If you’ve attempted to sign up on a centralized crypto exchange, you might have seen the acronym ‘AML’ being thrown around. AML or Anti-Money Laundering guidelines prevent illegal money from re-entering the financial system.
Most centralized exchanges request them because they improve the security of users and stem wrongdoing in the finance space. The level of anonymity provided by digital currencies somewhat encourages money laundering. That’s why AML regulations in the virtual currency industry depend on the observation of user behavior.
Discovering money laundering has proved to be difficult because it could be facilitated with businesses that look legitimate. For instance, an illegitimate money maker could reside in a US state like Maryland. Distinguishing the person’s business from legitimate ones like laundromats, bookmakers like FanDuel Sportsbook Maryland, or restaurants could become complicated.
What Is AML?
The Anti-Money Laundering regulations center on preventing the transfer of illegal funds. Each nation has its AML guidelines which are slightly different from the other. Nevertheless, the Financial Action Task Force (FATF) makes certain that the difference in AML regulations remains inconsequential at the international level.
Technology development has forced a subsequent change in AML procedures because money laundering has become more sophisticated. Programs built using AML measures try to flag user behavior that comes off as suspicious.
For instance, a sudden huge inflow of money to an account or activity in an account placed on a watchlist can trigger AML’s sensors. Anti-Money Laundering cuts across digital currencies to include the entire range of financial securities, be it precious metals or commodities.
The AML regulation measures for the crypto industry began years after the inception of blockchain tech. Nonetheless, these measures have evolved to cover aspects of the crypto sector adequately.
However, there is an opposing reaction from crypto faithfuls against AML measures. As outlined by Satoshi Nakamoto in his Bitcoin whitepaper, one of the attractive elements of digital currencies was the anonymity provided to users. AML measures strip down any level of privacy and introduce scrutiny to crypto wallet users.
Explaining the Process of Money Laundering
If you’re not familiar with the financial system, the process of money laundering may be alien to you. The goal of money laundering is to transform illegal money into legal tender. It doesn’t matter whether the final form is fiat currency or financial securities like stocks or bonds.
The source of this illegal money is shady businesses like drug dealing, human trafficking, cybercrime, etc. Every nation has its various rules on preventing money laundering. Nevertheless, the FATF is tasked with fusing these different rules to promote international cooperation.
The first step criminals take to launder money is placing the illegal money in the financial system. Suppose you’ve watched movies where drug dealers open cash-based businesses, restaurants, or stores. In that case, money laundering is the reason for that.
The second step is to bounce the illegal money, so that it becomes harder to track. Digital currencies are one of the best ways for criminals to bounce illegal funds. The last step is to wash the money into the economy.
Cybercriminals use numerous methods to launder money using the steps mentioned above. The long-standing approach has been fabricating fake receipts for business services requiring cash payments. The real receipts are then mixed with the fake ones, and the illegal money becomes legitimate.
This method is difficult to expose, especially when the business has a large customer base. However, with the introduction of electronic cash, money laundering has become easier. Banks are efficient intermediaries in spotting money laundering. With electronic cash measures like PayPal, money laundering became simpler because of the elimination of banks.
Technology that ensures privacy, such as VPNs and digital currencies, has made it harder to track money laundering. When an internet user surfs the internet with a VPN, the traffic flowing in and out of the device remains encrypted. Hence, it becomes harder to track a money launderer’s activities.
Reasons We Need AML Measures in Cryptocurrency
Cryptocurrency has become the perfect park for money launderers to keep money because of its anonymous nature. In 2020, a study by Reuter revealed that $1.3 billion was laundered via crypto.
Digital currency is prime for these launderers because transactions on the blockchain cannot be reversed, which keeps the laundered funds safe. Certain private blockchains like Monero also ensure that transactions are hidden, making it difficult to track money laundering cash.
Regulating the cryptocurrency industry with AML measures will ensure that digital currencies become more credible. AML measures have been utilized to catch ransomware and hackers like the CL0p group.
Anti-Money Laundering is a term that several crypto users have spotted but still have no idea about. AML regulations prevent criminals from recycling illegal money into the financial system. Most times, the method used by these criminals involves establishing cash-based businesses and creating fake receipts.
However, with the advent of technology, sophisticated measures like PayPal and digital currencies are increasingly used to launder money. AML measures are needed in the virtual currency sector because it provides much-needed credibility to the industry and helps to stop criminals.