In this episode, we look at two complex concepts: crypto and AML Risk scoring. It’s understandably complex, but keep your cool !
Mircea joined Coinfirm 18 months ago with the aim of accelerating the expansion of this software provider offering AML & Risk Analytics solutions for blockchains and cryptocurrencies.
Supporting over 1,200 cryptocurrencies, including BTC, ETH and Dash, Confirm’s AML solutions are used by over 140 global clients, ranging from crypto exchanges such as Binance, protocols like NEAR to major financial institutions.
From regulatory risk, transaction and counterparty risks, we cover the entire range of risks that Coinfirm helps its clients to mitigate.
We deep dive into Coinfirm’s four different building blocks, including on ramp, onchain, off ramp and analytics, and delve into how the start-up improves the knowledge of the compliance officer getting into the crypto space, and how they shift from a pure TradFi way of thinking to a hybrid one to understand and properly address those risks.
We also talk about the last Series A with investors like Middlegame Ventures and Coinshares.
AML risks
Basics - three phases
The money-laundering mechanism can be described in three phases:
Placement: how funds from criminal operations are brought into the financial system.
Layering: covers the tracking of where the funds originated from through the multiplication of successive banking or financial operations involving various accounts, institutions, people, products and countries.
Integration: in this last phase, fraudulent funds are brought into the economy to appear legitimate with the aim of deriving profits from them. Of course, the reality is often much more complex.
AML risks in crypto
Due to the pseudonymisation of cryptocurrencies, criminals use this to launder illicit funds and commit tax evasion, but with regulation, their overall reputation can be improved and the required taxes can be collected. Improvements to AML efforts will benefit legitimate cryptocurrency users even more, although this will require more effort and time from all parties.
What makes it feasible?
1. Transactions are irreversible. Once you send funds through the blockchain, they cannot be returned unless the new owner sends them back.
2. Cryptocurrencies enhance anonymity.
3. Regulation and taxation of cryptocurrencies remain uncertain. Tax authorities around the world are still struggling to effectively tax cryptocurrencies, and criminals take advantage of this.
These differences change the methods used for money laundering. There are now more ways than ever before to hide and launder “dirty” money.
Anonymisation technologies, such as VPNs and cryptocurrencies, can make AML work even more difficult. While it may not be possible to link a specific person to the laundering activity, one can combat this by tracking “out” cryptocurrencies, among other methods.
By tracking blockchain transactions to an exchange, you can link laundered funds to a cryptocurrency exchange account or bank account. However, buying cryptocurrencies with cash or through peer-to-peer services makes it difficult to track the flow of dirty money into or out of the financial system.
I recommend you read the document “Vertical Risk Assessment: Virtual Asset Service Providers”, issued by the Ministry of Justice in Luxembourg, where you’ll get a complete understanding on money laundering and terrorism-financing threats and the best ways to assess them.
Here is the potential exposure of virtual asset service providers to each money laundering step.
Source: Ministry of Justice (Luxembourg)
Coinfirm
Coinfirm proposes crypto AML compliance, analytics and illicit asset tracing. Coinfirm was founded in 2016 by experienced compliance, technology and finance professionals and has since become a globally recognised RegTech firm. Their offices are in the UK, Poland, US, Canada and Japan.
The start-up supports crypto players in mitigating regulatory and reputational risk, and meets AML/FATF requirements.
How?
Coinfirm’s AML risk management platform helps to manage counterparty risk, review and escalate cases, to create the perfect audit trail. In real-terms, the deep insights it delivers on counter-parties and suspicious transactions shows how this is connected to illicit activities, such as terrorism financing, reclaims stolen digital assets, and digital registers, signs and verifies documents and data.
Investors
Coinfirm has raised a total of USD 12.5 million in funding over six rounds. Their latest funding was raised in 2021 from a Series A round.
Several angel rounds between 2016 and 2020
Convertible Note (2019) - G1 Ventures
Series A (2021) with Middlegame ventures (Episode #76 🇫🇷 👉 here), SIX FinTech ventures, FiveT Fintech
👋 To better understand the terms used by Mircea in this episode (blacklisted addresses, clustering algorithms, counterparty Risk in the context of crypto,…), please check the encyclopaedia 👉 here.
💡Shares
📗 What Mircea recommends:
The Bitcoin Standard again :) by Saifedean Ammous
🧐 Deep dive:
Cryptocurrency money laundering risk: the best explanation of a 3-step process.👉 Read
What is AML and how does it apply to Crypto (anti money laundering)? 👉 Read
To understand the travel rule and MiCAR, check my Special Edition #9 🇫🇷 with Pierre Person 👉 Listen
😁 What I recommend this week:
The Cold Start Problem by Andrew Chen 👉 Read
Building a Community and an Ecosystem from JC Samuelina (Alan) 👉 Read
🎧 The episode
🇫🇷 Main channel
Podcastics / Apple Podcast / Spotify / Google podcast / Deezer
🇬🇧 English channel only
Apple podcast / Spotify
👋 Contacts
Mircea Miheascu / Coinfirm
Source: Coinfirm, Binance.