Currently, the volume of criminal funds in cryptocurrencies is over $15 billion, according to Chainalysis. This is less than 1% of the total number of assets related to illegal activities.
AML services help you track the movement of such coins. Thanks to them, an address that has received multiple transactions from suspicious sources can be blocked to stop further movement of funds.
To confuse the traces and reduce the risk of cryptocurrency, attackers resort to a variety of ways.
ForkLog, together with the team of the decentralized security protocol HAPI Labs, figured out how "dirty" cryptocurrency becomes "white" and how AML services should mark it in the future.
Which cryptocurrency is considered "dirty"?
The term "dirty" cryptocurrency is used to describe coins or tokens that are associated with various types of illegal activities, including money laundering, terrorist financing, drug trafficking, fraud, and others.
Blockchain analytics services are engaged in identifying such assets, tracking their movement paths and relationships between different wallets. These include, for example, HAPI Explorer and HAPI LABS.
Based on the ratio of coins from different sources on addresses, they also calculate the risk level of the latter. The higher this indicator is, the more likely the administration of the trading platform will freeze funds, requiring proof of their origin.
Tools for tracking illegally obtained assets
The first method used by AML services is to analyze the blockchain using special software. It allows researchers to establish links between different wallet addresses, as well as identify illegal actions.
Companies use machine learning and data analysis algorithms to process large amounts of information and identify unusual or suspicious transactions.
Known "dirty" crypto wallets are included in separate databases. Researchers can use this registry for verification purposes.
Among other things, blockchain experts exchange information about suspicious transactions with government and law enforcement agencies and participate in investigations of crimes related to cryptocurrencies.
Methods of laundering cryptocurrencies
The most popular ways to make Tracking Dirty coins More difficult:
The objects of laundering schemes can potentially be NFTs, especially if they are associated with rare or historical items and have a high value. Nevertheless, experts have not yet recorded an increase in such precedents, given the low liquidity of this market.
In addition, there are two other ways to legalize funds that are not directly related to their laundering. First, these are state auctions, through which the authorities of various countries sell cryptocurrencies seized from criminals. For such assets, an amnesty mechanism is applied, after which the future owner will not face problems during AML checks.
The second method is a full or partial return of assets to the rightful owner. Often, the latter announces the payment of a reward to the hacker in case of voluntary asset recovery.
Dirty asset attacks
In August 2022, the Aave DeFi protocol blocked the wallet of Tron Foundation founder Justin Sun after he received ETH from an anonymous user of the sub-sanctioned Tornado Cash exchange.
Cyber attacks by sending "dirty" assets can indeed lead to multiple account freezes. To prevent such cases, platforms need to conduct a full analysis of the actions of the affected user and study the history of the origin of assets on its balance sheet.
Customers themselves should also notify the administration of the problem and provide all the information required for investigation.
Combating money laundering in the DeFi segment
Otherwise, the AML policy of decentralized applications that do not store user funds is constructed.
For example, the non-custodial Uniswap exchange blocks addresses at the front-end level. In this case, the user cannot use only the platform's website, but not the service itself, because it is open source.
If you have some technical knowledge, operations are still available through smart contracts. You can also interact with the basic Uniswap protocol via other interfaces, including IPFS.
According to HAPI Labs, there are practically no effective ways to combat money laundering in DeFi right now.
In turn, HAPI Labs develops its own HAPI Protocol security system that can work through the API and at the smart contract level. It allows you to exclude high-risk wallets from the resource.
You can track it, but you can't stop it
According to HAPI Labs experts, it is still impossible to talk about the success of AML services in the fight against money laundering.
Blockchain analysis tools need to evolve, especially considering the role of DeFi services in money laundering. Current solutions do not keep up with the speed of processing on-chain operations, so they only allow you to track transactions that have gone to mixers after the fact.
At the same time, blocking cash flows is also a problem for centralized services. Most often, tokens move faster than analysts and law enforcement agencies have time to conduct investigations. In such cases, the money goes to the addresses of custodial services and leaves before it is frozen.
The black market of verified exchange accounts allows fraudsters to conduct operations without hindrance, even on the most regulated exchanges.
AML services help you track the movement of such coins. Thanks to them, an address that has received multiple transactions from suspicious sources can be blocked to stop further movement of funds.
