the cryptocurrency market is still expanding.

Such as the fiat world cannot be ignored and most crypto-related businesses still settle in traditional currency (like USD, EUR, GBP), it means that these crypto businesses have to comply with fiat world standards.

Recently, the topic of cryptocurrency compliance and AML is getting very hot, requirements are getting higher. Especially with the introduction of the 5th AML directive – the next edition of European AML regulations. It appears that most financial companies and even large banks have a good way to improve the way they analyse their clients and transactions.

As a result, we see a number of companies for the purpose of customer onboarding and monitoring are doing KYC, AML, PEP check, etc. But those service providers are more of an automation tool for compliance, not a breakthrough.

KYC AML CFT services are obligatory for all fintech businesses, but what about cryptocurrency and blockchain?

It is getting controlled as well.

Unlike traditional finance, you cannot identify if the cryptocurrency wallet address 100% belongs to a particular person. But such as the blockchain technology is an open ledger of all transactions, it means it can be tracked.

Here comes in the crypto compliance software. 

Crypto compliance software tools are built to solve the main problem: chase cryptocurrency transactions, find origins of addresses. One of the service providers that we at Wunderbit are working with is Scorechain. At Wunderbit we offer cryptocurrency trading, specifically to buy and sell bitcoin and other cryptocurrencies.

Scorechain is a compliance and AML tool for cryptocurrencies that provides a number of great tools. Specifically, for Bitcoin and Ethereum blockchains, Scorechain services include:

  • Transaction monitoring
  • History and transaction flows Clustering
  • Balance of addresses and clusters Origin of crypto funds
  • Risk management (unique Index computation)
  • Full customisation of parameters 
  • Alerts system
  • Export reports 
  • Real-time API

Case: cryptocurrency compliance and AML software have helped the FBI to track and chase a number of hacked and robbed cryptocurrency exchange. In some cases, it took 3 years to trace digital assets. But eventually, the hackers were chased and caught. 

Bitcoin transaction analysis allows you to see what is the origin of funds, see estimated risk score and transaction history. Data is presented in a very easy to understand way. Moreover, API is available. For example, it is possible to automate the validation of the bitcoin address, making the process of validation instant for the client.

Scorechain dashboard view.

Checking a bitcoin wallet address instantly gives you an overview of user behaviour. Most importantly a stream of bitcoin can be easily analysed and reveal suspicious transactions. Among sources in the sample picture above, you can observe red-coloured pie slices indicating high-risk bitcoin wallets associated with the examined bitcoin wallet address.

Who should businesses use crypto compliance software?

As mentioned above most regulated financial institutions will demand monitoring and control of their client's operations. Thus, cryptocurrency businesses providing financial services that use the compliance software are a lot safer than those who don't. For example, check of client cryptocurrency wallet addresses during the onboarding process allows to pass risk assessment of bitcoin transactions, then an instant report will suggest if the address was having any relationship with black markets, stolen cryptocurrency, gambling, etc. 

Serving an order partially related to money laundering or terrorist financing may result in significant problems to the business as a facilitator of criminal activity and even bank serving that crypto business. Thus, unsuccessful verification will not proceed and AML requirements and legal aspects are met.

Apart from that, crypto compliance software allows identifying the nature of the business activity of the client, making it transparent which may help in establishing trust with the clients