Once considered the financial tools of choice for criminals, blockchain and cryptocurrencies can now be used to deter and prevent financial crime, helping banks improve their anti-money laundering operations. But despite the promise that blockchain offers, many financial institutions remain wary of using them. Kimberly Rosales, an expert in the cryptocurrency space and all things related to it, explains how cryptocurrencies and blockchain have been working hard to prevent money laundering from being brought into the equation.
“Both cryptocurrency and blockchain technology have gained a notorious reputation,” Rosales asserts. “That’s because cryptocurrency, and blockchain by extension, was seen as the currency of choice for the black market. Many people still associate cryptocurrency with dark web platforms, where criminals bought and sold illegal drugs or traded other illicit items.”
Information about sellers and buyers of illegal drugs, human trafficking, child pornography, illegal weapons, or terrorist financing, just to name a few, remains hidden. Bad guys can use cryptocurrencies to conduct these illegal activities and go undetected by authorities.
Criminals are often early adopters of a new financial services technology. They immediately exploit loopholes in the new tool and find ways to steal money, trick them into sending money, or move money quickly into an account they control. In person-to-person (P2P) services, fraudsters are quick to use unregistered phones and fake IDs to approve real-time money transfers to their own accounts.
“Traditional financial institutions are now embracing blockchain technology for a variety of business use cases,” Rosales points out. “In fact, in a very ironic twist, the technology that was once seen as the currency of choice for criminals is now being used to help detect and prevent numerous types of financial crime, including money laundering and related criminal activity.”
It turns out that cryptocurrency is not as anonymous as previously thought. The blockchain that supports it acts as a digital ledger that makes it easy to track the cryptocurrency’s movements. This includes previous owners and where it was previously used. Banks with access to the blockchain can see how the cryptocurrency is used and whether user activity should trigger alarms.
In other words, access to blockchain’s distributed accounting technology makes the cryptocurrency more transparent than its perceived reputation. Banks and financial institutions can use this technology and knowledge to help them comply with regulations and prevent financial crime. Banks can use blockchain to carry out due diligence responsibilities on their customers without having to rely on a third party to verify a person’s identity.
“The technology can also identify anomalous patterns indicative of criminal activity, such as money laundering or black market trading,” Rosales explains. “Blockchain can make the movement of funds clearer to banks, allowing analysts to determine whether a customer is hiding dirty money or acting on behalf of another bad actor.”
Blockchain aggregator relationships are similar to the arrangements most financial institutions have with credit reporting agencies to verify historical customer information. When these institutions launched, many banks were unsure how to work with them or whether they were reliable.
Banks now face a similar dilemma with blockchain and FinTechs operating in the space. Blockchain technology has been around long enough that some players are more trusted than others. Financial institutions and banks, which are considering taking their first steps in the blockchain context, should connect with FinTechs that regularly work as established blockchain players. Developing this relationship will help financial institutions understand how the space is changing and how to implement blockchain into their risk management strategy.
“Criminals may have been among the early adopters of blockchain, but the technology has changed considerably in the years since its launch. Today, technology has considerable potential to help financial institutions prevent financial crime. Banks must be willing to understand and rely on blockchain technology to bring their financial crime prevention and anti-money laundering compliance strategies into the modern era,” Rosales concludes.