To confuse the traces and reduce the risk of cryptocurrency, attackers resort to a variety of ways.
ForkLog, together with the team of the decentralized security protocol HAPI Labs, figured out how "dirty" cryptocurrency becomes "white" and how AML services should mark it in the future.
Which cryptocurrency is considered "dirty"?
The term "dirty" cryptocurrency is used to describe coins or tokens that are associated with various types of illegal activities, including money laundering, terrorist financing, drug trafficking, fraud, and others.
Blockchain analytics services are engaged in identifying such assets, tracking their movement paths and relationships between different wallets. These include, for example, HAPI Explorer and HAPI LABS.
Based on the ratio of coins from different sources on addresses, they also calculate the risk level of the latter. The higher this indicator is, the more likely the administration of the trading platform will freeze funds, requiring proof of their origin.
Tools for tracking illegally obtained assets
The first method used by AML services is to analyze the blockchain using special software. It allows researchers to establish links between different wallet addresses, as well as identify illegal actions.
Companies use machine learning and data analysis algorithms to process large amounts of information and identify unusual or suspicious transactions.
Known "dirty" crypto wallets are included in separate databases. Researchers can use this registry for verification purposes.
Among other things, blockchain experts exchange information about suspicious transactions with government and law enforcement agencies and participate in investigations of crimes related to cryptocurrencies.
Methods of laundering cryptocurrencies
The most popular ways to make Tracking Dirty coins More difficult:
- mixing — mixing cryptocurrencies with other users ' assets to break the connection between the sending and receiving addresses;
- cryptocurrency exchange — access to other digital assets or fiat;
- mining-transactions to the wallets of miners through private channels under the guise of a reward for the extracted block;
- transfers via multiple wallets, in particular, using cross-chain bridges.
The objects of laundering schemes can potentially be NFTs, especially if they are associated with rare or historical items and have a high value. Nevertheless, experts have not yet recorded an increase in such precedents, given the low liquidity of this market.
In addition, there are two other ways to legalize funds that are not directly related to their laundering. First, these are state auctions, through which the authorities of various countries sell cryptocurrencies seized from criminals. For such assets, an amnesty mechanism is applied, after which the future owner will not face problems during AML checks.
The second method is a full or partial return of assets to the rightful owner. Often, the latter announces the payment of a reward to the hacker in case of voluntary asset recovery.
Dirty asset attacks
In August 2022, the Aave DeFi protocol blocked the wallet of Tron Foundation founder Justin Sun after he received ETH from an anonymous user of the sub-sanctioned Tornado Cash exchange.
Cyber attacks by sending "dirty" assets can indeed lead to multiple account freezes. To prevent such cases, platforms need to conduct a full analysis of the actions of the affected user and study the history of the origin of assets on its balance sheet.
Customers themselves should also notify the administration of the problem and provide all the information required for investigation.
Combating money laundering in the DeFi segment
Otherwise, the AML policy of decentralized applications that do not store user funds is constructed.
For example, the non-custodial Uniswap exchange blocks addresses at the front-end level. In this case, the user cannot use only the platform's website, but not the service itself, because it is open source.
If you have some technical knowledge, operations are still available through smart contracts. You can also interact with the basic Uniswap protocol via other interfaces, including IPFS.
According to HAPI Labs, there are practically no effective ways to combat money laundering in DeFi right now.
In turn, HAPI Labs develops its own HAPI Protocol security system that can work through the API and at the smart contract level. It allows you to exclude high-risk wallets from the resource.
You can track it, but you can't stop it
According to HAPI Labs experts, it is still impossible to talk about the success of AML services in the fight against money laundering.
Blockchain analysis tools need to evolve, especially considering the role of DeFi services in money laundering. Current solutions do not keep up with the speed of processing on-chain operations, so they only allow you to track transactions that have gone to mixers after the fact.
At the same time, blocking cash flows is also a problem for centralized services. Most often, tokens move faster than analysts and law enforcement agencies have time to conduct investigations. In such cases, the money goes to the addresses of custodial services and leaves before it is frozen.
The black market of verified exchange accounts allows fraudsters to conduct operations without hindrance, even on the most regulated exchanges.
