Crypto Hygiene: An Unseen Practice of P2P and OTC Trading Platforms

https://www.financemagnates.com/cryptocurrency/crypto-hygiene-an-unseen-practice-of-p2p-and-otc-trading-platforms/

While crypto has always been scrutinized for potentially driving illicit transactions, the limelight has been intensified recently, especially on leading exchanges with accusations of being used by criminal and terrorist groups. Binance’s recent historic settlement with the US Department of Justice over criminal changes has come as a warning sign for all platforms. To stay in regulators’ good books, crypto exchanges are monitoring funds tied to illicit activities even more actively than ever.

This is why crypto hygiene has become more important than ever. Particularly in peer-to-peer (P2P) and over-the-counter (OTC) trading, the significance of this factor cannot be overstated. It’s a frequent yet underreported occurrence that crypto exchange platforms freeze client accounts due to suspected illicit activities or exposure to sanctions. While such measures are essential for maintaining the integrity and legality of trading platforms, they often catch users off guard, highlighting a gap in general awareness and understanding.

Due to the media almost always focusing on the sensational aspects of crypto, these concerns often receive less attention, and the users end up suffering the most. However, such outcomes can be easily avoided by maintaining the foundational practices of crypto hygiene in P2P and OTC transactions.

The Recent Case Considerations: AMLBot’s Insightful Intervention

Centralized exchanges and custodian wallets have a key responsibility to ensure strict regulatory adherence. So, it’s not uncommon for them to take overreaching actions when suspecting even the smallest of misconduct in a chain of transactions. A prime example of this can be drawn from a recent case handled by our AMLBot team.

In this case, a client engaged in a fiat-to-stablecoin exchange, converting USD 200k to USDT, encountered an unexpected hurdle when the exchange flagged his transactions as suspicious. The platform took prompt action to freeze his assets, based on a suspected connection to sanctions.

The client, seeking to prove his innocence and the legitimacy of his funds, turned to AMLBot for assistance. AMLBot’s investigation process involved a meticulous risk assessment of the client’s wallet and his transaction history. We found that while there was a minor exposure to sanctioned assets after receiving the exchanged USDT, the client himself was not directly associated with any sanctions nor engaged in laundering illicit funds. This subtle distinction was crucial, as the client’s unfortunate situation was a result of inadvertently receiving crypto assets with sanction exposure, rather than any direct violation or malicious intent.

Fortunately, the exchange recognized the validity of AMLBot’s analysis and also conducted its internal investigation, which reached the same conclusions. The client was ultimately able to reclaim his assets. This case underscores the complex nature of crypto transactions and the potential for misinterpretation or overzealous compliance measures by platforms. So, how can users mitigate the risks of P2P and OTC transactions and ensure this doesn’t happen to them?

Ensuring Crypto Hygiene in P2P and OTC Trading

Cryptocurrencies are not just mere investment tools today, they have evolved into a much greater asset class. From taking salaries in stablecoins to making international business transactions, the use case of digital assets has and will continue to increase rapidly. And, with most regions still far from regulatory clarity, P2P and OTC trading will remain a core medium of transactions. So, with this growing adoption, users need to adopt certain measures to ensure that their priced possessions are not restricted or frozen by their custodian platforms, just like the case mentioned.

Instances like the one AMLBot handled are not isolated; rather, they reflect a broader pattern of challenges within the crypto community. This underscores the necessity for traders to be vigilant and proactive in their security measures. Often, individuals are unaware of where to start in protecting themselves and their transactions, making it imperative to understand and implement the following rules:

  1. Escrow services: Utilize reputable escrow services for P2P and OTC transactions Escrow services act as a neutral third party, ensuring that both sides of a transaction fulfill their obligations before any funds or assets change hands. In P2P and OTC trading, where transactions are typically larger and involve a degree of trust between parties, using a reputable escrow service is crucial. These services provide a layer of security, preventing instances of fraud and ensuring that the terms of the trade are met by both parties. They hold the assets until both parties have verified that the transaction conditions are satisfied. When selecting an escrow service, traders should look for established providers with a proven track record of integrity and reliability.
  2. Identity verification: Verify the identity and reputation of trading counterparties. Knowing who you are trading with is fundamental in the crypto world. Thorough verification of a counterparty’s identity and reputation can significantly reduce the risk of fraudulent activities. This involves checking the counterparty’s transaction history, reading reviews from other users, and confirming their identity through multiple sources. In some cases, it might involve background checks or using services that provide ratings or trust scores for individuals in the crypto space. This verification process helps ensure that you are dealing with a legitimate party and not inadvertently engaging in a transaction that could expose you to financial loss or legal complications.
  3. Secure communication: Communicate through encrypted and secure channels protecting sensitive information during communication is as vital as securing the transaction itself. Utilizing encrypted and secure communication channels helps safeguard personal and transactional details from being intercepted or accessed by unauthorized parties. This includes avoiding unsecured public Wi-Fi networks for transaction-related communications and using encrypted messaging apps or secure email services. Maintaining operational security in communications prevents sensitive information from falling into the wrong hands, which could lead to targeted phishing attacks or identity theft.

To Sum It Up

Given the complexity and evolving nature of the cryptocurrency market, staying informed and being proactive in maintaining crypto hygiene is not just advisable but critical. Traders should not only rely on platforms and services to safeguard their interests but must also take personal responsibility for the security of their transactions. This proactive approach in P2P and OTC trading environments ensures a safer trading experience, protecting one’s assets and contributing to the overall integrity of the cryptocurrency ecosystem.

While crypto has always been scrutinized for potentially driving illicit transactions, the limelight has been intensified recently, especially on leading exchanges with accusations of being used by criminal and terrorist groups. Binance’s recent historic settlement with the US Department of Justice over criminal changes has come as a warning sign for all platforms. To stay in regulators’ good books, crypto exchanges are monitoring funds tied to illicit activities even more actively than ever.

This is why crypto hygiene has become more important than ever. Particularly in peer-to-peer (P2P) and over-the-counter (OTC) trading, the significance of this factor cannot be overstated. It’s a frequent yet underreported occurrence that crypto exchange platforms freeze client accounts due to suspected illicit activities or exposure to sanctions. While such measures are essential for maintaining the integrity and legality of trading platforms, they often catch users off guard, highlighting a gap in general awareness and understanding.

Due to the media almost always focusing on the sensational aspects of crypto, these concerns often receive less attention, and the users end up suffering the most. However, such outcomes can be easily avoided by maintaining the foundational practices of crypto hygiene in P2P and OTC transactions.

The Recent Case Considerations: AMLBot’s Insightful Intervention

Centralized exchanges and custodian wallets have a key responsibility to ensure strict regulatory adherence. So, it’s not uncommon for them to take overreaching actions when suspecting even the smallest of misconduct in a chain of transactions. A prime example of this can be drawn from a recent case handled by our AMLBot team.

In this case, a client engaged in a fiat-to-stablecoin exchange, converting USD 200k to USDT, encountered an unexpected hurdle when the exchange flagged his transactions as suspicious. The platform took prompt action to freeze his assets, based on a suspected connection to sanctions.

The client, seeking to prove his innocence and the legitimacy of his funds, turned to AMLBot for assistance. AMLBot’s investigation process involved a meticulous risk assessment of the client’s wallet and his transaction history. We found that while there was a minor exposure to sanctioned assets after receiving the exchanged USDT, the client himself was not directly associated with any sanctions nor engaged in laundering illicit funds. This subtle distinction was crucial, as the client’s unfortunate situation was a result of inadvertently receiving crypto assets with sanction exposure, rather than any direct violation or malicious intent.

Fortunately, the exchange recognized the validity of AMLBot’s analysis and also conducted its internal investigation, which reached the same conclusions. The client was ultimately able to reclaim his assets. This case underscores the complex nature of crypto transactions and the potential for misinterpretation or overzealous compliance measures by platforms. So, how can users mitigate the risks of P2P and OTC transactions and ensure this doesn’t happen to them?

