The article discusses how to avoid receiving illicit funds and the increasing pressure of anti-money laundering on the cryptocurrency community. It also explores the impact of these issues. Below is a summary of the content. For the full article, please listen to the podcast.
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Is it more common to unexpectedly receive illicit funds? What is the current trend?
Currently, there is an observed increase in the exploitation of cryptocurrencies in cybercrime. High-value tokens such as Bitcoin, Ethereum, and USDT are frequent targets of hacker attacks. USDT, due to its high liquidity, convenient transfers, and low fees, is particularly popular. While these features benefit regular users, they are also exploited by criminals for quick fund laundering and transfers.
These criminal activities involving cryptocurrencies can be categorized into two types: optimizing existing fraud and money laundering business models using cryptocurrencies, and creating new risk activities based on cryptocurrencies and infrastructure, such as hash gambling and 0U phishing.
Although these criminal activities are not universally considered illegal on a global scale, there is no unified standard for anti-money laundering regulations on cryptocurrencies across countries. Due to the global nature of blockchain, vigilance is required from local institutions and individuals when certain criminal activities involving cryptocurrencies are deemed illegal in specific countries or regions. For example, money laundering groups may heavily utilize exchanges and OTC markets for cashing out, leading to the receipt of risky funds by regular users or cryptocurrency institutions. This could result in account marking, fund freezing, or even legal liabilities.
Why don't illicit actors use more decentralized currencies like Bitcoin for settlements?
There are three main reasons:
Abundant liquidity: Liquidity is crucial for illicit actors using cryptocurrencies. Before the emergence of Tether (USDT), Ethereum was widely utilized due to its extensive use and strong fund liquidity. Over time, USDT became the preferred choice for illicit actors due to its widespread application and high liquidity. For instance, the circulation of USDT on the Tron network alone has exceeded 50.8 billion, demonstrating the market's significant processing capacity.
Rich ecosystem: USDT is not only supported by centralized exchanges (Cex) but also widely used in many decentralized exchange platforms (Dex) and DeFi protocols. With a daily trading volume of over 30 billion, there is a huge demand for stablecoins.
Lower fees: Despite Tron increasing its on-chain fees, they remain lower compared to other public chains such as Ethereum or Bitcoin. Additionally, some second-layer solutions like Optimism offer low fees. Illicit actors are highly sensitive to fees as they need to process a large number of transactions, making fee optimization a critical concern.
Will Tether's crackdown on illicit funds be adjusted as regulations become stricter?
Over time, especially after significant events in the cryptocurrency industry, Tether and its collaborating law enforcement agencies have intensified their crackdown on illicit funds. Many within the industry previously did not fully understand the centralized nature of Tether, leading to insufficient understanding of its on-chain operations. For example, after specific events, the U.S. government sanctioned certain cryptocurrency addresses, prompting Tether to freeze funds associated with these addresses.
This change has gradually shifted perceptions within the industry. Previously, criminals may have believed that only when funds enter exchanges and are cashed out would they face risks. However, they are now realizing that law enforcement agencies can trace on-chain funds and may freeze exchange accounts or even blacklist them directly from Tether due to suspected illegal fund flows.
As a result, not only compliant enterprises and regular investors need to be more vigilant, but illicit actors and criminal groups are also becoming more aware of the risks associated with using USDT. For example, in Southeast Asia, some collateral platforms providing services to illicit actors have started preliminary fund screening, refusing to accept funds involved in serious crimes such as drug trafficking, fraud, or human trafficking.
Is it safer for regular users to use USDC? Why don't illicit actors use USDC?
Whether it is safer for regular users to use USDC instead of USDT depends on various factors, including their respective infrastructure support and ecosystems. Due to its longer history and broader ecosystem support, USDT has gained wider recognition and usage in the market. Users, including those engaged in illicit activities, have become accustomed to using USDT.
Path dependence plays a crucial role in the preference for USDT over USDC. Due to its earlier market launch and extensive ecosystem support, USDT has become the preferred stablecoin for many users. Even if USDC may offer similar or better services in some aspects, users, including those engaged in illegal activities, may still prefer to use the stablecoin they are more familiar with and trust, which is USDT.
How to reduce the risk of receiving illicit funds in daily life?
1. Avoid transactions in highly anonymous environments: Try to avoid exchanging cryptocurrencies for fiat currency in highly anonymous environments, such as Telegram communities or payment platforms without KYC (Know Your Customer). These platforms are prone to attracting risky funds.
2. Stay away from online gambling: Do not engage in online gambling or conduct cryptocurrency transactions with individuals involved in online gambling. Online gambling platforms usually do not perform KYT (Know Your Transaction), and their fund pools may be used for illegal fund laundering.
3. Avoid money laundering activities: Refrain from participating in money laundering or score running activities, and do not be tempted to purchase so-called "discounted U". These activities carry high financial risks.
4. Use monitoring tools: Before conducting transactions, use monitoring tools available in the market (such as Detrust, MistTrack, OKlink, etc.) to check the counterparty's address for potential risks. These tools can help identify fund sources and whether they are involved in fraud, money laundering, or other illegal activities.
Do exchanges conduct KYT checks on users' funds?
1. Enhanced KYT requirements for centralized exchanges: Over time, many centralized exchanges have increasingly demanded KYT. These exchanges are collaborating with external partners (such as the company you mentioned) to enrich their database of risky funds. Larger exchanges may have established relatively comprehensive anti-money laundering (AML) mechanisms but still require specific types of risk data, especially those related to specific regions (such as Southeast Asia).
2. AML mechanisms for small exchanges: In contrast, small exchanges may not have established robust AML mechanisms. These exchanges may seek assistance to build effective KYT and AML systems.
Will the increasing pressure of anti-money laundering lead to many difficulties for cryptocurrencies in decentralization and privacy?
1. Impact of anti-money laundering pressure on decentralization: The examples you provided illustrate the impact of anti-money laundering measures on decentralized protocols. For instance, a user attempting to launder USDT acquired at a low price through a semi-decentralized cross-chain bridge protocol ultimately led to fund freezing because the protocol's business address was subject to centralized exchange supervision. This demonstrates that even decentralized protocols may be affected due to interactions with centralized systems.
2. Balancing decentralization and compliance: Your point reflects a critical issue: in the context of strengthening anti-money laundering measures, both centralized and decentralized institutions face challenges in ensuring fund cleanliness. The example of collateral platforms indicates that even if certain institutions operate legally in specific regions, they may still come into contact with unclean funds by providing services to illicit industries. In such cases, evaluating the cleanliness of an institution's funds becomes complex.
3. Evaluating the cleanliness of an institution's funds: Whether an institution's funds are considered "clean" or "unclean" depends on the degree of its association with illegal activities and its compliance efforts. If an institution knowingly provides services to illicit industries, even if it operates legally in certain regions, its funds may still be considered unclean. This requires exchanges and other cryptocurrency-related institutions to be extra cautious when dealing with such funds.
In conclusion, with the strengthening of anti-money laundering measures, the cryptocurrency industry faces challenges in decentralization and privacy protection. This necessitates cryptocurrency institutions to ensure compliance with increasingly stringent regulations while maintaining decentralization and user privacy.
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