Crypto Fraud Now Exposing Legacy Banks to Compliance Issues, Reports CipherTrace

The nature of cryptocurrency fraud is shifting away from exchange hacks, and toward Ponzi-style frauds, pyramid schemes and exit scams. A massive 533% rise in the value of such crimes means that as misappropriated funds are laundered, the traditional banking system is increasingly exposed to risk under upcoming Financial Action Task Force (FATF) rules. That’s the conclusion reached by CipherTrace, a cryptocurrency intelligence firm, in a report released today.

The Travel Rule requires virtual currency businesses to “obtain, hold and transmit required originator and beneficiary information in order to identify and report suspicious transactions, monitor the availability of information, take freezing actions and prohibit transactions with designated persons and entities.”

The rule will apply to the 37 members of the FATF, including the United States, China, Japan, South Korea, and many European countries. It is slated for implementation in June 2020.

Banks at risk?

Despite a significant 160% year-on-year escalation of losses suffered by cryptocurrency users, exchanges, and investors — from $1.74 billion in 2018 to over $4.5 billion in 2019 — it’s not only the crypto industry that stands to lose as a direct result of increased criminal activity. According to CipherTrace’s research, the typical top 10 U.S. bank unknowingly facilitates approximately $2 billion in illicit cryptocurrency transactions each year. While banks paid a total of over $6.2 billion in Anti-Money Laundering (AML) fines in 2019, that number could increase as the Travel Rule is introduced.

“As crypto-assets become increasingly entangled in traditional financial services, AML and CTF [Counter-Terror Financing] compliance risks are on the rise,” said Stephen Ryan, COO of CipherTrace. “Virtual assets are now pervasive in bank accounts and payment networks, and banks must find ways to deal with the risks. Effectively mitigating cryptocurrency risks requires equipping compliance officers with the best tools and intelligence to gain visibility into this new asset class.” 

CipherTrace CEO David Jevans continued:

“Like them or not, banks have a lot more virtual assets lurking in their accounts and payment networks than most in the industry had previously thought. Banks need new capabilities to ferret out illicit MSBs [Money Service Businesses], terrorist financing, and other major sources of risk.”

Scams on the rise

Although the total value of thefts and hacks decreased by 66% over 2019, losses suffered by direct cryptocurrency industry participants rose to $4.5 billion, driven by the increase in the amount misappropriated through scams.

CipherTrace dubbed 2019 the year of the “Malicious Insider,” explaining that the trend of events such as the disappearance of funds from the QuadrigaCX and IDAX exchanges are count as “insider” jobs.

While the decrease in security hacks is encouraging, the “logarithmic rise” in losses to insider-perpetrated scams means that cryptocurrency industry participants need to continue to exercise extreme caution in their investment research.