Cryptocurrencies have revolutionised payment solutions and trading, offering alternative methods to traditional transactions. However, these advancements have also raised security and information concerns, with illicit activities exploiting blockchain technology’s capabilities.
Crypto platforms and businesses have implemented measures to enhance blockchain and DeFi security, reducing cyber threats and hacks. Anti-money laundering (AML) practices are widely used to prevent malicious programs from misusing cryptocurrencies and engaging in illegal activities, emphasising the importance of AML.
What is AML?
Anti-Money Laundering (AML) is a global campaign against money laundering and financial crimes involving policies, regulations, and laws to prevent criminals from hiding illegally obtained money.
The USA was one of the first countries to legislate AML in the 1970s, focusing on the rise of dirty drug money. The Financial Action Task Force (FATF) was established in 1989 as the largest organisation fighting against money laundering and financial crimes worldwide.
The International Monetary Fund (IMF) is another organisation combating money laundering crimes. The European Union and member countries also use AML compliances and procedures against money laundering. The 6th directive on AML/CFT (AMLD 6) policies against money laundering is set to be published by the European Union.
Cryptocurrencies, like blockchains and DeFi projects, are characterised by their decentralised nature, allowing no central authority to monitor and control funds and information.
This lack of a regulatory framework makes them susceptible to suspicious activities. Despite this, crypto developers and enthusiasts are expected to act in good faith, advocating for decentralisation.
Crypto transactions and wallets don’t require personal information to protect identity, but this creates a gap for illegal activities. Money laundering is a common practice where operators exchange illegally earned money for cryptocurrencies, allowing them to create a legal clean slate for their business.
Local governments and regulations are implementing anti-money laundering measures, requiring crypto exchanges and operators across various jurisdictions to comply with combating illegal activities and fostering a healthy DeFi ecosystem.
AML practices involve monitoring transactions, avoiding blacklisted personnel, and flagging suspicious activity for further investigation. They are often paired with KYC procedures, requiring businesses to collect user information to prevent malicious actors or fraudulents.
How to Assess AML Risks
Anti-money laundering is a prevention-based strategy that involves thorough monitoring, evaluation, and analysis of operations, enabling operators to flag and suspend suspicious activities for security.
Collect Data
The first step in data analysis is data collection, which involves categorising and structuring user information such as origin, currencies, transaction volume, and registration date. This information is then organised to create patterns, allowing for easy data identification of outliers or anomalies.
Identify And Analyse Risks
Identifying hazards requires vigilant observation and comparison with established norms to determine potential risks. Any odd actions or unusual transactions are identified as potential threats and should be thoroughly examined.
When a server encounters a potentially risky event, it’s crucial to analyse the transaction’s nature, including origin, amount, parties, and currency, to compare it to industry norms and assess potential dangers, which will guide the resolution step.
Mitigate Risks
Upon analysing a transaction, it is crucial to determine the resolution method to prevent risk from completing its intention. Server administrators determine risk mitigation strategies, which may involve holding the activity until further documentation is submitted, suspending the transaction, or blocking the involved parties.
The AML risk assessment process involves reporting all events and activities, documenting, analysing, and resolving risks, which helps create performance evaluation and analysis patterns.
Monitor And Improve
The anti-money laundering risk assessment protocol is a continuous monitoring system that promotes transaction security and sustainable service development, not a temporary solution, ensuring overall transaction security.
Final Thoughts
Cryptocurrencies and decentralised platforms face increasing challenges due to a lack of central control. Anti-money laundering procedures improve the security of transactions using Bitcoin and other cryptocurrencies.
These practices involve monitoring events, identifying potential issues, and taking necessary actions to prevent them. This supports expanding a crypto business while safeguarding the security of decentralised finance.