Cryptocurrency continues to become more present in modern finance, but how do we handle it?

In late May, Abrigo will be hosting their ThinkBIG Conference in San Antonio, Texas, for which SMARTER Risk Management is a Silver-Level Sponsor. In conjunction with this, I’ll be writing a blog around one of the topics that experts will be presenting on during the conference until the conference begins. This first blog in the series is based on the Fraud and AML in Cryptocurrency topic.

On their own, AML, fraud, and cryptocurrency are topics we’ve covered several times on this blog. Fraud forms one of the biggest issues impacting the financial industry, and though AML methodologies seek to lower that impact, it doesn’t mean they’re successfully doing so. In many cases, the internal strategy employed by your organization offers a very effective solution toward the prevention of money laundering, but there are certain limitations that come with internal only solutions.

One big blind spot for many modern financial organizations is the risk associated with cryptocurrency. As we noted in our first blog on the topic, cryptocurrency is inherently risky for all sorts of reasons, but many financial institutions are beginning to dip their toes in the market. Cryptocurrency is hard enough on its own… but how do we recognize, investigate, and address fraud and prevent money laundering when cryptocurrency is involved?

What Makes Cryptocurrency Challenging?

Let’s start with what makes cryptocurrency so difficult to investigate: there is so much complexity to the space of “crypto.” While there are several cryptocurrencies you might be familiar with by name, such as BitCoin, Ethereum, or Tether, there are countless other “currencies” and coins that it’s impossible to keep track of. The more Twitter-savvy among you may be familiar with the cryptocurrencies that celebrities and billionaires have invested in or talked about, but even these are hard to recognize and understand. Cryptocurrency is also very volatile, so the entire landscape could shift (though stablecoins are the exception).

Cryptocurrency investments happen on the blockchain, which is basically a decentralized computing power (sort of like the cloud) that records the investment. The blockchain cannot be modified by outside sources and keeps a running tab of every single transaction that occurs on it. This is very much a double-edged sword when it comes to risk, especially when considering money laundering: theoretically, this should mean an overall decrease in risk thanks to its transparency.

However, this also means that the blockchain is massive; there are millions of transactions on the blockchain a day. This means you need to understand how to investigate this blockchain efficiently to find the information that might actually be relevant to your investigation if you do suspect that there was money laundering involved. Either that, or you need to find a way to ensure that your automated processes can effectively do this. Without being a technical expert, this can be particularly difficult.

The Tools You Need to Investigate on the Blockchain

If you’re an expert in preventing money laundering or AML techniques, you understand that one of the most difficult parts of tracking down money laundering is that these launderers tend to perform many transactions before sending the money to its final destination. This issue is also pervasive in cryptocurrency money laundering, where criminals will send funds through several “wallets” and “mixers” to attempt to make themselves more anonymous. However, these transactions are still on the blockchain, so it should realistically be more possible to track. Manual efforts would be extremely cumbersome and borderline impossible.

That’s why you need the right tools. Internal efforts would require paying cryptocurrency experts, which could be prohibitively expensive and, ultimately, very difficult even for the experts. Instead, it’s likely a smoother idea to utilize either a third-party partner or an open-source solution. For example, there are new financial technology organizations that specialize in these types of analyses, which may be a solution for you if you find yourself simply not having the time or expertise to investigate the fraud.

Once again, though, that kind of third-party solution is expensive, which will make it an unfeasible option for many smaller community banks and credit unions. For these organizations, though, there are thankfully open-source solutions that you can use when you need to investigate money laundering or fraud on the blockchain.

How Open-Source Intelligence Solves the Problem

While trusting hackers is not generally the sort of solution you’d expect to read on a risk management blog, the writers at Hackers Arise actually provide a good few tools to look into when investigating cryptocurrency scams. The tools they detail allow you to track Bitcoin transactions across the blockchain and explore transaction histories for various accounts. One of the tools, Bitcoinwhoswho.com, even mentions whether the transaction has appeared on websites, along with providing the IP address of the last transaction. While this isn’t foolproof—VPNs can mask the IP address—it does provide a stepping stone. The final tool on their recommended list, Bitcoinabuse.com, even lets you enter a wallet address and see whether anyone has reported fraud related to that particular wallet!

These websites are also cited by the United Nations Office of Counter-Terrorism in their presentation on conducting effective Open Source Investigations online. If you’re looking for a bit of light reading, this whole presentation offers quality tips. Cellebrite, a digital intelligence platform, also provides some guidance, and if you have a pre-existing relationship with them, their new Crypto Tracer Solution may be an option for you, too. There are many other ways to improve your knowledge of the risks of cryptocurrency fraud, including courses on Udemy and Eduonix that can shore up your crypto knowledge.

We are excited to be back in person this year and continue as a sponsor of this event! We hope you join in at Abrigo’s ThinkBIG Conference in San Antonio, TX. RSVP and register for fresh ideas on how to drive growth and manage lending, portfolio, and financial crime risk.