Anti-Money Laundering (AML)

What is money laundering? It is a major crime within the financial sector, where money from illegal activities such as human or drug trafficking, fraud, corruption, etc. is smuggled into the financial systems. There are various money laundering methods, and they change and improve every year. According to the International Monetary Fund, money laundering accounts for 2 to 5 % of global GDP. Therefore, local and global authorities impose regulations to combat financial crimes and minimize their damage.

AML is a set of rules, principles, legislation, laws, regulations, processes, and tools specific to the financial sector, which aim to combat the laundering of money obtained illegally by criminal or terrorist organizations. This includes monitoring and reporting of suspicious users and transactions. Financial institutions and other businesses in many countries around the world have a legal obligation to comply with relevant guidelines. For example, crypto exchanges (CEXs) are required to screen their customers using KYC. This includes credentialing and verifying users’ identity.

Cryptocurrencies are one of the most dynamic and innovative parts of financial services. However, all innovation comes with risks. Many lawmakers have cited non-compliance with anti-money laundering measures as one of cryptocurrencies’ biggest shortcomings.

Do cryptocurrencies need regulation?
In recent years, the crypto world has become the darling of cybercriminals. This is a far cry from the original idea of Satoshi Nakamoto, who developed Bitcoin after the 2008-2009 financial crisis and decided to boycott the state-controlled financial system. The world changes and adapts as needed.

Crypto Scams: In 2021, losses of 575 million USD were reported to the Federal Trade Commission (FTC) from crypto scams related to investment opportunities. The decentralized blockchain platform features that cryptocurrencies are based on increase privacy, and thus provide ideal opportunities for money laundering and cybercrime.

Ransomware Payments: Blockchain analytics company Chainalysis is seeing a sharp increase in the ransomware payments made through cryptocurrencies.

Money Laundering: Chainalysis saw a 1.964 % increase in cryptocurrency laundered through DeFi protocols, which equates to about 900 million USD in dirty money.

PROs

• Control over the financial world
• Terrorism suppression
• Criminal organizations operation restriction
• Protects local economies

CONs

• Financial sector anonymity suppression
• Potential misuse of entrusted information

There is one dApp in the crypto world that bypasses AML and maintains anonymity. It's called Tornado Cash. This dApp preserves the essence of crypto, which is as much anonymization as possible, allowing you to move your assets from one address to another without the connection between the two addresses being visible in the transaction statement.

Conclusion

Central banks and authorities do not have enough control over cryptocurrencies, anonymous crypto transactions, and price volatility. They are waiting to see what happens, but cryptocurrencies are here to stay. It is time for banks and traditional financial institutions to get ready to support cryptocurrencies or they will miss the train.
As the global scope of AML to govern crypto transactions expands, financial institutions have to prepare by building new platforms and implementing appropriate controls to comply with the new regulations.