Anti-Money Laundering Challenges for Banks Offering Crypto Services

    Financial institutions are increasingly investing capital, time, and effort into on-chain analytics solutions as they begin to offer services related to digital assets like cryptocurrencies and nonfungible tokens (NFTs).

    This requires new Anti-Money Laundering (AML) capabilities that can navigate the complex constructs of the crypto industry, including cross-chain bridges, mixers, and privacy chains, which hackers and crypto thieves can use to obfuscate stolen assets.

    To effectively identify AML risks, institutions require a vast amount of data from varied sources. Wallet monitoring and screening are necessary to assess whether a wallet has interacted with illicit actors like hackers, sanctions, terrorist networks, and mixers. Blockchain investigation is critical to ensure transactions on the network do not involve any illicit activities. Multiasset monitoring is also essential to monitor risk where multiple tokens are used to launder money on the same blockchain.

    However, cross-chain transaction monitoring is a challenging problem to solve. Cross-chain asset transfers are commonplace and a genuine use case that drives interoperability, unlike mixers and dark web transactions. Additionally, smart contract screening is crucial to protect decentralized finance (DeFi) users, where smart contracts are checked to ensure there are no illicit activities.

    Exchanges are classified as Virtual assets service providers (VASPs), and due diligence involves both on-chain and off-chain data. Some AML vendor platforms provide a view of risk based on the country of incorporation, Know Your Customer requirements, and the state of financial crime programs.

    As mainstream financial institutions continue to provide services related to digital assets, AML capabilities will become increasingly important to protect clients from bad actors and identify illicit activities.

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