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Most cryptocurrency wallets and exchanges do little to prevent money laundering. But what can be the ways to combat fraud?
New technologies such as blockchain, cryptocurrencies, artificial intelligence (AI) and privacy tools have greatly changed the picture of financial crime. In today’s globalized economy, threats have become limitless, and the growing risks of financial crime have drawn the attention of public and private sector leaders around the world. While mitigating such threats is an increasingly high priority, their complete elimination is a complex task requiring international cooperation. This collaboration is especially important for small open economies such as the Netherlands and Singapore, whose ambitions to achieve global recognition as “progressive blockchain states” and leading technology hubs are vulnerable to endless new threats.
Cryptocurrencies are often misused
Compared to traditional financial channels, which are highly regulated and protected by law around the world, cryptocurrencies provide criminals with effective tools to launder illicit funds. Many cryptocurrency exchanges offer their services with little or no anti-money laundering (AML) or know your customer (KYC) procedures, further simplifying the life of fraudsters. Cryptocurrencies are becoming an increasingly important channel for cross-border money laundering due to their global nature, pseudo-anonymity, convenience and fast transaction processing.
Weak regulatory oversight of cryptocurrencies has increased their popularity as a means of payment for criminal activities such as ransomware attacks and illegal online gambling. An alarming report from CipherTrace, a blockchain analyst firm, showed that major cryptocurrency thefts, hacks and frauds totaled $ 681 million in the first seven months of 2021, with decentralized finance (DeFi) crimes continuing to rise quarter after quarter. By their very nature, DeFi platforms such as Decentralized Exchanges (DEX) appear to be in conflict with fundamental regulatory principles, highlighting the magnitude of the challenges they face.
Singapore-Netherlands Partnership to Fight Cryptocurrency Financial Crimes
Good governance and collaboration are critical to fighting cryptocurrency-related financial crime. However, building trust across cultures, methodologies and jurisdictions, and overcoming regulatory or communication barriers can be cumbersome.
In this regard, Singapore and the Netherlands organized an ongoing roundtable discussion under the Partners for International Business (PIB) program to promote knowledge sharing between the two countries. Singapore is one of the most digitized and technologically oriented countries in the world and is currently striving to establish itself as a leading player in the global crypto economy. The Netherlands has also proven to be a leader in blockchain and digital assets with a vibrant crypto ecosystem, professionalism in cybercrime investigations and a wealth of experience in developing use cases and proof-of-concept. Because cybercrime poses multi-stakeholder challenges, it makes sense for practitioners from both countries to join forces to combat them.
Considering that financial crimes related to cryptography encompass a variety of functional areas, from criminological knowledge to deep technological know-how, the roundtable brings together experts from government, industry and academia. Only in this case can one expect that the decisions made can be optimal.
Analysis of crimes
Governments should prioritize strengthening their position in virtual asset analytics. Some of the key tools they can use include AML red flag indicators, dark web analytics, predictive analytics and artificial intelligence, and collective transaction monitoring.
In terms of countering money laundering using virtual assets, the Dutch authorities have developed about 100 warning signs that have been distributed across the country to all banks, payment systems and related service providers in order to better prepare them to deal with financial crimes related to cryptocurrencies. Many of these indicators have subsequently been adopted by the Financial Action Task Force on Money Laundering (FATF) in its report entitled “Virtual Assets of Money Laundering and Terrorist Financing Alerts” as guidelines for international best practice.
Dark Web Intelligence, which includes cryptocurrency addresses and IP addresses, and intelligent analytics on the relationship between cyberattacks and financial crimes such as ransomware attacks, are other powerful intelligence-gathering tools. Big data requires artificial intelligence capabilities that can go beyond blacklisting and whitelisting and extract strategic insights and operational perspectives from large distributed datasets in an efficient and understandable manner.
Collective mechanisms and information exchange
New tools designed to detect financial crime using cryptography may require the exchange and synthesis of data by various regulated organizations such as financial institutions. Collective transaction monitoring channels such as Transaction Monitoring Netherlands (TMNL) have helped increase the likelihood of detecting criminal money flows and networks by providing member banks with a platform to jointly monitor their payment transactions for signs of money laundering. Given the confidential and highly confidential nature of this data, and the rules restricting its transfer, the exchange of data between organizations and industries, not to mention the transnational level, remains a challenge.
To mitigate these concerns, countries can use new privacy-enhancing technologies such as Multi-Party Computation (MPC), which empowers them to collect information and detect financial crime based on sensitive data from multiple banks without actually exchanging data between banks. Thus, MPC is designed to provide privacy and security, balancing both regulatory needs for data privacy and confidentiality and the need to discover and investigate complex data.
The Importance of Proper Checks and Balances
Adequate checks and balances are needed for the virtual asset space, and both countries have taken decisive action in this regard. In Singapore they take the form of the Payment Services Act, the main regulation governing cryptocurrencies and virtual assets, while in the Netherlands the FSA, the Netherlands Anti-Money Laundering Act and the Prospectus Ordinance prescribe the regulatory framework for cryptocurrencies and cryptocurrency services. To foster technological innovation in financial services, the Monetary Authority of Singapore has created a FinTech Regulatory Sandbox that allows financial institutions and FinTech players to experiment with innovative financial products or services in a real-world environment, but within a well-defined space and duration.
KYC methods are also required to protect against abuse or misuse of cryptocurrency. Working with national identity intermediaries such as DigiD (Netherlands) and Singpass (Singapore) to include real identifiers can also help ensure regulatory compliance. A topology with warning indicators and integrated monitoring of KYC transactions to provide data relevant to reports of suspicious transactions, as well as advanced technical analytics to handle large volumes of these reports, will bring significant benefits to investigators, operators and analysts.
Towards the Safe and Healthy Growth of the Cryptoasset Industry
Given the cross-border nature and anonymity of cryptocurrencies, as well as restrictions on the exchange of sensitive data, the fight against financial crime using cybersecurity will not be easy to fight or defeat. Good governance and cooperation between countries will go a long way in deterring such crime. As such, innovating robust collaborative solutions and enacting stricter AML and KYC regulations by financial institutions, wallet providers and cryptocurrency exchanges will be critical to ensure the safe and healthy growth of the cryptocurrency industry.
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