The Blocktrain Has Left the Station

Gone are the days when a mysterious internet-based currency
called bitcoin was seen simply as a tool used by criminals to purchase illicit
goods and launder money. Today, Bitcoin is recognized as a promising innovation
and its underlying technology (blockchain) has inspired the design of a
multitude of new blockchains that work in nuanced ways to accomplish a
multitude of tasks. Successful blockchain-related businesses are blooming
across the globe and financial institutions, law enforcement and governments
have taken notice. The new discussion is not about whether blockchains are here
to stay, the discussion is about the many ways blockchains can be leveraged to
create revolutionary new applications and replace antiquated systems. The most
prevalent blockchain application to date remains the transfer of value through
cryptocurrencies, and it is imperative that anti-money laundering (AML)
professionals understand, and keep up-to-date with this technology and the
related money laundering risks and solutions. This is particularly true as
cryptocurrency valuations have soared as much as 300 percent in recent months,
attracting the attention of investors (and possibly criminals) worldwide. This
article highlights two events organized by ACAMS chapters in February, which
introduced AML professionals to the world of blockchain with a purpose of
fostering a culture of learning and collaboration.

The Chicago and Toronto ACAMS chapters hosted an event in
their downtown cores, where they highlighted the universe of blockchain
applications and their accompanying compliance issues and solutions. The
events’ participants were an eclectic group that included financial
institutions, government officials, central bankers, Fintech startups,
public-private alliances, and compliance and analysis companies. The wide range
of professionals who are involved in this space highlights the breadth,
sophistication and interest this technology has roused, and signals the staying
power of this technology. As AML professional Peter Warrack noted in the
Toronto event, “The Blocktrain has left the station and it’s time to get

The network of blockchain experts assembled at these events
was like a microcosm of the industry. It highlighted how businesses, law
enforcement, compliance professionals and governments are working toward the
same goal: using blockchain technology to innovate while still safeguarding

Learning About Blockchain Technology

In both cities, the audience received ‘Blockchain 101’
lessons that summarized how the technology works and the various benefits
offered. Generally, blockchains are a type of distributed ledger that serves as
an incorruptible record of transfers of ownership. Perhaps the best way to
introduce an audience to blockchain technology is by showing them a live
example of how transactions work and this is exactly what Jonathan Solomon,
co-founder and CEO of Digital Mint and Joe Ciccolo, founder of BitAML, did in
Chicago. By presenting the process of transferring cryptocurrencies through
exchanges, it is easier to introduce concepts like wallet ownership and how
wallets are generated. Generally, cryptocurrency exchanges create wallets for
clients free of charge. Providing wallets is comparable to providing email
addresses. A person can have multiple email addresses, email addresses are
always unique, and anyone who knows the login information can use them.
However, describing the multiple differences and subtleties of the various
popular blockchains necessitates much more time and research than a single
article can accommodate.

Blockchain-Based Business

While the best-known blockchain-related businesses are
exchanges, entrepreneurs have found many other uses for blockchains. Businesses
can provide notary-like services, such as time stamping documents1 or track
diamonds from the mine to the consumer and beyond.2 For example, Joseph
Weinberg, CEO of the Canadian-based money services business (MSB), Paycase,
explained how his company makes use of blockchain technology in order to send
remittances internationally.

The company offers clients a computer and mobile-based
platform that provides a relatively cheap alternative to legacy systems such as
wires. The service is fast (sometimes instant) and offers bank-to-bank
transfers, cash-pick up and even door-to-door cash delivery. In addition, it
allows money to be sent to unbanked areas in the world where few options are
available, despite the dire need for financial assistance.

Cryptocurrency Transaction Monitoring and Compliance

This Canadian-based MSB uses blockchain infrastructures to
move value across borders, using banks and partners in the beneficiaries’
jurisdiction to get money to its final destination. This business model is
different from cryptocurrency exchanges, which are the most popular value transfer
mechanism for cryptocurrencies. The main difference between the two is that
cryptocurrency exchanges provide clients with cryptocurrency wallets. People
can use these wallets to exchange fiat currency into cryptocurrency and use
said cryptocurrency to speculate on cryptocurrency value, transfer wealth and
purchase goods and services worldwide. Retailers who accept cryptocurrencies,
usually bitcoin, range from small shops to

Wallets can provide a certain amount of anonymity for the
wallet owners, and this was once amongst the greatest hurdles exchanges had to
get over: how to mitigate criminal use of cryptocurrencies. Ciccolo and Solomon
explained that what was once seen as a hurdle has turned out to be a gift to
AML investigators. Although it is true that the owners of cryptocurrency
wallets are not publicly known, many blockchains offer a complete public record
of all transactions that have ever occurred and this information can be
leveraged for investigative purposes. In the Chicago event, several free tools
were used to trace bitcoin transfers including, a free
online wallet and a blockchain explorer service. Free tools that share massive
amounts of information gave Ciccolo a good reason to call blockchains “314(b)
on steroids.”3

As exchanges have evolved, so have companies that provide
know your customer (KYC) enhanced due diligence and transaction monitoring
services. One such company is Chainalysis—their CRO, Jonathan Levin, joined the
Toronto event. Levin explained how the Bitcoin blockchain can be leveraged to
risk score and track wallet activity within this publicly broadcasted
blockchain. Chainalysis has created algorithms that detect and track activity
through scenario-based monitoring and alerts, which can trigger on a multitude
of predetermined suspicious and unusual schema. The software is visually
intuitive and provides the end user with the ability to find connections and
track transactional history quickly and easily. Such software gives exchanges
some of the tools necessary to conduct AML investigations. It also gives
exchanges the ability to present data from an independent source that verifies
their client’s activity. Such reports can be useful in growing or improving
relationships with financial institutions, regulators and law enforcement.

