/ COMPLIANCE WATCH / Warrack, and indirectly builds on the research completed in 2014 by Vivian Shum at the University of Toronto. In summary, both report that cryptocurrencies operate within separate environments that either interact with traditional financial institutions and fiat currency, or operate independently. This observation is crucial for AML professionals when establishing the parameters of an investigation. The environments proposed by Warrack in ACAMS Today magazine will be used here to show how they operate in relation to money laundering. Examples of each environment (with a drug dealer facilitating the transactions) follow. In the top diagram, at right, cryptocurrency is transferred through different virtual wallets and is eventually utilized for purchase at an online retailer. There is no nexus with traditional financial institutions, such as banks. In the bottom diagram, cryptocurrency is transferred through different virtual wallets and is eventually conver ted to f iat currency and w ired to traditional financial institutions.
blockchain’s ledger. This essentially eliminates one of blockchain technology’s most celebrated features when it comes to AML—the ability to trace transactions. The first cryptocurrency to implement this technology is referred to as Zcash, and the Zcash motto is: “All coins are created equal.” This slogan undoubtedly refers to the debated issue surrounding the fungibility of cryptocurrency. According to Zcash: “If Bitcoin is like http for money, Zcash is https. Zcash offers total payment confidentiality, while still maintaining a decentralized network using a public blockchain. Unlike Bitcoin, Zcash transactions can be shielded to hide the sender, recipient, and value of all transactions on the blockchain. Only those with the correct view key can see the contents. Users have complete control and can opt-in to provide others with their view key at their discretion.” Since Bitcoin’s inception, the concept
of a decentralized, international open ledger has enticed many to attempt to regulate or monitor its activity. This has led some to attempt to mark specific coins that have been determined to be related to criminal activity and render them less valuable or valueless due to their involvement in a suspicious transaction. The notion of marking cryptocurrency has irked many in the decentralized blockchain space as they believe cryptocurrencies, such as Bitcoin, should be equally as fungible, or interchangeable, as any fiat currency. Recently, the debate on fungibility appears to be tipping in the favor of those who believe in universal fungibility for cryptocurrency. This is due to the advent of seemingly anony mous blockchain transactions, which are made possible through zero-proof technology. Fully a nony mous cr y ptocur renc y transactions represent a concept that
New compliance approach Blockchain and cryptocurrencies present A ML professionals w ith several new challenges that require an evolved approach. This approach needs to utilize existing transaction monitoring, risk rating, and Know Your Customer documentation methodologies, and modify them for inclusion of the advances blockchain technology introduces. Also, institutional ledger sharing and transmission of funds between entities without a traditional financial institution nexus requires a realignment of resources to focus on the entities themselves, as opposed to trying to determine the life cycle of a cryptocurrency transaction. To some, this proposal may be controversial. However, the rapid evolution of blockchain and cryptocurrency technology is forcing AML professionals to become increasingly creative when devising adequate and effective controls.
“Zero hour” approaches An example of a technological advancement that has been recently introduced is “zero-proof.” Zero-proof technology removes any identifying information (sender, recipient, and transaction amount) from a 38
December 2016/January 2017