Immutability, transparency, and permissiveness are central to the blockchain. However, for a healthy and functioning environment, this ecosystem needs at least a fraction of control. The integration of crypto alongside fiat currency and other assets is far beyond impressive, and, naturally, leaves authorities wondering how to prevent risks associated with VASPs (Virtual Asset Service Providers).
Lack of supervision can turn exchanges, payment gateways, and other crypto projects into a playground for money laundering schemes. The recent 5th Anti-Money Laundering Directive already covers virtual assets and obliges entities to comply with AML regulations. This makes compliance absolutely necessary, not only to remain a reputable FinTech company, but to start a business in the first place.
What are AML and CFT?
Anti-Money Laundering and Combating the Financing of Terrorism compliances are a set of regulations and policies enforced by local regulatory authorities. They're based on the recommendations of the Financial Action Task Force (FATF) that fight these crimes internationally. AML regulations require FinTechs to collect users’ data as well as track and monitor their transactions. If any suspicious activities arise, the companies must report them to regulatory authorities. In a nutshell, there are 3 major stages in money laundering. Disclaimer: This is not a tutorial on how to execute fraud!
First, illegal funds are placed on a trustworthy platform, then mixed and matched and layered with legal funds to conceal their origin, and finally redistributed among the accounts of the launderers.
Among the businesses which can be involved and affected by these actions are innocent off-chain firms, foreign banks, real estate companies, and offshore institutions. Illegal funds can be transported between such companies without monitoring. To prevent this, Anti-Money Laundering systems come into play.
Who needs to comply with AML and CFT regulations?
- Centralized Exchanges - CEXs
- Decentralized Exchanges – DEXs
- On-and-off ramps
- Crypto payment gateways
- Custodians—digital wallet providers
- dApps
- NFT marketplaces
- Transaction or wallet providers
AML/CFT in digital assets and blockchain
When it come to exchanges (centralized or decentralized), payment gateways, and blockchain projects in general, hackers may see the lack of regulation and anonymity in the field as a perfect opportunity to take advantage of FinTech apps.
Given this, VASPs that have all intermediaries removed from their acquisitions, without exception, need administrative supervision. Compliance is an absolute must for anyone dealing with finance if they want to secure their legal and reputable existence and prevent illicit financial flows.
How does Blockmate tackle AML?
Blockmate, an API provider for connecting crypto wallets, offers its users hassle-free AML support and equips them with tools to minimize regulatory risks, comply with AML/CFT regulations, and avoid regulatory scrutiny. Enabling compliance-friendly crypto transactions, Blockmate's API executes two main actions: risk assessment and Know Your Transaction (KYT) procedures.
Jiří Kobelka, CEO at Tatum, the world's most used Web3 development tool, comments on the partnership with Blockmate. “The API of Blockmate enables us to implement new regulatory compliance features into our platform quickly. Thanks to that, our clients can instantly check all their transactions and wallets to mitigate crypto-related risks.”
For businesses to remain clean and uncompromised, the AML system scans all transactions. Suspicious activities and threats are evaluated based on their risk levels from 0 to 100. The publicly available transaction data is monitored to detect illegal and criminal behavior. The wallet is tracked back and assigned a risk level. Additionally, Blockmate verifies the transactions for matches with sanctions lists and 3rd party databases. These records include addresses involved in scams and hacks. The system automatically determines the risks if matches are found and suggests pausing all further actions. For additional security and future case management, Blockmate archives all previous decisions made on transactions for prospective evaluation and in case of regulatory or law audit.
As much as Web3 offers robust and productive opportunities, it also produces creative opportunities fraud and other crimes. Illicit actors will simply find ways to take advantage of the system and its partially anonymous nature, so measures to safeguard the ecosystem from cyber hazards should be taken. A staple diet of AML/CFT procedures will help to keep your crypto environments clean and reputable.
