The more cryptocurrencies become part of the modern financial system, the faster the mechanisms of its regulation by the state are implemented

What are AML and KYC, and how to protect yourself from suspicious transactions

29.03.2021

2834

5 min

. The “Wild CryptoWest” is becoming a thing of the past, there are fewer and fewer anonymous projects, and you can get a real prison sentence for cheating users or tax evasion.

New legislation is being formed around cryptocurrencies, designed to bring this market into the legal mainstream. In order to control financial flows and protect people from fraud, mandatory KYC and AML procedures have been introduced in many countries. Let's take a closer look at them.

KYC, or Know Your Customer, is the process of identifying cryptocurrency users to determine the owner's identity, passport data, place of residence, and source of income.

AML, or Anti-Money Laundering, is a set of measures to detect illegal sources of income, financing of terrorist activities, or money laundering from criminal schemes.

KYC and AML are now mandatory for most centralized exchanges and cryptocurrency platforms. With their help, the authorities implement a number of important functions:

  • Protecting people from fraud.
  • Controlling the payment of taxes.
  • Combating money laundering.
  • Preventing the use of cryptocurrencies in criminal schemes.

Despite the obvious advantages of KYC and AML, there are no common standards for regulating the crypto industry yet. Each country decides independently which projects and platforms are allowed to operate in the domestic market.

For example, in the United States, cryptocurrencies are allowed but strictly regulated by the Securities and Exchange Commission (SEC). The entire community usually follows the proceedings in America, because the outcome of events in the US largely determines the further promotion of the project in the global market.

One of the most high-profile cases was the conflict between the SEC and Pavel Durov, who was banned by the Commission from distributing GRAM tokens, and American investors from participating in the project. And currently, SEC proceedings are unfolding against Ripple, which is accused of selling unregistered securities in the form of XRP tokens worth $1,3 billion.

In Russia, the situation with cryptocurrencies is not so clear. Since January 2021, bitcoin and other digital currencies have been equated to the concept of property, using cryptocurrency as a means of payment for goods or services in Russia is completely prohibited. Also on February 17, 2021, the Russian State Duma in the first reading adopted a government bill on the taxation of transactions with cryptocurrencies, providing for payment of taxes if the amount of receipts/write-offs of digital currency is more than 600 000 rubles per year.

As for Europe, the EU authorities are not planning to ban cryptocurrencies yet, and all efforts are directed at regulating this market and bringing all processes in a legal direction. In addition, the authorities seek to protect the traditional financial system and look negatively at the possibility of launching stablcoins by private companies (such as Facebook's Libra).

Most developed countries seek to regulate the cryptocurrency market, which is quite natural. Therefore, any cryptocurrency platforms, exchanges, or services that want to operate legally in these countries must comply with KYC and AML regulations.

Modern tools for detecting suspicious transactions

Despite the widespread implementation of KYC and AML regulations, cryptocurrencies are often used in illegal transactions. However, there are already tools that can analyze the blockchain for suspicious transactions. One such project is Bitfury Cristal, created by one of the largest mining hardware companies.

Bitfury Group was founded in 2011. It is an international technology company engaged in developments in the field of artificial intelligence, blockchain, communications, security, and high-performance computing. It has offices in London, Tokyo, Hong Kong, Amsterdam, Seoul, Moscow, and Dubai, with data centers in Canada, Norway, and Georgia.

The company's founder, Vitaly Vavilov, primarily focused on creating technological solutions that provide security and trust in the bitcoin blockchain. This led to the creation of five generations of advanced mining chips and cutting-edge data centers.

The Bitfury Group, led by Vitaly Vavilov, is currently working on projects such as:

  • Bitfury Tardis mining center on Clarke ASIC chips.
  • Peach, a commercial cryptocurrency payment platform
  • BE BIG education initiative
  • The in-house artificial intelligence department
  • Launch of Surround division focused on the music industry
  • Cristal analytics platform

What is Bitfury Cristal

The development of Cristal allows a comprehensive analysis of the blockchain. It can be used to find transactions and users involved in illegal activities. To do this, the system uses 5 tools:

  1. Clustering. Grouping of addresses belonging to the same owner.
  2. Risk assessment. Analysis of the probable connection of wallets with potentially illegal activities.
  3. Visualization. Transactions' flowchart construction.
  4. Interaction. Search for direct transactions between different clusters.
  5. Tracking. Automatic tracking of cryptocurrency flow, determination of delivery paths and addresses.

Using this tool allows calculating so-called “dirty” bitcoins and not releasing them into circulation. This can be implemented, for example, by cryptocurrency exchanges, which will be able to block high-risk bitcoins based on Cristal's verification results.

How to check the risk level of your cryptocurrency and protect yourself from blocking funds?

You can check the risk level of your existing cryptocurrency using the service.

In addition, there are a number of recommendations that will help you protect yourself from suspicious transactions and avoid locks and losses:

  • Accept each incoming transaction to a new address.
  • Check the transaction risk using the service.
  • If the transaction is high-risk, return it to the sender. Otherwise, there is a risk that your funds will be blocked in the future.

If KYC, AML, and these simple rules are observed, all parties will be protected, and cryptocurrencies will eventually become a safer and more understandable tool for regulators. This will bring their global adoption as a legal means of payment closer.

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