Criminals are now adopting cryptocurrencies and non-fungible tokens (NFTs) to blank their illicit budget as an additional approach to cash laundering. For banks and their regulators, the emerging world of decentralized finance (DeFi) raises many cybersecurity concerns. To save illicit activities, those new virtual currencies will have to be regulated, but this will take time.
Below are 4 knowledge topics that describe the disorders caused by DeFi and cryptocurrencies, as well as what organizations want to know about their cybersecurity.
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A report through Chainalysis found that cryptocurrency-based crimes hit a record high in 2021, with illicit addresses receiving $14 billion a year. By comparison, this figure was $7. 8 billion in 2020.
Currently, DeFi works with few AML (anti-money laundering) or KYC (know your customer) controls. It is usually unregulated compared to centralized finance, where regulations are clear and centralized virtual asset service providers are subject to the same criteria. as classical monetary institutions.
Some cryptocurrencies are used much more than others for cash laundering with ransomware, and some virtual currencies are thought to account for between 10 and 20% of ransom payments. weapons to drugs.
The cost of NFTs is arbitrary; they are cost the cost that someone sets, basically. We believe that a thief needs to launder a giant sum of cash; they can buy and sell NFT and then direct the payment through a third party. This approach cleans up cash in a safer and easier way than classic stratification approaches. Such transactions are difficult to control and identify using existing rules.
Although DeFi is more traceable than NFTs, the scenario remains complex. You want to use a centralized platform like Coinbase to withdraw cash from many of those decentralized currencies.
For example, let’s say you buy cryptocurrencies worth $10,000 and place them on a decentralized platform. Then, you transfer the cryptocurrencies to someone else, in which case you will have to retrieve them or buy them back. Because anyone can practice transaction history through blockchain, this action makes the transaction more traceable.
New virtual currencies need to be regulated to prevent criminal activity, but regulation will take time and diligence to prevent stifling growth.
This year, the Financial Action Task Force (FATF) issued new recommendations, but only 58 of the 128 reporting regions report applying the FATF’s modified criteria to virtual assets. And because the region has to go through its own regulatory process, those types of regulations take a long time to implement.
That said, in March 2022, the president of the United States. . . U. S. Secretary of State Joseph Biden signed an executive order ordering the federal government to expand a plan to cryptocurrencies. The goal is to coordinate efforts among regulations to better perceive and mitigate the dangers of illicit use of cryptocurrencies and explore opportunities. presented through virtual assets.
In addition, there are several other pending or passed laws that explain the cryptocurrency remedy and seek to mitigate its role in criminal activities. These include:
These proposals and Biden’s command constitute a big step forward, but it remains to be seen how and when they will be implemented and how temporarily the findings will turn into action.
The first step in solving the challenge is figuring out how to decentralize finance without being too restrictive. Right now, the best thing monetary institutions can do is monitor new regulations and work with organizations looking to track down those criminals, although there is no obligation for financial firms to catch them and invest money in those solutions.
DeFi surveillance calls for collaboration that includes industry leaders as well as regulators, as demonstrated by the U. S. Task Force. U. S. on ransomware and digital extortion and others.
Bad actors prefer to succeed at the culmination in question. They are forced to adopt more secure choice tactics to engage in money fraud due to the progression within classic monetary establishments of more complex transaction tracking systems using AI. These techniques are used in fewer regulated markets, such as NFT and DeFi.
Financial professionals want to stay on top of the latest money laundering schemes and work with regulators to make it riskier for criminals to use those methods.
About the authors:
Edward Moss, Director of Market Research, and Deleep Nair, Director of Solutions Engineering, Symphony AyasdiAI