AML Regulations in Web3: Unika Use Case
Money laundering is the process of concealing the source of money. Usually, ‘dirty’ money comes from illicit activities such as gambling, drug trafficking, embezzlement, or corruption, which are prosecuted by law enforcement organizations all around the world. It’s quite logical to assume that money laundering practices could have stayed with us since the early days of banking development, which is around 2000 AD. Nevertheless, the first attempts to set some limitations and fight money laundering were taken in the 1930s in the USA during the period of Prohibition. At the edge of XX and XXI ct, with the development of technologies and the wide acceptance of computers and mobile phones, AML practices have become even more strict and overwhelming. But then the blockchain ecosystem made its way into the financial world and made it possible for money laundering criminals to avoid AML regulations imposed by traditional institutions, which represented a new frontier on the financial fraud landscape. Blockchain pseudo-anonymous nature helps criminals hide their real identities behind the digital ones as well as technological tricks performed while placing, layering, and integration of ‘dirty’ funds back into the national economies make it difficult to track them even in such a transparent and publicly verifiable ecosystem as Web3.
Ways to Launder Money in Web3
Criminals could launder illicitly obtain money in Web3 through several ways:
- Tumblers
‘Tumblers’ is the name for mixing services that help to split up ‘dirty’ crypto. Tumblers send money through multiple addresses and after that recombine it. The biggest chunk of these addresses could be located in the darknet. After a series of ‘hops’ money is considered to be clean and they are traded on legitimate DEXs for altcoins or sold for fiat.
- P2P Networks
Criminals turn their heads to decentralized P2P networks due to their international nature. Users of these Web3 service platforms are unaware of what type of funds they might be sending further. Usually, the final destination of such money transfers are countries with little or no AML regulations.
- CryptoATMs
There are 39K cryptocurrency ATMs installed across 77 countries worldwide. Bitcoin ATMs allow anyone to purchase Bitcoin with their credit or debit cards. These ATMs could also accept cash and provide users with QR codes to be scanned at DEXs to purchase Bitcoin or other cryptos.
- Prepaid Cards
Some digital banks are providing their clients with debit cards that are loaded with crypto. In case of data leakage, such cards and PINs associated could be the target of cybercriminals.
- ICOs
ICO is another way for criminals to launder money due to its anonymous nature and unregulated status. Crypto purchased during the ICO with illicitly obtained funds could be later traded at exchanges.
- Gambling and Gaming Websites
Many online gaming and gambling websites accept crypto to buy virtual chips or credit. After a few small transactions, these virtual chips or credit could be easily cashed out.
- DEXs
In the next paragraph, we will discuss DEXs case in more detail.
DEXs Coming Under Money Laundering Threat
Unfortunately, criminals are using exchanges as the main target for money laundering activities. Based on a recent report, centralized exchanges witness the flow of almost 50% of the ‘dirty’ money. The next position is occupied by decentralized exchanges (DEXs), around 20% of money laundering transactions, with a whopping increase of around 2000% yearly.
Another aim of cyber criminals is cross-chain bridges as a subcategory of DEXs, which allow them to connect different blockchains and enable asset and information transfer. Cross-chain bridges came along as a robust solution for speedy money transfers between Bitcoin and Ethereum and new actively emerging blockchains, for example, Layer 2 networks. The majority of cross-chain bridges use a lock-and-mint model which could be attractive for cybercriminals to run money laundering operations. Also, the trustless character of cross-chain bridges and their reliance on smart contracts during crypto transactions could make them vulnerable to hacking.
The growing weight of DEXs and cross-chain bridge solutions indicate that the continuous development of Web3 and its impact on the global financial system may evoke in the nearest future a plethora of new crypto-criminal schemes for funds laundering. Big percentage of such operations can affect the level of trustworthiness of crypto exchange platforms and harm the reputation of individuals who were (un)lucky enough to ‘catch’ dirty funds.
