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Looking back, 2022 was a turning point for the development of crypto policy and regulation.
Sweeping regulations in Europe, mixer sanctions and the collapse of several prominent exchanges are just some of the highlights of a dramatic year in the space.
So what can we expect from the next 12 months? Well, in our new Regulatory Outlook report, we examine five trends that will have a big impact during 2023.
In this second of five extracts from the report, we explain how the Anti-Money Laundering and Financing of Terrorism (AML/CFT) authorities will step up their efforts to combat cross-border money laundering.
DeFi is changing the game
The recent development of decentralized finance (DeFi) has fundamentally changed the crypto ecosystem. Where users of cryptoassets were once largely limited to transactions with a limited range of services native to a single blockchain at any given time, new innovations allow users to engage in cross-chain transactions to seamlessly access products and services across numerous blockchains.
For example, decentralized exchanges (DEX) such as Uniswap allow users to engage in peer-to-peer (P2P) exchanges on Ethereum and other blockchains quickly and without the need to interact with a centralized intermediary. Similarly, cross-chain bridges allow users of one blockchain – such as the Bitcoin blockchain – to transfer their assets to another blockchain such as Ethereum, without having to rely on exchanges.
These innovations have created a rich multi-chain ecosystem that is increasingly lightweight, user-friendly, and offers the ability to launch new services across the cryptospace. However, these innovations also provide new approaches for illegal actors to launder cryptocurrencies.
Cross criminality
As we pointed out in our October 2022 “Report on the state of inter-chain crime”illicit financial flows through assets and blockchains are growing rapidly. Our research shows that since 2020, illicit actors – including ransomware attackers and North Korean cybercriminals – have laundered more than $4 billion through cross-chain services.
This includes $1.2 billion laundered by hackers through DEX and $540 million laundered through RenBridge, a service that allows users to exchange funds over the blockchain.
The use of cross-chain bridges to launder corrupted cryptoassets was highlighted in November when funds extracted from FTX were sent through these services. In the case of FTX, more than $470 million in cryptocurrencies left the exchange – apparently without authorization. The perpetrator of the apparent theft exchanged certain tokens for Ethereum on DEXs and then transferred some of the Ether they received to the Bitcoin blockchain using RenBridge.
Elliptic predicts that the value of chain-laundered or asset-hopped cryptocurrencies will reach $6.5 billion by 2023 and $10 billion by 2025.
Agencies take note
Some AML/CFT watchdogs have already expressed concern about the rise in cross-crime. In a June 2022 report, the Financial Action Task Force (FATF) warned that the increasing use of cross-chain bridges allows criminals to take a “chain of jumps” in the money laundering process. The US Treasury’s Financial Crimes Enforcement Network (FinCEN) also noted the increasing use of these techniques in a ransomware report.
We expect that in 2023, AML/CFT authorities at the global level will focus their full attention on fighting financial crime in various chains. This will include issuing detailed alerts and crime red chain indicators that they expect Virtual Asset Service Providers (VASPs) to detect. We also expect sanctions authorities to target DeFi services that facilitate cross-laundering on behalf of actors such as North Korea – as we describe further elsewhere in this report.
Importantly, we believe that in 2023, regulators will expect VASPs to implement screening capabilities to detect risk exposure across multiple chains.
To that end, VASPs should ensure they use next-generation blockchain analytics solutions – such as Elliptic’s Holistic Screening capabilities – that enable compliance teams to gain a real-time understanding of cross-chain risk exposure when evaluating their clients’ wallets and transactions .
To learn more, click below to download our brand new Regulatory Outlook report.
Click here for parts one, three, four and five of our excerpts from the regulatory review report.
