Crypto Academy

Anti-Money Laundering

Anti-Money Laundering

6 min reading

Let’s improve your knowledge about crypto evolution by learning all things Anti-Money Laundering.

Anti-money laundery

Anti-Money Laundering (AML)

In recent years, bitcoin and other cryptocurrencies have emerged as prominent features of the global financial system. Due to their drastic growth, crypto-currencies and ICOs have become a very important form of personal wealth. A wide range of businesses has also emerged that recognize crypto-currencies as currencies to buy. The growth of the cryptocurrency markets has been fueled by major investors, so many are now including crypto-currencies in their investment portfolios. The online system around it opens the door to threat vulnerabilities, but its iterative nature prevents reversibility, especially in case of fraudulent transactions. In this article, we will explain what anti-money laundering (AML) is.

History of AML

A brief history of AML indicates that its regulation is largely influenced by the policies that shape the United States’ approach to money laundering. These include two pieces of legislation, the founding of the Bank Secrecy Act of 1970 and Title III of the Patriot Act of 2001, created to combat money laundering and terrorist financing, respectively. The BSA requires financial institutions to join the government in combating money laundering.

This then led to the creation of AML regulations such as the Money Laundering Control Act (1986) and the Anti-Drug Abuse Act (1988). However, it was not until the publication of Title III of the Patriot Act that the Know Your Customer (KYC) principle was implemented. This measure requires financial institutions to know who they are doing business with. The Patriot Act, on the other hand, was intended to eradicate terrorist financing through the financial sectors.

Features of cryptocurrencies

First and foremost, it is important to note that cryptocurrencies are virtual currencies that do not have a legal tender but serve as a medium of exchange, a unit of account, and a store of value. AML is a set of rules and regulations that combat money laundering. It aims to detect and interrupt any form of money laundering that usually occurs in three layers, namely placement, layering, and integration. Since cryptocurrencies are decentralized and do not involve any third party, they have caused some disruption. Criminal activities such as money laundering have emerged and criminals are hiding the sources of their crime. Terrorist groups are receiving supplies through this.

Crypto sector regulation

Regulations have been issued on how to prevent these financial crimes. But with the rapid growth of crypto-currencies, authorities have been slow to implement these rules and regulations, which has allowed criminal organizations to engage in money laundering. After spotting these threats, anti-money laundering regulators took action by issuing anti-money laundering regulations for crypto-currencies, while other regulators simply included crypto-currencies in existing anti-money laundering laws. Each country develops its own regulatory framework for banks and other financial institutions regarding AML compliance procedures. Recent changes in AML legislation show that in the next few years regulators in many countries will introduce new tools to increase the transparency of cross-border transactions and combat money laundering. Among such tools are publicly accessible beneficiary registries, PEP registries, new requirements for service providers with virtual assets, reduction of limits on prepaid cards, the inclusion of traders of precious metals and works of art into the list of monitoring subjects. In addition, many banks and financial companies are already imposing additional requirements for the presence of economic substance when opening an account. This requires the company to have employees a physical office, facilities (for trading companies), and relevant experience of the company’s employees and management.

How it works

The AML procedure includes both identifications, storage, and exchange of information (about users, their income, transactions) between organizations and agencies. AML essentially shows a user’s transaction history in blockchain that cannot be altered or falsified, which means it is a more reliable tool for protecting against illegal activity. Another advantage of this procedure is that AML scoring is automatic and the user does not participate in it. Sometimes AML-procedure is called KYT (know your transaction).

Both procedures are carried out with the help of special software. KYC software is similar to collecting information to compile a database. AML- the software uses more of a variety of algorithms to link the KYC database (and other sources of information) to all the wallet addresses in the blockchain. This forms the AML database, which is constantly updated as cryptocurrency wallets (new entries in the blockchain), and information about their owners is updated. Building, updating, and analyzing the AML database is a complex task because, in addition to the depth and number of links in this database, there are different numbers of participants, which for simplicity are grouped into so-called clusters. Each cluster is given a conditional risk of being involved in illegal activity as a percentage. 


It is worth noting that although the KYC and AML procedures are independent of each other, their tools can be used in parallel – an example are the exchanges, most of which resort to the KYC procedure. But instead of collecting a lot of personal information to track financial flows and stop illegal activities, it is much more effective to use AML tools, which verify cryptocurrency addresses at the entrance. As a result, the user maintains both his privacy and the integrity of his crypto assets, because suspicious funds cannot enter his wallet. And at the same time, the illegal cryptocurrency remains in the owner’s possession, avoiding the transfer and subsequent blocking on the exchange. AMLBot is an example of AML tools.

In conclusion, the goal of AML is to eradicate terrorist financing through the financial sector. Since these AML regulations are still new, governments and regulators are still working on money laundering and publishing new regulations that could be implemented in the crypto market. This will help combat all forms of evil that could arise and maintain the integrity of cryptocurrencies.