How To Uncover The Identities Of Fraudsters In Cryptocurrency Investigations
Cryptocurrencies have long been associated with facilitating illicit activities, exploiting the relative lack of regulation compared to traditional financial systems. Many perceived the decentralized nature of cryptocurrencies as a loophole through which individuals could evade scrutiny from regulators and law enforcement. However, as the cryptocurrency industry continued to grow and the risks involved became tangible on the scale of global finance, regulators and law enforcement agencies began to focus their efforts on understanding and regulating these digital assets.
In the United States, crypto regulations have evolved, and existing market regulators like the SEC and CFTC gained more authority. The SEC has actively pursued cases against crypto businesses like Ripple and Coinbase. Despite regulatory developments, the industry continues to thrive, as seen with the recent approval of the first Bitcoin Spot ETFs. China has banned crypto enterprises and mining, while Canada has been proactive, approving a Bitcoin ETF and requiring registration for trading platforms. The UK recognizes crypto assets as regulated financial instruments and imposes reporting requirements. Japan treats cryptocurrencies as legal property and enforces AML/CFT obligations. Singapore licenses and regulates exchanges, while South Korea mandates registration with the KFIU and bans privacy coins. Brazil legalized cryptocurrencies as payment methods. In the EU, cryptocurrency legality varies by member state, with recent regulations tightening KYC/CFT obligations and introducing licensing requirements for certain crypto service providers.
With every regulatory advancement in the cryptocurrency scene, the perception of crypto as a threat to financial systems is undermined.
KYC Promoting a Safer Cryptocurrency Environment
The integration of Know Your Customer (KYC) processes in cryptocurrency exchanges resembles one of the most significant regulatory steps toward securing the global financial ecosystem. By mandating the collection and verification of personal information, KYC procedures play a crucial role in deterring and identifying potential financial crimes within the crypto space, such as money laundering and fraud.
What is KYC?
It is a regulatory and compliance process used by financial institutions and cryptocurrency exchanges to verify the identity of their clients. The primary aim of KYC is to prevent financial crimes and fraud by ensuring that exchanges know the true identity of their customers.
How Does KYC Work in Cryptocurrency Exchanges?
The KYC process in the context of cryptocurrency involves several key steps designed to collect and verify information about users. These steps typically include:
Collection of Personal Information: Users are asked to provide basic personal details such as their name, date of birth, and residential address. This step establishes the user’s identity on a foundational level.
Document Verification: Users are required to submit government-issued identification (such as a passport or driver’s license) and proof of address (like a utility bill or bank statement). This documentation helps verify the authenticity of the personal information provided.
Selfie or Video Verification: To further ensure the person creating the account is the rightful owner of the submitted documents, users may be asked to submit a live selfie or a video. This step combats identity theft and impersonation.
Screening Against Sanctions and Watchlists: Exchanges screen user information against global sanctions and watchlists to ensure they are not involved in criminal activities or under international sanctions.
Risk Assessment and Ongoing Monitoring: Based on the information collected, exchanges assess the risk profile of each user, which can dictate transaction limits or account privileges. The aim is to identify and address suspicious activities over time.
The requirements and depth of KYC processes can vary significantly across different countries and regions. However, the objective remains to have the ability to hold illicit actors accountable for the malicious activities they perpetrate.
With all the safety and benefits KYC brings to the crypto industry, many major exchanges are yet to adopt robust AML/CFT procedures, encompassing strict KYC rules. Anatoly Legkodymov, a Russian national and senior executive of Bitzlato Ltd., a Hong Kong-registered cryptocurrency exchange that operated globally, was arrested in Miami for allegedly facilitating illicit funds transfer and failing to meet regulatory standards. Bitzlato was accused of catering to criminals by allowing minimal identification requirements and facilitating transactions with Hydra Market, an illicit online marketplace.
Why KYC Matters to Investigators
KYC is an indispensable armament for cryptocurrency investigators. It emerges as a vital tool for cryptocurrency investigators, bridging the gap between blockchain transactions and real-world identities. In the aftermath of the 2016 Bitfinex hack, where 120,000 bitcoins (US$72 million at the time) were stolen, KYC data proved instrumental in tracing and apprehending suspects involved in laundering the stolen funds. By mandating the submission of personal identification documents like passports and driver’s licenses, KYC enables investigators to map digital transactions to individuals or entities, facilitating the tracking of illicit funds.
Beyond this pivotal case, KYC is a linchpin in various scenarios where investigators combat financial crimes involving cryptocurrencies:
- Unraveling Complex Schemes:
- Situation: Intercepting intricate money laundering schemes.
- Benefit: Analyzing KYC-verified accounts exposes hidden connections in well-orchestrated money-laundering schemes, exposing minor participants and masterminds.
- Cross-Jurisdictional Cooperation:
- Situation: Investigating international fraud schemes.
- Benefit: KYC facilitates information exchange between jurisdictions, enhancing international efforts against financial crimes.
- Building Legal Cases:
- Situation: Compiling evidence for legal proceedings.
- Benefit: KYC establishes a concrete link between digital transactions and real-world identities, providing evidence for prosecution.
- Screening for High-Risk Individuals:
- Situation: Preventing misuse by sanctioned or politically exposed persons (PEPs).
- Benefit: KYC enables the identification and interception of transactions by individuals on watchlists, curbing the exploitation of crypto platforms for illicit financial activities.
In these scenarios, KYC transforms ambiguity into clarity, empowering investigators to expose individuals and operations exploiting cryptocurrencies for nefarious purposes. When combined with powerful blockchain analytics tools, investigators can easily identify regulated cryptocurrency exchanges involved with suspicious transactions and issue a subpoena to connect the issuers of such transactions to real-world identities.
Written By: Omar Marzouk
Writer, Content marketing at Blockchain Intelligence Group
