3 types of crypto risks that can be mitigated through blockchain analytics

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SCORECHAIN

Date: September 2nd 2021

Published on: Global News, Regulation

Tags:

AML/CFT, crypto AML, Cryptocompliance, Cryptocurrency, Cryptoregulation, Decentralized Exchange, DEX, FATF, Mixing, Risk assessment,

3 types of crypto risks that can be mitigated through blockchain analytics

Key takeaways:

  • FATF identified a trend in the use of methods to increase anonymity to launder illegal proceedings.
  • Blockchain analytics can help mitigate crypto-related risks.

Using cryptocurrencies for money laundering (ML) / terrorism financing (TF) or fraud purposes is not new. And this is why worldwide regulators are putting in place legal frameworks on cryptocurrencies to contain this phenomenon. Blockchain analytics tools can help companies comply with these frameworks.

In its 2nd 12-month review of the implementation of the revised standards1, the Financial Action Task Force (FATF) highlighted that the ML/TF trends for cryptocurrencies remain stable and noted that:

  • The most frequent offenses involving cryptocurrencies are for example ML, TF, the sale of illegal items, fraud, cybercrime, child exploitation, etc…;
  • Illicit activities are more likely to take place at poorly regulated VASPs; and
  • The use of methods to enhance anonymity such as the use of  mixers, privacy coins, decentralized applications, decentralized exchanges (DEXs), etc…

How can blockchain analytics help compliance officers mitigating crypto risks?

Among the several blockchain analytics tools that are available on the market, Scorechain Blockchain Analytics solution provides the best data quality at the most competitive price. Scorechain’s solution gives compliance teams in crypto-related businesses all the needed features to improve AML/CFT policies and satisfy regulatory requirements.

Also, it helps to identify and monitor various risk patterns with customizable features to adapt to internal processes.

Discover how Scorechain can help compliance teams identify and mitigate risks with three use cases.

Mixing services

First, malevolent actors often use mixing services to try to obfuscate the source of ill-gotten funds. Using mixing services makes the funds very difficult to trace and monitor. For example, the hacker(s) at the origin of the recent Liquid hack sent a good chunk of funds to mixers.

If we take this address 0x5578840aae68682a9779623fa9e8714802b59946 related to the hack, Scorechain Ethereum platform identifies that 63% of funds held on this address have been sent to Tornado.cash. Therefore, the user is notified of this with the outgoing risk scoring and with risk indicators (if set) as shown below.

Screenshot of an Ethereum address page on Scorechain's blockchain analytics

Also, compliance officers must treat funds coming from mixing services carefully as they could come from illegal sources.

Decentralized exchanges (DEXs)

Second, malevolent actors can use DEXs to launder proceeds from illegal activities. Because of their decentralized nature, these services don’t have KYC processes. Also, DEXs allow direct P2P transactions and thus preserve anonymity.

For example, someone hacked Bilaxy exchange just a few days ago; the hacker stole 295 ERC-20 tokens. The hacker is using a DEX to swap stolen tokens to ETH. In the screenshot below, we can see that the Bilaxy hacker swapped LCX tokens for ETH using the Uniswap DEX. 

Screenshot of a DEX transaction on Scorechain's blockchain analytics

However, Scorechain Ethereum Analytics platform identifies DEX trades. The ETH funds remain tainted as they have been swapped from tokens related to a hack. Thus, the user can take appropriate measures concerning these funds. Read more here.

Regulation level of VASPs

Third, illegal actors can also use poorly regulated VASPs to launder their funds. Indeed, it is easier to launder funds through such VASPs as they often don’t require KYC/due diligence or appoint compliance officers for example. To assess the regulation level of VASPs and their risk level, companies can use on Scorechain Entity Directory to perform risk analysis on their counterparties to mitigate money laundering and terrorism financing risks.

Besides, Scorechain Analytics suite also comes with useful features such as risk scoring, risk indicators, reports, etc… With an upcoming FATF updated guidance2 and rapidly evolving crypto regulation, it is vital for cryptocurrency businesses to put in place processes and tools to satisfy new requirements.

You are operating in a cryptocurrency-related business and need to comply with AML requirements? So, don’t hesitate to contact us for a free demo.

About Scorechain

Scorechain is a Risk-AML software provider for cryptocurrencies and digital assets. As a leader in crypto compliance since 2015, the Luxembourgish company serves more than 100 customers in 37 countries, ranging from cryptocurrency businesses to financial institutions with crypto trading, custody branch, digital assets customers onboarding, audit and law firms and some LEAs.

Scorechain solution supports Bitcoin analytics with Lightning Network detection, Ethereum analytics with all ERC20 tokens and stablecoins, Litecoin, Bitcoin Cash, Dash, XRP Ledger and Tezos. The software can de-anonymize the Blockchain data and connect with sanction lists to provide a risk scoring on digital assets transactions, addresses and entities. The risk assessment methodology applied by Scorechain has been verified and can be fully customizable to fit all jurisdictions. 300+ risk-AML scenarios are provided to its customers with a wide range of risk indicators so businesses under the scope of the crypto regulation can report suspicious activity to authorities with enhanced due diligence.


References:

  1. https://www.fatf-gafi.org/publications/fatfrecommendations/documents/second-12-month-review-virtual-assets-vasps.html
  2. https://www.fatf-gafi.org/publications/fatfrecommendations/documents/public-consultation-guidance-vasp.html