Self-policing illicit activity on the blockchain may soon be a necessity for the cryptocurrency space.
The everyday cryptocurrency enthusiast within the future is probably going to spend time identifying illicit wallets and transactions to avoid. The U.S. Department of the Treasury has made that inevitable.
A few weeks ago, Treasury quietly published additions to its FAQs section on the web site for the Office of Foreign Assets Control (OFAC), the unit which oversees U.S. economic sanctions. The language shows that OFAC is getting to include “digital currency” addresses on its Specially Designated Nationals and Blocked Persons (SDN) list.
This would be an enormous deal.
Banks and every one sorts of businesses are alleged to check the SDN list to make sure they are doing not provide financial services to people, organizations, and governments which the U.S. has designated as “blocked” thanks to involvement in terrorism, nuclear proliferation, kleptocracy, human rights violations, and other crimes.
Banks are often legally compelled to freeze any assets they need custody over that belong to those on OFAC’s list, and stop their transactions. The financial penalties for not doing so are often severe. And while most everyday cryptocurrency investors know little about the legalese-laden world of sanctions compliance, anyone running any kind of financial business knows that noncompliance can put you out of business–and potentially, in jail – quick.
Never before features a specific cryptocurrency address or wallet been listed by OFAC, although legal experts have understood for years that sending bitcoins or other cryptocurrencies to anyone on the SDN list is against the law for U.S. persons.
Still, there’s an enormous difference between blocking funds within the fiat banking world and what are often wiped out the realm of crypto. Peer-to-peer cryptocurrency transactions can’t be blocked or reversed by third parties.
So an OFAC-designated crypto wallet is probably going getting to bring more scrutiny on the external addresses it transacts with instead of the designated wallet itself.
Some cryptocurrency industry compliance experts argue that digital currency wallet designations could inaugurate a replacement era; where tokens get categorized as either clean, tainted, or unknown with reference to their level of association with SDN addresses.
This might cause varying price levels for coins on an equivalent blockchain, with clean tokens valued above those with tainted or unclear origins, and therefore the end of the fungibility that cryptocurrencies have enjoyed since their existence.
One also can expect that blockchain forensics tools will become more valuable and more widely deployed as crypto exchanges aim to reduce the danger of transacting with users with tainted coins.
It’s on you
However, the more significant a part of a replacement era arising from financial authorities scrutinizing cryptocurrency addresses goes to be what the cryptocurrency community itself will need to do: Work to stop illicit transactions on the blockchain.
This is something many within the crypto space don’t want to listen to .
Cryptocurrency experts often point to “censorship resistance” because the technology’s most precious feature, enabling anyone to store and send funds, unencumbered by any government authority. In theory, this is often a robust enabler of freedom and democracy.
But in practice, this technical ability has never been a scalable reality given the reach of laws in most jurisdictions concerning financial crime. While evading the impositions of corrupt governments may be a worthy goal, the crypto community should recognize that it’s morally unacceptable to remain passive while evidence grows that criminals and terrorists are exploiting the community’s freedom.
In recent years, anti-money laundering (AML) compliance experts that specialize in the blockchain industry have encouraged cryptocurrency firms to travel beyond doing the “know your customer” (KYC) due diligence required of traditional financial institutions and do “know your transaction” (KYT) analysis by leveraging data on the blockchain.
There are multiple startups specializing in such blockchain forensics, serving crypto exchanges along side other enterprise customers like enforcement agencies and enormous banks. These companies’ analytic tools are useful for fighting crime, but many voices within the crypto community criticize such tools–which deanonymize financial transactions on the blockchain–for undermining privacy. However, most information from blockchain forensics isn’t shared publicly. One usually must be a company or government client to access the info .
But OFAC listing cryptocurrency addresses would raise the stakes of KYT analysis.
It would make it more important for anyone involved in cryptocurrency transactions to verify the “licitness” of the addresses they touch.
And although it’s likely that the amount of designated addresses would be minimal to start with (OFAC doesn’t make designations lightly), even the tiny chance of a sanctions violation brings compliance risk mitigation into the image for John Doe Token Buyer.
An inadvertent transaction with a banned address or an address that has transacted with a banned address would be viewable on the general public blockchain ledger, possibly tainting that person’s cryptocurrency wallet also .
The only thanks to help everyday users of cryptocurrency navigate the maze of an SDN-laden blockchain platform would be having real-time AML/KYT insight into the funding flows of varied wallet addresses. this is often impossible under the present environment where blockchain analysis is completed in siloes, available just to financial firms and enforcement .
What’s needed is an open-source platform where illicit activity is flagged and derogatory information is vetted. Call it crowdsourced AML on the blockchain.
I understand this need. As a researcher at a nonprofit national security think factory , I’ve investigated cases of cryptocurrencies and illicit financing, like bitcoin terrorist funding campaigns within the Middle East . Our team has used free public blockchain explorer websites to research donations to those campaigns.
These tools aren’t as robust as what the govt and banks can access with costly specialized machine learning and algorithmic tools. And even if I, through rigorous manual tracking and analysis of blockchain activity, flag addresses I see transacting with a terrorist funding wallet, there’s no efficient thanks to share my findings on a platform so everyday cryptocurrency users could see my “flags,” evaluate their veracity, and stay beyond those addresses, as appropriate.
The industry can help.
Two years ago, I suggested that cryptocurrency experts should found out their own watchdog groups to seem out for nefarious activity on the blockchain, almost like how “white hat” hackers flag viruses and other cyber threats. Treasury’s plans make it more important now for the crypto space to create self-policing initiatives.
And besides incorporating OFAC’s blacklist, a public crowdsourced blockchain AML tool could address a bootleg finance threat that affects crypto users directly: crypto heists. it might allow victims of ransomware or exchange hacks to voluntarily list their extorted or stolen tokens. While that won’t bring funds back to their rightful owners, it could make moving or stealing coins harder and disincentivize cryptocurrency theft within the future .
Of course, for a self-policing AML platform to figure , there would need to be how to vet listings in order that inaccurate and false information isn’t published. Otherwise, such a tool might be misused to falsely malign addresses, and thus, undermine innocent people financially. But this is often more a technical problem to unravel instead of a reason to not pursue a far better way of doing AML on the blockchain.
The breakthrough of the primary blockchain protocol, bitcoin, was in designing a decentralized thanks to incentivize strangers to compete and ensure the veracity of a worldwide public financial record.
Certainly, with all the eye , time, and money invested in new products and services built off of cryptocurrency tokens, those that are developing this technology should be ready to design ways to incentivize keeping the blockchain clean.