Cryptocurrencies are often presented as the perfect haven for criminals looking to hide their illicit funds. However, by analyzing data on a public and transparent blockchain, it is possible to raise a tip of the iceberg regarding the flow of criminal funds through the cryptocurrency ecosystem.
Blockchain monitoring solutions have become an important part of regulatory compliance in the cryptocurrency space, enabling cryptocurrency companies, banks, and other regulated financial institutions to mitigate risk and comply with AML and transactional requirements.
In this blog post, we explore the four components of AML risk assessment in blockchain: the address, asset, transaction and the beneficiary owner.
A blockchain address is a unique string of numbers and letters that functions like an email address. It refers to a specific destination on the network to which cryptocurrencies can be sent, and can only be used once. The idea is that whenever a person wants to receive cryptocurrency, they will receive a unique address.
A crypto asset is a special term that stands for powering the most applications of blockchain technology. More specifically, a cryptocurrency is a digital asset that uses cryptography, peer-to-peer networks, and public ledgers to govern the creation of new entities, validate transactions, and protect them without the intervention of intermediaries.
Crypto-Asset enables industry decentralization by using cryptography and peer-to-peer networks to eliminate intermediaries, thereby reducing costs. Whether making payments, sharing files, or using the Internet of Things (IoT), crypto-assets are typically required to do so.
A transaction can include cryptocurrency, contracts, documents, or other information. The requested transaction is sent from the nodes to the P2P network.
The network of nodes verifies the transaction and the user’s status using known algorithms. Once the transaction is completed, the new block is added to the existing blockchain. Thus, it is permanent and immutable.
The Beneficiary owner
A designated entity or person may hold a private key to distribute funds from one or more addresses corresponding to that private key. A holder may hold private keys for multiple addresses on the blockchain.
Transactions and participations often involve multiple addresses for counterparties and beneficiary blocks. Therefore, the most accurate, reasonable and realistic risk assessment is usually an address-based assessment.
In addition, address-based assessments should take into account all types of digital asset transfers to and from a given address, as one asset may be clean while another may be illicit. Furthermore, if an illicit device is introduced into a blockchain, it should automatically affect all known addresses on the same blockchain of the recipient.
A risk assessment of the transaction, owner or digital asset can provide additional information, but should normally be complemented by an assessment of the individual addresses on the blockchain that comprise it.