As an example, we can use a case discussed in a FAFT paper on money laundering activities. Criminals who used phishing to steal around $300K from South Korean users completed high-value transactions to transfer funds from one account into another through DEXs. Before the ‘dirty’ funds entered a foreign cryptoaccount, they were passed through 48 other cryptowallets to hide their origin.
Uniqueness of AML Regulations in Web3
Recently DEX platforms introduced a set of measures helping to fight crypto money laundering activities. One of the regulations is to identify and report any suspicious transactions, for example, big inflows and outflows of funds from users’ accounts. As soon as the transaction is reported a decentralized exchange blocks the user’s ability to withdraw and deposit at least during the time of the financial investigation. In case of proving any illegal activity, the platform notifies the relevant authorities and hands the evidence over. Apparently, these means are not enough and DEXs still present a legal grey area with an unclear regulatory future. Moreover, the processes we are witnessing in the Web3 regulatory sphere contradict the nature of blockchain and endanger the two most valued features there: decentralization and anonymity. To prevent an unsafe financial environment, and combat financial fraud AML standards in Web3 are being actively pushed toward the existing ones in Web2, but from our perspective, it is not a way out.
Unika Harnesses Modern Technologies to Amplify AML Regulations in Web3
Right now the cryptocurrency industry and specifically a DeFi segment are facing a dilemma. On the one hand, there is an urge to adapt to AML compliance to build transparency and trust, reduce financial crime threats, and stabilize DEXs. And on the other hand, Web3 service providers should find the middle way and not be trapped in deanonymization and centralization.
Unika introduces an additional onboarding layer which at the same time could act as a standardized identification protocol for any decentralized and even centralized exchanges. Unika has the potential to facilitate compliant crypto transfers between all exchanges and be able to investigate suspicious transmittals and the origins of money transferred.
What is Unika and How it Challenges Money Laundering in Web3
Unika is a decentralized anonymous identification protocol that links users’ biometric data with their blockchain addresses. Its unique approach to user identification as well as the technological features of the protocol make it a robust tool in fighting money laundering across Web3.
Unika protocol is built in a way which makes users completely anonymous. During the identification procedure, users don’t have to reveal their identities or scan and upload any of their IDs. Moreover, users’ data cannot be stolen or leaked, because Unika protocol is running in TEE. Last but not least, Unika does not store any data because it doesn’t have centralized storage. Upon the completion of the identification procedure, the data is sent to the encrypted decentralized storage and can be only extracted in the form of an answer to a request coming from any Web3 service providers. It means that there could be no breaches or any information leakages concerning sensitive users’ data.
How to Partner Unika?
- Connect to Unika Services
Any Web3 service providers including DEXs and cross-chain bridges could easily integrate Unika. Our protocol is built in a blockchain agnostic way and operates across all blockchain ecosystems.
2. User Identification
The most important step is onboarding DEX members through the Unika identification system. Here is a step-by-step guide on how the Unika identification is completed.
3. Keeping Track of Transactions
When users want to exchange the crypto on one blockchain for the crypto on another blockchain they send a transfer with a randomly generated number attached. For example, if it’s ETH that needs to enter a BTC crypto wallet, Unika confirms that both cryptowallets: ETH and BTC belong to the same person based on the unique biometric data and the generated number provided indicates which crypto equivalent is sent. Such a mechanism makes all transactions transparent and in case of a money laundering attempt, it will be obvious who sent ‘dirty’ crypto to the exchange and who by mistake got it deposited on their cryptowallets.
Conclusion
The speedy development of Web3, its tendency to embrace Web2 financial institutions, and the growing Defi presence indicate that criminal actions taking place in Web2 will flood Web3 in the nearest future. Nowadays, the Web3 ecosystem experiences substantial pressure toward the application of Web2 methods of user identification: centralized database, deanonymization, etc. Our team strongly opposes such a tendency and as a result, is ready to provide Unika — an ideal identification tool for blockchain ecosystems.
If you love freedom as much as we do, and would like to keep Web3 as a manifestation of the end of digital slavery when only users decide who to share their data with, join our project. Send us an email to find out how to be helpful and how to support us. Also, network with us to find out what are other cases of the Unika applications.
