Are DEXs widely used to launder money and finance terrorism? Scorechain report on the State of ML/TF through DEXs in 2020




Date: February 18th 2021

Published on: Researches & Statistics


AML, AML/CTF, crypto AML, Crypto Compliance, Cryptocurrency, Cryptoregulation, CTF, DeFi, DEX, Risk assessment,

Key takeaways:

  • Since last year, there has been a boom in the usage of DeFi protocols and platforms, and amongst them DEXs.
  • An increased risk of ML/TF derives from DeFi and DEXs due to a lack of KYC/AML standards.
  • Scorechain released a report to analyze the state of ML/TF through DEXs in 2020. Download the full report here:

What are DEXs? The most popular DeFi app 

Decentralized exchange (or DEX) is an application of decentralized finance (DeFi) and both have become very popular in the last few months. DEXs are blockchain-based peer-to-peer (P2P) online services allowing users to make direct crypto transactions with each other. DEXs don’t require users to pass know-your-customer (KYC) and are not custodian entities, unlike centralized exchanges. DEXs only provides the protocol that enables transactions.

This surge of interest for DeFi and DEXs drew a lot of attention from regulators and compliance officers worldwide mainly because such platforms have been targeted by scammers and hackers over time.

Ongoing debate on DEXs in terms of ML/TF

The rapid growth of DeFi and DEXs has drawn a lot of attention especially when it comes to Money Laundering and Terrorism Financing (ML/TF) risks.

Like DeFi, DEXs lack KYC and AML procedures as well; users can generate wallets in-app and directly start trading without having to disclose personal information for instance.

This lack of AML/KYC procedures from DEXs can be explained by 3 factors:

  • DEXs – being established on blockchains – often don’t rely on specific jurisdictions or regulations;
  • DEXs don’t have access to users’ funds and can’t perform AML/KYC checks on them;
  • DEXs are in a regulatory gray area; some argue that DEXs are decentralized and should not be regulated and some are in favor of a clearly defined legal framework.

These factors clearly show why DEXs are considered risky by regulators worldwide. Are DEXs really widely used by criminals to launder money or finance terrorism?

Analysis of the state of money laundering and terrorism financing through DEX

Scorechain, the Luxembourg-based leading Risk-AML company for cryptocurrencies, analyzed the 5 most traded cryptocurrencies on the top 4 DEXs (1inch, Kyber network, SushiSwap, and Uniswap) in 2020 and released a full report.

Interested in the findings of this study? Download it for free:

You are a VASP and need to mitigate ML/TF risks? Contact us for a free demo to know how Scorechain solution can help:

About Scorechain

Scorechain is a Risk-AML software provider for cryptocurrencies and digital assets. As a European leader in crypto compliance since 2015, the Luxembourgish company serves worldwide customers in 33 different countries with more than 150 licenses established, 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, Ethereum analytics with all ERC20 tokens and stablecoins, Litecoin, Bitcoin Cash, Dash, XRP Ledger and Tezos. The software is able to de-anonymize the Blockchain data and connect with sanction lists in order 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