Cryptocurrencies are appealing to their users largely due to their anonymity. But that same anonymity makes it easier for bad actors to engage in criminal activity through crypto transactions.
Authorities are crafting new regulations to prevent criminal activity facilitated by crypto and to trace transactions if they suspect that crimes have been committed.
With that said, there are several vulnerabilities in the current system. In addition to following regulations, firms and individuals must take a proactive approach to avoid getting caught in the crosshairs of regulatory noncompliance and cybercrime.
Common-sense precautions combined with cybersecurity tools are the best way to keep your online activities clean, especially when using cryptocurrencies.
AML/CFT and KYC in the Crypto World
One of the biggest risks for crypto users is receiving digital currencies that have been used for money laundering.
Let’s say a bad actor launders money into cryptocurrency tokens using mixers, tumblers, and exchange trading. Those digital funds can traverse through the crypto sphere before ending up in your wallet. You might be unaware of the origin of those coins, but you would still be at risk of being subject to an investigation if law enforcement authorities are paying attention.
Authorities have enacted security regulations including anti-money laundering and counter financing of terrorism measures (AML/CFT), as well as requiring know-your-customer (KYC) due diligence from financial institutions, payment processors, and crypto exchanges. The goal is to track and stop the suspicious activity before the tokens land into innocent people’s wallets or get cashed out into fiat.
The New FATF “Travel Rule”
The Financial Action Task Force (FATF) adopted new standards in June, referred to as the “travel rule.” The travel rule requires crypto exchanges to share customer data with financial institutions receiving transfers of digital currencies. The travel rule was designed to help law enforcement track suspicious activity involving cryptocurrencies and their exchanges.
Although the law is well-intentioned, compliance will be a challenge. First, crypto exchanges lack the infrastructure to share customer data with each other. Second, the decentralized nature of blockchain technology, on which cryptocurrencies are based, creates an obstacle towards reaching a consensus on establishing a new transaction tracking and compliance system.
Individual Safety Measures
Following due diligence procedures before completing a crypto transaction isn’t just limited to large organizations. Individuals can also take steps to protect themselves from getting into legal entanglements.
You should always know who you are transacting with. To stay safe, individuals need to:
● Verify the identity of whom they are transacting with
● Check if they’ve ever been involved in criminal activity
● Maintain detailed records of all transactions in case regulators come calling
These measures are certainly worth taking to reduce your risk, but sometimes they are not enough. Which brings us to the next section.
Coin Tracking Tools
There are tools available to check the legitimacy and even the past criminal activity of a cryptocurrency wallet before you transact with it.
Uppsala Security developed the Threat Reputation Database (TRDB), which contains information about the most current cybersecurity threats. The database has whitelists of safe URLs and wallet addresses, in addition to blacklists of malicious URLs, wallets, and recorded phishing scams.
Individuals can use UPPward, a tool that can be installed as a Chrome or Firefox browser extension for free, to check wallet addresses against the TRDB before they go through with their transactions.
Uppsala Security also aims to get ahead of bad actors with the Crypto Analysis Risk Assessment (CARA) tool, which uses machine learning to distinguish between the cryptocurrency behaviors of law-abiding individuals and malicious actors. Also, the Crypto Analysis Transaction Visualization (CATV) is available to help businesses or individuals track the movement of funds.
Cybersecurity on Privacy Coins
Privacy coins are even more anonymous than Bitcoin and other traditional cryptocurrencies. While the identities of Bitcoin users are anonymous, their financial transactions are public and quite easy to trace.
With privacy coins such as Monero, ZCash, and Dash, it’s nearly impossible for authorities to track the flow of these coins. The $534 million heist of Coincheck (a Japanese exchange) was facilitated by privacy coins. In another high-profile case, abductors demanded a $10 million ransom payable in Monero, to release a kidnapping victim.
The good news is that criminal activity is becoming more difficult to carry out using privacy coins. Exchanges are either delisting privacy coins, or not allowing people to cash out directly with privacy coins.
Digital Security in the 2020s
Regulators are trying to fit an emerging industry into existing frameworks, which brings obvious challenges. Adding more regulations may not necessarily help, but rather make compliance even more complicated.
The fact of the matter is that the cryptocurrency industry will continue to evolve throughout the 2020s. Bad actors will search for new ways to profit, while law-abiding crypto users must combine vigilance and advanced tools to protect their crypto wallets and avoid legal headaches.
At Uppsala Security, we believe the best approach is to develop new cybersecurity tools, using blockchain technology, to stay ahead of these bad actors.