Authors: Wayne Huang, You Zhiwei (India You), Sun Huang
The cryptocurrency market has witnessed unprecedented growth, with major corporations like Tesla, PayPal, and Visa adopting Bitcoin, alongside institutional investors and NFT platforms driving demand. However, this rapid expansion brings challenges in tracking digital currency flows, ensuring exchange security, and preventing fraud, money laundering, and illicit activities—critical concerns for exchanges, investors, and regulators alike.
Taiwan’s Executive Yuan recently delineated the scope of Virtual Asset Service Providers (VASPs) under Article 5 of the Money Laundering Control Act, mandating strict Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance for exchanges, custodial services, and related financial activities, effective July 1.
As a global digital currency platform, XREX applauds Taiwan’s regulatory strides, which reflect proactive governance in blockchain innovation. Over the past two years, XREX has prioritized AML tools to safeguard transaction integrity:
- Clean Withdrawals: Ensuring all outgoing cryptocurrencies are untarnished by illicit activities.
- Wallet Screening: Preventing transfers to high-risk wallets linked to terrorism, sanctions, or criminal enterprises.
This article explores cryptocurrency AML analysis through three case studies (Coinbase, LocalBitcoins, MorphToken) and introduces XREX’s proprietary AML solutions.
Silicon Valley’s Blockchain AML Tool: CipherTrace
XREX employs CipherTrace to automate risk analysis and empower AML analysts with intuitive risk assessment tools. The platform aggregates data from 850+ VASPs across 80+ countries, including Binance, Kraken, and Coinbase.
Case Study 1: Coinbase
Coinbase’s Nasdaq debut ("COIN") spotlighted its AML posture:
- Top Counterparties: Binance dominates inflows/outflows, indicating intertwined liquidity.
- Inflow Sources: Huobi and OKEx rank among top origins, suggesting regional user bases.
- Institutional Activity: Market maker Cumberland accounts for 11.59% of inflows and 22.16% of outflows.
- Privacy Coins: Supports Monero (XMR) and Zcash, increasing AML complexity.
- Fiat Integration: Partners with five traditional banks, detailed via SWIFT codes in CipherTrace.
- KYC Rigor: "Green light" rating for strict identity verification.
Key Takeaway: Coinbase’s robust compliance aligns with U.S. regulatory standards.
Case Study 2: LocalBitcoins
This peer-to-peer exchange shows high-risk traits:
- KYC Rating: Upgraded from red to "yellow light" post-KYC implementation.
- Inflow Sources: Binance, Huobi, and Kraken dominate, avoiding outright blacklisting.
- Outflow Risks: Top destinations include black markets (AgoraMarket, Silk Road) and sanctioned entities like BTC-e.
- OFAC Sanctions: Flags wallets linked to North Korea’s Lazarus Group.
Case Study 3: MorphToken
Noted in FBI’s Blueleaks report as a hub for Bitcoin-to-Monero laundering:
- KYC Rating: "Red light" for zero identity checks.
- Illicit Inflows: 23.6% from black markets, 9.52% from high-risk exchanges.
- Privacy Coin Support: Facilitates anonymous transactions.
Conclusion: Platforms like LocalBitcoins and MorphToken attract criminal activity due to lax controls, warranting avoidance by legitimate users.
XREX’s Proprietary AML Innovations
Risk Level Detector
XREX’s Risk Level Detector flags wallet addresses as red (high-risk), orange (caution), or green (safe), empowering users to assess transaction risks proactively.
Compliance Framework
XREX adheres to FATF standards via:
- Certified AML Analysts: CAMS and CipherTrace-certified staff.
- KYC Partnerships: Integration with Sum & Substance.
- Global Collaboration: Membership in Crypto Defenders Alliance and TRISA.io for travel rule compliance.
- Transparency: Public AML policies and investigative reports (e.g., Case 1, Case 2).
Why Taiwan Must Lead in Virtual Asset AML
FATF’s 2018 virtual asset guidelines underscore global AML imperatives. Taiwan’s alignment with FATF standards ensures international competitiveness and blockchain industry growth.
Action Steps for Taiwanese VASPs
- Adopt International Standards: Preemptively implement KYC/AML to avoid high-risk labels.
- Leverage Tools: Utilize CipherTrace and Cybavo for illicit wallet screening.
- Engage Globally: Join alliances like Crypto Defenders Alliance for threat intelligence.
XREX exemplifies this through:
- Annual audits by Big Four firms.
- Product-level AML features (e.g., Risk Level Detector).
Conclusion
Blockchain and cryptocurrencies are reshaping finance. Taiwan must balance innovation with risk management to seize this transformative opportunity.
FAQ
Q1: How does XREX ensure withdrawal safety?
A1: By screening all outgoing crypto against global risk databases and marking wallet addresses by risk level.
Q2: Why are privacy coins risky?
A2: Their anonymity complicates AML efforts, often attracting illicit activities.
Q3: What’s Taiwan’s new AML regulation?
A3: Article 5 mandates KYC/AML for VASPs, effective July 1.
👉 Explore XREX’s AML tools
👉 Learn about Risk Level Detector
About XREX Group
XREX Group is a blockchain-powered financial institution facilitating cross-border payments and crypto services for emerging markets. Licensed in multiple jurisdictions, it combines security with innovation to advance financial inclusion.