What are the biggest changes in the blockchain and cryptocurrency landscape this year, and how have AML compliance and risk management solutions been adapting?
The market for new cryptocurrencies, decentralized protocols (DeFi), and non-fungible tokens (NFTs) has boomed over the past year. But with this growth comes risk, displayed through a rise of crypto crime. Understanding this threat and mitigating the risk is essential to ensure a safer blockchain economy. And blockchain risk analysts are key to powering this safer economy.
Blockchain spending is forecasted to hit $11.7 billion in 2022. In this article, we’ll discuss some of the trends driving this growth, how this will impact the lives of millions within the next year, and how blockchain analytics solutions for AML are adapting to meet these new trends.
The number of blockchains is increasing – as is blockchain-hopping to launder stolen funds. The growing number of blockchains now bridged by various mechanisms can easily count in the hundreds – means that blockchain hopping (crossing from one blockchain to another) is on the increase. This means that bad actors have more options for “washing” or obfuscating funds.
This trend may seem more difficult to track, but it’s not impossible. It does mean more complex monitoring and tracking solutions are required, as analytics businesses now need to navigate transaction monitoring that crosses hundreds of blockchains with varying ML mechanisms.
Crystal is bringing awareness to compliance with a blockchain monitoring solution that works across multiple blockchains. This advanced monitoring tool helps modern financial institutions and crypto services meet their operational and business compliance needs by streamlining these parties’ crypto regulatory and compliance management, detecting fraudulent activities, monitoring the risk of crypto entities and portfolios, and automating due diligence procedures.
One trend in the tech that exploded in 2020 is the area of decentralized finance. Often referred to as DeFi, this umbrella term is used to describe an array of financial services. The projects in this space are attempting to take on big banks – cutting out middlemen to ensure that transactions are cheaper, faster, and automated thanks to smart contracts.
The rise of DeFi has transformed the role of the humble crypto exchange. Most trading platforms were centralized in this industry’s early days — where only bitcoin and a small handful of coins existed. But now, decentralized exchanges (DEXes) have risen in popularity.
Crystal statistics show a monthly transaction volume of $111 billion from decentralized exchanges (DEXes) as of November 2021 (that’s compared to $131 billion for centralized exchanges or CEXes.) For comparison, those figures stood at $90 billion per month for CEXes and $77 billion for DEXes in August 2021.
Centralized or not, every exchange needs to offer transparency and risk management, but decentralized platforms need to take a different approach. Many DeFi protocols rely on unique governance structures that allow everyone in an ecosystem to have their say on a project’s future direction. They could benefit from intelligence that prevents their communities from being hurt or damaged. This presented a dire need for a radical change: enter Crystal for DeFi.
The Crystal team identified the need for a decentralized approach to tackle the risks associated with DeFi – in our latest Security Breaches and Fraud Report, Crystal highlighted that at least $1.76 billion has been siphoned through DeFi hacks and exploits since 2020. We are now working with Clarity Protocol to offer a multi-chain, accessible, decentralized protocol that supports democratic risk management and due diligence.
To maintain Clarity’s decentralized ethos, Crystal isn’t a majority stakeholder or shareholder in this project. Instead, it simply serves as a critical data provider, delivering verified information that communities can use everywhere to make transparent decisions.
Ransomware attacks are increasing in sophistication with cybercriminals. Beyond encrypting data, hackers today often steal confidential or business-critical data, only returning if a ransom is paid. If no payment is made, the data is leaked publicly. The UK announced that ransomware had doubled in 2021. Nasdaq reported ransomware as the greatest business threat of 2022.
In addition, the combination of cryptocurrencies and ransomware has created a powerful extortion tool for organized crime groups. Ransomware is providing a high ROI for criminals, and the rapid growth of liquidity in cryptocurrency markets is creating more opportunities for these lucrative attacks on businesses.
In September 2021, the DOT announced the designation of SUEX OTC, SRO, a Russia-based virtual currency exchange, on the DOT Office of Foreign Assets Control (OFAC) List of Specially Designated Nationals for its part in facilitating financial transactions for ransomware actors.
OFAC also released an Updated Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments stating the US government’s policy to strongly discourage the payment of cyber ransom or extortion demands and providing steps companies can take to mitigate such risks.
Fortunately, blockchain analytics tools like Crystal are increasingly being used by authorities, and crypto service providers – and companies providing services related to digital assets – to monitor transactions and detect questionable or revealing patterns related to ransom attacks.
Countering ransomware benefits from close collaboration with international partners rose to the top at the G7 meetings in 2021. Here, participants committed to working together to address the escalating shared threat from criminal ransomware networks urgently. The G7 is considering the risks surrounding ransomware, including potential impacts to the finance sector.
Given the illicit finance risk that virtual assets pose, including ransomware-related money laundering, in October 2021, the Financial Action Task Force (FATF) updated its standards that require all countries to regulate and supervise virtual asset service providers (VASPs), including exchanges, and to mitigate against such risks when engaging in virtual asset transactions.
Countries are expected to impose customer due diligence (CDD) requirements and suspicious transaction reporting obligations across VASPs, which can help inhibit cybercriminals’ exploitation of virtual assets while supporting investigations into these illicit finance activities.
Because profit-motivated cybercriminals must launder their misappropriated funds, AML/CFT regimens are a critical chokepoint in countering and deterring this criminal activity. This magnifies the need for all countries to effectively and expeditiously implement and enforce the FATF’s standards on virtual assets and VASPs. But how?
Crystal provides crypto transaction analysis and monitoring for exchange, bank, and FI AML compliance requirements, helping build a better, safer blockchain future.
Amidst all this change within the industry, mainstream adoption of cryptocurrencies is rising. In November 2021, the cryptocurrency market touched $3 trillion in market capitalization.
Crystal data shows that from January to November 2021 there were 485 million+ transactions made via bitcoin alone, which is 5% more transactions made than during the period January to November 2020. In USD, that’s $5.2 trillion worth of transactions made between January and November 2020, which ran up to $42.7 trillion worth of transactions in USD between January to November 2021 – a phenomenal 7X growth rate year on year between 2020 and 2021.
In 2021, El Salvador became one of the first nations to adopt Bitcoin as a legal tender. And Bitcoin wasn’t the only digital asset making the news – statistics show that Ethereum, Dogecoin, and Safemoon overshadowed Bitcoin as the Google search of choice in 2021. Future projections show we will see several countries follow suit in 2022. National cryptocurrencies, or CBDCs, are another area where we will see growth and innovation in 2022.
As these new currencies enter the market, the need for compliance continues to rise. Crystal is driving the compliance adoption movement with solutions to mitigate risks and make the blockchain a safer place for all parties.
As the crypto world continues to change, so does the type of customers who need Crystal’s solutions. These new customers can include investigative and financial journalists, retailers performing due diligence, lawyers and auditors involved in disputes, and the payment processors responsible for opening crypto to merchants and consumers alike.
Compliance needs have never been higher, bringing awareness to intelligence firms like Crystal, playing a significant role in making digital asset transactions safer for all parties involved. Want to know how to ensure you’re remaining compliant and secure across the crypto economy?
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