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Bybit Learn
Jul 27, 2022

Anti-Money Laundering (AML)

Anti-money laundering, or AML, is any type of method that prevents criminals from moving illicit funds with crypto.

In 2021 alone, criminals used cryptocurrency to launder a whopping $8.6 billion worth of criminal funds. Though the anonymity of crypto can benefit the average user, it makes coins vulnerable to criminal activity. Fortunately, many crypto assets are starting to use anti-money-laundering techniques. These measures can help prevent financial crime and keep law enforcement agencies from getting involved in crypto.

What Is Anti-Money Laundering?

Anti-money laundering, often abbreviated as AML, refers to methods used to keep criminals from converting illegally obtained crypto assets into fiat money. Anti-money laundering can include practices such as customer verification and crypto travel rules.

Anti-money laundering is a very broad term because it includes a lot of different laws, regulations and techniques. However, all of the various anti-money-laundering methods have one objective in mind: To combat money laundering. 

"Laundering" refers to the criminal activity of turning crime profits into legitimate funds that  can be deposited in a bank. For example, crypto money laundering often involves buying crypto with drug-trafficking money, then selling the crypto and reporting it to the Internal Revenue Service (IRS) as money earned through crypto trading. 

When it comes to crypto, anti-money-laundering regulations are recommended by the Financial Action Task Force (FATF). This organization sets standards that blockchains can follow to recognize and report suspicious transactions, thus combating crypto laundering. Though anti-money-laundering regulations aren't a legal requirement in most countries, they can enhance a blockchain's security and reduce the need for government intervention.

How Does Anti-Money Laundering Work?

Anti-money laundering is all about identifying common ways of laundering money and making these strategies more difficult. Since there are so many different types of blockchain, not all anti-money-laundering methods will work equally well. 

Some AML techniques may focus on preventing frequent transactions, while others may prioritize user verification. In general, anti-money laundering is intended to ensure that crypto is used for investing or financial transactions, instead of surreptitiously shuffling money around. Anti-money laundering also makes it easier for the government to identify criminals and seize illicit crypto assets.

Most anti-money-laundering tactics don't try to completely eliminate money laundering. Instead, their main goal is to make it harder to launder large amounts. Even with robust anti-money-laundering practices in place, a small-time criminal may still be able to launder insignificant amounts. 

However, major crime lords can no longer use crypto assets to launder thousands of dollars at once. Anti-money-laundering regulations have proven to be an effective way of stopping the worst offenders, while still allowing legitimate users some privacy and anonymity for their transactions.

Ways to Ensure Anti-Money-Laundering Compliance

Many different techniques can keep cryptocurrency platforms from becoming money-laundering hubs. Here are a few of the most popular methods.

Know Your Customer (KYC)

Know your customer, or KYC, is essentially a set of identity verification procedures that allows any virtual asset service provider to keep track of who’s using their services. This can mean documenting each crypto trader's legal name, passport number and/or date of birth. It can also involve tracking each user account’s purchases, even if that account's real-world identity is known. 

KYC is useful for stopping money laundering, but users who prioritize privacy tend to protest against this anti-money-laundering practice.

Customer Due Diligence (CDD)

Customer due diligence, also known as CDD, refers to using research and statistics to stop money laundering. Crypto companies can use customer transaction reviews to identify risky accounts and monitor them more closely. This tends to require more complex software and employee labor, but it can be very useful. 

Crypto Travel Rule

The crypto travel rule is a regulation that requires customer due diligence every time crypto assets are moved. Companies can verify the identities of both the sender and receiver in a transaction, so they can spot red flags. Depending on the guidelines set up, a provider can choose to halt suspicious transactions before they even go through.