Ensuring Crypto Hygiene in P2P and OTC Trading

Cryptocurrencies are not just mere investment tools today, they have evolved into a much greater asset class. From taking salaries in stablecoins to making international business transactions, the use case of digital assets has and will continue to increase rapidly. And, with most regions still far from regulatory clarity, P2P and OTC trading will remain a core medium of transactions. So, with this growing adoption, users need to adopt certain measures to ensure that their priced possessions are not restricted or frozen by their custodian platforms, just like the case mentioned.

Instances like the one AMLBot handled are not isolated; rather, they reflect a broader pattern of challenges within the crypto community. This underscores the necessity for traders to be vigilant and proactive in their security measures. Often, individuals are unaware of where to start in protecting themselves and their transactions, making it imperative to understand and implement the following rules:

  1. Escrow services: Utilize reputable escrow services for P2P and OTC transactions Escrow services act as a neutral third party, ensuring that both sides of a transaction fulfill their obligations before any funds or assets change hands. In P2P and OTC trading, where transactions are typically larger and involve a degree of trust between parties, using a reputable escrow service is crucial. These services provide a layer of security, preventing instances of fraud and ensuring that the terms of the trade are met by both parties. They hold the assets until both parties have verified that the transaction conditions are satisfied. When selecting an escrow service, traders should look for established providers with a proven track record of integrity and reliability.
  2. Identity verification: Verify the identity and reputation of trading counterparties. Knowing who you are trading with is fundamental in the crypto world. Thorough verification of a counterparty’s identity and reputation can significantly reduce the risk of fraudulent activities. This involves checking the counterparty’s transaction history, reading reviews from other users, and confirming their identity through multiple sources. In some cases, it might involve background checks or using services that provide ratings or trust scores for individuals in the crypto space. This verification process helps ensure that you are dealing with a legitimate party and not inadvertently engaging in a transaction that could expose you to financial loss or legal complications.
  3. Secure communication: Communicate through encrypted and secure channels protecting sensitive information during communication is as vital as securing the transaction itself. Utilizing encrypted and secure communication channels helps safeguard personal and transactional details from being intercepted or accessed by unauthorized parties. This includes avoiding unsecured public Wi-Fi networks for transaction-related communications and using encrypted messaging apps or secure email services. Maintaining operational security in communications prevents sensitive information from falling into the wrong hands, which could lead to targeted phishing attacks or identity theft.

To Sum It Up

Given the complexity and evolving nature of the cryptocurrency market, staying informed and being proactive in maintaining crypto hygiene is not just advisable but critical. Traders should not only rely on platforms and services to safeguard their interests but must also take personal responsibility for the security of their transactions. This proactive approach in P2P and OTC trading environments ensures a safer trading experience, protecting one’s assets and contributing to the overall integrity of the cryptocurrency ecosystem.

Crypto’s aversion to anti-money laundering standards is only hurting itself

https://forkast.news/crypto-needs-anti-money-laundering-standards/

Money laundering has always been one of regulators’ biggest concerns that has held back the evolvement of the crypto industry. To alleviate these concerns, there needs to be a greater collaborative regulatory effort among jurisdictions across the globe. Recently at a meeting held by the Financial Action Task Force (FATF), over 200 jurisdictions agreed in principle that establishing and following standards to combat financial crime is of utmost priority. But adopting FATF standards globally remains a challenge.

Developing global regulations around digital assets is a relatively new trend. More active regulation of virtual asset service providers (VASPs) began in 2021, with half of the jurisdictions implementing the revised FATF standards. The majority of that half regulated VASPs while six of them prohibited their operation. This past year saw a number of jurisdictions including the Philippines, the United Arab Emirates and Gibraltar — under increased monitoring for having persistent “strategic deficiencies” in their regulatory regimes to combat money laundering and anti-terrorism financing effectively. The reasons for their inability to meet FATF standards vary, but it’s fair to say that for the crypto ecosystem to grow for the long term, stronger anti-money laundering laws and enforcement must be adopted globally. 

