Over 40 per cent of funds transferred using decentralised finance (DeFi) protocols are linked to illicit addresses. A new Vilnius-based regulatory technology start-up wants to help change that.
Exploiting weak Anti-Money Laundering (AML) crypto policies, crypto criminals are taking advantage of decentralised finance protocols and using them for illegal activities.
According to Chainalysis, 23.8 billion US dollars in cryptocurrency was sent from illicit addresses in 2022. Despite a decreasing trend in 2023, ransomware continues to pose a significant threat.
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The rise of decentralised finance usage, involving over six million unique addresses, complicates current AML practices in tracking illegal crypto movements.
The Chainanalysis report showed that more than 40 per cent of funds transferred using DeFi protocols are associated with illicit funds.
“The growing use of DeFi protocols for crime funding is a precedent to develop new anti-money laundering crypto compliance practices,” says Gintarė Košubienė, CEO and co-founder of Micapass, a Vilnius-based start-up that wants to help fight crypto misuse. “Crypto crime can affect anyone, especially considering the risks associated with large-scale money laundering and terrorist financing.”
Micapass offers an AML compliance tool, complete with advanced AML wallet screening and continuous KYC/AML monitoring designed for DeFi protocols, enabling the identification of bad actors, helping to prevent potential sanctions, and ensuring regulatory compliance.
Last week it secured a 240,000 euros investment from the Super How? innovation lab and Baltic start-up accelerator Firstpick. Micapass will use the investment to develop a fully decentralised compliance tool with AI-based suspicious activity alerts and multichain support, says Košubienė.
”In general, investors’ trust for the relatively young regtech market shows the clear demand for solutions helping blockchain users to navigate the complex regulatory compliance terrain.”
According to Košubienė, privacy is a fundamental component of blockchain, and decentralisation ensures there’s no third-party AML company storing users’ data.
“It seems like a challenge to undergo the screening process if we’re thinking of it as a task for institutions,” she says. “If we shift this process to the client side, one can undergo the KYC process once and be accepted by different DeFi protocols.
“To make the whole AML compliance in cryptocurrencies easier, the outcome of the KYC process can be shared using a digital verification of legitimacy. In this case, the private user’s data stays off the chain and there’s no need to repeat KYC screenings on different protocols.”
New compliance solutions
With the growing concern about crypto-related AML practices, the decentralised nature of DeFi poses a challenge to regulatory coordination between countries.
Europe is taking the lead by introducing Markets in Crypto-Assets Regulation (MiCA) and taking measures that will require compliance with money laundering and terrorism financing practices. The UK is making proactive steps to create a stable regulatory framework for cryptocurrencies, while the US is facing a regulatory slowdown with operations being held across different states.
“The lack of global consensus hinders current AML crypto implementation, yet regtech companies can help develop solutions applicable in the upcoming regulatory environment that will prevent sanctioned entities from entering the protocols,” adds Košubienė.
“Having the KYC screening process transferred to the client side, we can ensure that users receive digital proof of being good actors keeping their private data off-chain.”
The future of AML practices in cryptocurrencies rests on the compliance tools development to provide more legitimacy to the unregulated crypto market.
Developing compliance technology can accelerate governmental initiatives to regulate the market and reduce the crimes financed with cryptocurrencies.
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