A Guide to Anti-Money Laundering for Crypto Firms
The volume of cryptocurrency transactions grew to $15.8trn in 2021, up 567% from 2020, another sign that the trading of digital assets is becoming increasingly mainstream.
Highlights from a new report from blockchain data platform Chainalysis show illicit crypto transactions totaled $14bn in 2021, up 79% from $7.8bn in 2020. However, due to the rapid growth in overall crypto transactions, this still represents only 0.15% of crypto transactions completed in 2021.
As of early 2022, illicit addresses hold at least $10bn worth of cryptocurrency, most held by wallets associated with cryptocurrency theft, Chainalysis says.
While there are continuing risks for cryptocurrency investors, this new data indicates that criminal transactions represent just a fraction of current cryptocurrency usage, and are becoming a smaller part of the cryptocurrency ecosystem.
One area of concern however is decentralized finance (DeFi) – financial services that are provided on public blockchains – which is increasingly being used for scams and money laundering. DeFi transaction volumes grew by 912% in 2021.
Out of the total of about $3.2bn in cryptocurrency stolen in 2021, $7.8bn was attributed to scams, and 72% was stolen from DeFi protocols.
According to Chainalysis, most thefts from DeFi protocols can be traced back to errors in the smart contract code governing those protocols, which hackers exploit to steal funds, similar to the errors that enable rug pulls.
Rug pulls are a relatively new type of scam, in which developers build what seem to be legitimate cryptocurrency projects, before taking investors’ money and disappearing. Chainalysis says that around 90% of the total value lost to rug pulls in 2021 was carried out by one fraudulent centralized exchange, Thodex.
DeFi was also an increasingly popular way of laundering money, according to Chainalysis. The use of DeFi as a way to launder money increased 1,964% between 2020 and 2021.
Regulations and Law Enforcement
The report comes at a time when Congress is planning a new regulatory framework for crypto firms, which could include stablecoin issuers being regulated in the same way as banks.
Regulators have also issued some high profile fines for AML violations – most notably BitMEX, which agreed to a $100m settlement after the exchange failed to carry out sufficient checks on its customers. The IRS also seized more than $3.5bn worth of cryptocurrency in 2021 from non-tax investigations – representing 93% of all its criminal investigation seizures.
The federal government has also been looking more closely at the intersection between ransomware and cryptocurrencies. In September 2021, Suex became the first virtual currency exchange to be sanctioned by the US for laundering cyber ransoms, followed in November by the imposition of sanctions relating to virtual currency exchange Chatex, which facilitated financial transactions for ransomware actors. In June 2021, the Department of Justice also seized $2.3m in cryptocurrency paid to ransomware extortionists Darkside.
The Financial Action Task Force (FATF) also issued updated guidance for virtual asset service providers (VASPs) in November 2021. As crypto adoption continues to accelerate, further regulatory scrutiny and legislative measures are likely. Closely monitoring the evolution and diversification of the sector will be critical for compliance teams, with a particular focus on new emerging typologies that may emerge out of the crypto market.
Find out more about the state of financial crime in 2022 by pre-registering for this year’s report.
Originally published January 14, 2022, updated May 6, 2022
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