Overview of the FATF standards

As digital assets gain popularity, criminals and malicious actors are finding new ways to perform money laundering and terrorism financing. That’s why it is more important than ever for governments to find ways to regulate VASPs. At the recent FATF meeting, it was observed that many jurisdictions do not follow existing guidance, including the well-known “travel rule” that would require crypto companies to screen, collect and pass on information regarding the originator and beneficiary for transactions above a certain threshold. According to a FATF survey last year, only 11 out of 98 jurisdictions are enforcing the travel rule.

FATF is a prominent global watchdog organization with 39 members. Its membership includes 37 countries as well as regional bodies like the European Commission and the Gulf Cooperation Council. FATF sets legal, regulatory and operational standards for combating money laundering and counter-financing of terrorism (AML/CFT). The organization serves multiple objectives, with one general goal of protecting the international financial system.

Its recent meeting has had a significant influence on the crypto industry for several reasons. What we saw in 2022 was a wake-up call for many exchanges and VASPs around the globe, with over US$3 billion stolen due to hacks. Now the global community is pushing to fight ransomware attacks on crypto platforms. Jurisdictions with little or no AML/CFT controls in place become vulnerable for businesses in this industry. 

Another ever-growing area that the FATF has named as one of “increasing concern” is non-fungible tokens (NFT) and decentralized finance (DeFi), due to their potential for letting funds escape the regulatory environment. A stricter and clearer regulatory regime pertaining to DeFi and NFTs may help these industries gain more credibility and attract more clients from the traditional big corporate world. 

Benefits and drawbacks for the crypto industry

Implementing and complying with the standards established by FATF can provide immense benefits to the global crypto community. First of all, it would improve the crypto industry’s reputation, which would in turn promote the adoption of digital assets to the masses. Having gone through the visionary and early adoption stages of the new technology life cycle, crypto is now entering the early majority stage, and the industry needs to help eliminate all possible security concerns. It is also critical to increase the industry’s legitimacy. Digital asset products can get better recognition from the traditional finance market when crypto platforms achieve full compliance with international AML/CFT standards. When governments, the financial establishment and ordinary people stop seeing crypto as a means for illegal activities, adoption will reach a new milestone. 

When compliance standards are promoted and adopted across the industry, it also reduces uncertainty and broadens market access. In order for businesses to efficiently operate globally, they need to trust that the industry has consistently implemented and abides by international regulations. Many countries require businesses to comply with international regulations before they can even register an entity in their jurisdictions. Likewise, complying with the FATF standards will offer crypto companies opportunities in new markets. 

Increased regulation and compliance will come at a cost. When regulations limit the scope for acceptable business practices and activities, it could also reduce revenues and the potential for growth in some areas. To be FATF-compliant, companies will have to invest in hiring compliance experts and new technology that enables platforms to collect and share customer information in a regulations-compliant manner — which increases transaction costs that get passed to the customers. Adopting global regulatory standards can also raise privacy issues and lead some crypto customers to switch from law-abiding platforms to non-compliant platforms. 

Some companies may simply refuse to go along if subject to more regulations. But others that invest more resources that allow their product and services to stay at the top of the game and be regulations-compliant will likely be the ones that can grow globally and thrive for the long term. 

Meeting users’ expectations while fulfilling the requirements of new regulatory standards remains the crypto industry’s primary challenge. 

Conclusion

It remains to be seen how the implementation of these regulations will affect the crypto industry in the long run, and the FATF Plenary has revealed that many jurisdictions still need to make a stronger effort in their crypto regulatory regimes. The potential benefits of complying with global regulatory standards for crypto will likely ultimately outweigh the costs — but crypto companies as well as the many countries that still fall short of international standards need to be persuaded that it would be in their best interest to do so.

