Gone are the days when bitcoin was synonymous with drug deals and the dark net. Today, many ordinary people understand that bitcoin is a digital currency with many legitimate uses.
Yet the fact that bitcoin has largely outlived the nefarious reputation of its early days does not mean that avoiding association with criminal activity has ceased to be a concern for companies operating in the crypto industry. On the contrary, as more and more mainstream investors and institutions explore the crypto market, it has become all the more important for businesses that work with bitcoin or other cryptocurrency to have the right programs in place to track and identify crypto risks, make smart decisions and continue to deliver safe and trusted crypto services.
Doing so is critical not just for staying ahead of regulatory compliance requirements, but also for instilling confidence in customers and business partners in order to grow in the fast-moving crypto industry.
Bitcoin and Criminal Activity
Illegal activity may no longer be the only thing that most people associate with bitcoin. But concerns about illegal activity remain a barrier in many cases for banks. It’s easy to understand why, given continuing headlines about criminal activity in the crypto ecosystem. Bitcoin exchanges can be an easy way to launder money. Loosely regulated Bitcoin transactions can help criminals defraud investors. Bitcoin is a handy payment mechanism for bomb-scare extortionists.
Perceptions of the crypto ecosystem as a target for criminals erode the trust of banks in businesses that work with crypto. This makes it hard for these businesses to gain access to mainstream banking services, which are important for helping them to grow.
It’s a problem for banks themselves, too. The crypto and fiat economies are increasingly merging. As a recent Fidelity survey shows, for example, many more mainstream investors are now interested in crypto assets. As a result, banks are facing mounting pressure to be able to make sure that the crypto businesses they work with are operating legitimately in order to help support those investors.
And while this investor interest grows, risk protection needs to evolve as well. It behooves those who may be entering the cryptocurrency space from more traditional fields to thoroughly look into both the direct and indirect risks they face and to develop a comprehensive process for risk identification and mitigation from there.
Upon this introspection, many groups realize the potential of advanced blockchain analytics. This risk mitigation solution can help users accurately assess the risks of the cryptocurrency space and make more confident decisions about how to manage them.
But leveraging advanced blockchain analytics properly is no easy task. Bitcoin users are spread across the world, and they are constantly growing in numbers (making the safe adoption of crypto services all the more critical).
At the same time, government regulations and regulatory activity surrounding crypto are quickly increasing in scope and complexity. In March, AUSTRAC, the Australian Anti-Money Laundering (AML) regulator, suspended the licenses of two crypto exchanges that facilitated the operations of organized criminals involved in drug dealing on the dark web. As a result, the two exchanges are no longer able to conduct business in Australia. AUSTRAC used the opportunity to remind Australian exchanges of their AML obligations, such as the requirement to detect and report suspicious transactions.
On April 10, the New York Department of Financial Services (NYDFS) declined Bittrex’s application for a BitLicense, requiring Bittrex to cease operations in New York State. The denial letter sets out NYDFS’s high AML compliance expectations for any crypto businesses seeking to provide services in New York State, including using appropriate transaction monitoring systems. Also, Japan’s Financial Services Agency (JFSA) undertook on-site examinations of two Japanese exchanges, reviewing the quality of their AML controls in response to changes in management at each of the companies.
Also in April, the U.S.’s Financial Crimes Enforcement Network (FinCEN) imposed a $35,000 fine and a ban on trading activities against an individual acting as an unlicensed peer-to-peer exchange business. FinCEN cited failure to have appropriate AML policies and procedures, and failure to report suspicious transactions, as motivation for the action against the crypto broker.
In order to help banks comply with this growing set of regulations, Elliptic is building a platform that enables banks and businesses to gain more visibility into crypto transactions and identify illicit activity on the blockchain. By pairing machine learning with a proprietary cybercrime database to identify patterns that could signal fraud, money laundering or other crimes, Elliptic helps organizations stay ahead of the ever-changing strategies that criminals use in the crypto industry. It provides safeguards against unwitting participation in money-laundering schemes, terrorist fundraising and other financial crimes that can threaten the reputations of well-meaning businesses in the crypto industry.
Part of Elliptic’s purpose is to help organizations comply with AML financial regulations, which require them to take steps to detect and combat money laundering and fraud. But Elliptic’s vision — and its importance for the crypto ecosystem — extends far beyond the narrow purview of AML compliance. As noted above, identifying illicit activity in the crypto ecosystem is important not just for improving bitcoin’s image or keeping regulators happy. It’s key to enabling banks and businesses in the space to continue to grow and to gain the confidence of the investors and customers who are essential to that growth.
In short, a solution for banks to identify illicit activity related to crypto is critical if the crypto industry is to keep growing, and if the crypto ecosystem is to continue merging with the fiat economy. Banks need a way of protecting themselves against criminals who take advantage of the relative anonymity of bitcoin to commit fraud, money laundering and other crimes. Elliptic provides that solution, enabling companies not just to meet compliance requirements, but to manage risks and boost their confidence in delivering safe and trusted services in the blockchain-based economy unhindered by the threat of crime.
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