Leading cryptocurrency and blockchain intelligence firm CipherTrace released its Q3 anti-money laundering (AML) report yesterday.
According to the report, cryptocurrency crime has resulted in a staggering $4.4bn in losses for this year alone – almost 2% of the entire market cap.
What else does the CipherTrace report say?
The amount of virtual currency lost in hacks and scams over the year is enough to make your eyes water. However, CipherTrace revealed that there was actually a significant drop in cryptocurrency crime in quarter three. This bucks a rising trend over the last two years.
— CipherTrace (@ciphertrace) November 27, 2019
The intelligence firm attributes this decline to the “outsize influence” of two mammoth and still unexplained exit scams earlier this year in the shape of QuadrigaCX at $192m and PlusToken at a staggering $2.9bn.
In quarter three, cybercriminals stole a mere $6.5m from cryptocurrency exchanges. Inside jobs and Ponzi schemes racked up $9m from their victims.
While it’s still largely uncharted terrain, it appears as if the Wild West is beginning to rein itself in. CipherTrace notes, “This total of $15.5 million represents the smallest number of cryptocurrency crimes of any quarter in the past several years.”
QuadrigaCX and PlusToken aside, the report concludes that the drop in crime could be due to increased regulation in the space.
Two-thirds of the top 120 cryptocurrency exchanges have weak KYC
Another interesting focus of this quarter’s report is that CipherTrace carried out its first-ever comprehensive investigation into cryptocurrency exchanges’ KYC procedures.
It found that two-thirds (around 65%) of the top 120 exchanges “lack strong KYC policies”.
This means that, with just seven months to go before the FATF guidelines become law in its member states, most exchanges cannot comply.
They are not equipped to handle the requirements of KYC, much less comply with the stringent “Travel Rule” which states that exchanges must share sensitive information on all transactions over $/€1,000.
Crypto currencies and other virtual assets have a global reach. So who regulates a virtual asset service provider with a presence and client base in multiple countries, and prevent their misuse by criminals and terrorists?
👉https://t.co/jO5qTds436 #virtualassets #MoneyLaundering pic.twitter.com/Q2G7HFQvfU
— FATF (@FATFNews) November 21, 2019
Member nations that fail to enforce the FATF guidelines may be subject to financial sanctions and be added to the FATF blacklist. This lists countries judged as being “non-cooperative in the global fight against money laundering and terrorist financing”.
This also means that stringent KYC is necessary. While the report doesn’t name and shame individual exchanges, its findings are alarming. Businesses that fail to comply with the upcoming regulation are likely to face extreme consequences and even closure.
This is exactly why Guidepost Solutions CEO Julie Myers Wood stated that it is absolutely vital that cryptocurrency exchanges hire a compliance officer.
“With increased regulatory focus in this area, you can’t afford not to meet these obligations,” she told Coin Rivet.
One-third of all cryptocurrency exchanges still list privacy coins
The Travel Rule is especially problematic for ‘privacy coins’. After all, their main aim is to keep payments anonymous and obfuscate money transmitter data. This is in direct contrast with the requirements of the FATF.
Yet despite the impending legislation, one-third (32%) of exchanges are still listing privacy coins like Zcash and Monero. This includes exchanges whose KYC has been identified as “weak”.
However, that also means that two-thirds of the top exchanges have already begun delisting privacy coins. Quarter three saw increased preparations to meet compliance at least by removing support for untraceable digital assets.
Terrorists are developing new ways to obfuscate cryptocurrency flows
CipherTrace also found that terrorists are increasingly using cryptocurrencies to raise funds without detection.
On September 11 2019, the recently retired US Treasury Undersecretary Sigal Mandelker stated: “Without the appropriate strong safeguards, cryptocurrencies could become the next frontier.”
She said that the terrorist organisation Hamas was using cryptocurrency as a payment rail by asking for Bitcoin donations from its supporters to two different addresses.
The report notes that increased regulatory pressure may be having some effect, although “terrorists are using more sophisticated methods to secure funding and launder money for operations and attacks”.
For further details and more information about trends to look out for, such as increased regulation and cybercrime, be sure to read the full CipherTrace Q3 Cryptocurrency Anti-Money Laundering Report here.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.