Is Bitcoin’s Lightning Network Adoption in Jeopardy – Liquidity and Risk Issues Loom Large

https://dailyhodl.com/2023/04/03/is-bitcoins-lightning-network-adoption-in-jeopardy-liquidity-and-risk-issues-loom-large/

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Over the last five years, the Lightning Network has emerged as the technology solution to the Bitcoin scalability issue.

However, its development has been slow and faced significant obstacles such as a lack of liquidity and potential risks.

Addressing these hurdles will require a collaborative effort between centralized and decentralized solutions, paving the way for wider Lightning Network adoption and increased Bitcoin usage.

I see these problems of Lightning Network clearly  but first, let’s take a look at the numbers.

Lightning Network – statistics

For now, the Lightning Network protocol has over 16,000 nodes, with a total of 75,647 payment channels. Since 2020, the number of nodes has increased by 240%.

The current network capacity is over 5400 BTC, with the average node capacity at 0.333 BTC.

According to a recent study, the majority of the nodes are located in developed countries. Germany, Canada and the Netherlands have nearly 10,000 nodes between them, while roughly half of all existing nodes are based in the US.

Lightning Network apps (LApps) or LN wallets provide access to off-chain transaction channels. Currently, there are over 70 LApps or wallets across the market.

Exploring the risks

Although LN’s popularity and adoption are increasing, it features some risks users might be unaware of.

First, LN channels are fundamentally anonymous and decentralized, meaning the responsibility is shared solely by the parties involved.

This creates a massive concern in case one of the parties turns out to be a bad actor (e.g., when both parties are in the payment channel, one may close the channel and pocket the funds while the other party is offline).

Second, as all transactions are recorded off-chain except the last settlement, all funds may be lost if any participant closes the channel. This issue goes against the fundamental principle of blockchain technology, which is to ensure transparency.

Third, there’s the risk of malicious cyberattacks that can disrupt transactions and increase network congestion.

A report by the Florida International University showed that malicious bots could be configured to attack Lightning Network channel servers.

By breaching the network, they can create several channels and close them simultaneously, resulting in massive congestion and providing a window of opportunity for hackers to steal funds from their targets.

And fourth, there’s the risk of the counterparty default. If one of the participants does not have enough funds to cover their balance, the transaction will fail, and the funds will be lost.

How can operators improve the Lightning Network

These risks and concerns hold back the broader potential of LN. The first step to securing the network is improving user knowledge and experience – for example, by making LN channels easy to set up and use.

Also, there should be a strong emphasis on improving node quality. Many operators manage their nodes through special advanced software ecosystems, but they must balance their channels properly.

This reduces the network speed, slowing down transactions and spoiling LN’s fundamental use case.

And lastly, what the LN could use is a cheap plug-and-play device that users could just plug into an electric socket and easily set up, so it would automatically optimize all network configurations and node performance.

On the road to adoption

Overall, the Lightning Network was created as a solution to the scalability issues of the Bitcoin network, making transactions faster, cheaper and more efficient.

However, these benefits will not be widely received if the current risks and liquidity issues continue to exist.

Therefore, operators and developers must improve the user experience and security features of LN platforms going forward and introduce effective solutions to LN if they were to grow their adoption across other regions.

Ultimately, we observe a correlation between the rise of layer two solutions and transaction fees in layer one.

This trend is particularly evident in Ethereum, where the surge in average gas prices from 2020 to 2022 prompted many developers to explore layer two solutions. This resulted in the rise of new layer two scaling solutions.

However, the transaction fees on the Bitcoin network are not as significant, leading most users to rely on the native layer.

That’s why it’s crucial to solve the inner problems of the sector to grab potential users and be the best market-fit solution if the network transaction fees rise.


Slava Demchuk is a co-founder of AMLBot, CEO of PureFi and founder of AMLSafe, companies that specialize in crypto AML/KYC compliance and security. Slava is an experienced C-level executive, visionary and AML specialist, certified by the EIMF (European Institute of Management and Finance).

 

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