In addition, new blockchains have emerged such as ZeroCash,
which allow users to transact through payments that reveal neither the origin,
destination, or amount of the payment. Because such cryptocurrencies do not
provide a public history of transfers, new hurdles dealing with lack of
transparency have emerged. That said, the volume of Zcash transferred every day
is a fraction of better-known cryptocurrencies, such as bitcoin (~$11.4 million
daily vs ~$1 billion daily).4 The low volume suggests there are much fewer
Zcash users, in comparison to other cryptocurrencies. The high volume of
Bitcoin users suggests that users are willing to give up a certain amount of
privacy for the ease of use.

Compliance solutions by companies like Chainalysis are
necessary for sustainable growth of cryptocurrencies, as they allow responsible
companies to combat the use of cryptocurrencies for nefarious activities. Such
companies are looking to create future solutions to blockchain risks and are
already helping to combat existing crimes. One such crime that has been linked
to the use of bitcoin is human trafficking.

Combating Human Trafficking

Warrack, from the Bank of Montreal, presented in Toronto on
the connection between bitcoin and human trafficking.

Some online classified ad platforms have garnered a
seemingly endless stream of adverse media, and government and social pressure
due to their reputation as facilitators of the online sex trade. While
prostitution may be legal in various jurisdictions, human trafficking (coercing
a person through threats and violence to perform sexual acts for money) is not,
and the illicit profits generated through this crime are often laundered. In
recent years, major credit card companies have stopped supporting payments to
such platforms, and since then, bitcoin has become the primary method for
sending payments to such companies.

Law enforcement and entities that are expected to report
instances of money laundering associated with human trafficking should become
acquainted with the different ways Bitcoin is used to purchase ads on adult
classified ad platforms. While most Bitcoin exchanges have KYC regimes that
human traffickers would want to avoid, there are payment methods available to
avoid KYC programs. Possibly the most discreet way of accomplishing this is
through Bitcoin ATMs. These machines exchange cash for bitcoin and charge a
substantial fee (on average 8.4 percent).5 A client deposits cash into these
machines and receives a wallet number with the amount of bitcoins equal to
their deposit minus a fee. There are also websites6 that will convert payment
from one source (e.g., credit card) to credits, for the purposes of buying
online adult classified ads. These websites essentially work as brokers that convert
fiat currency into bitcoins. Finally, even gift cards can be used to purchase
these credits through the use of websites that provide these online conversion

Successful law enforcement investigations involving
cryptocurrencies are often aided by services from private companies that track
and rate cryptocurrency activity. Many companies offer these services and there
are public-private partnerships that help players in the blockchain industry
connect with law enforcement worldwide.

Public-Private Partnerships

Alan Cohn, from the Blockchain Alliance (a forum for
industry, law enforcement and regulatory agencies for the combating of criminal
activity on the blockchain), gave an overview of the goals and services that
this group provides. Cohn explained that the inspiration for the Blockchain
Alliance stemmed from the lessons learned in the early days of the internet,
when criminals exploited the technology for heinous crimes like child
pornography. Given the novelty of the internet in its early days, law
enforcement reached out to the industry for training and guidance. This time
around, the industry has reached out to law enforcement proactively to promote
responsible uses of the new technology.

The Blockchain Alliance brings together some of the most
lauded players in the blockchain ecosystem to serve as a resource for law
enforcement and regulatory agencies. It offers education, technical assistance
and informational sessions about the uses of blockchain technology. It has
garnered support from industry players including miners, exchanges, analysis
companies and many others who participate in this open forum to help combat
criminal activity. The alliance also counts law enforcement and government
agencies, such as the U.S. Department of Justice, the U.S. Department of
Homeland Security Investigations, the U.S. Federal Bureau of Investigation, the
U.S. Secret Service and many other parallel international organizations as
partners.8 The group serves as an excellent example of the synthesis needed to
help to ensure safe growth and adoption of blockchain technologies through
awareness of regulatory necessities and a constructive relationship management
with law enforcement.

Government Interest

A blockchain’s accurate accounting and tracking abilities
can be used for a plethora of different tasks. Government interest for
blockchains shows just how many different uses this technology can have. At the
Chicago event, Jennifer O’Rourke, from the Innovation & Technology at the
Illinois Department of Commerce, and Ciccolo discussed the “Illinois approach”
to blockchain. This approach is one that leverages private and public
relationships to examine how to advance possible blockchain-related applications
without curtailing growth with premature legislation. In fact, the Illinois
Department of commerce has begun researching to see if blockchain could be used
in the future to house government records.

As governments further explore blockchain solutions, financial
institutions may also begin to review potential clients differently. At the
Chicago event, Michael Busch of Burling Bank discussed his institution’s
yearlong research of the Bitcoin industry, which continues to this day. Such
research includes studying the different types of businesses that use
blockchains and or cryptocurrencies in their operations. As time passes and greater knowledge is
acquired, banking blockchain companies may become less dichotomous if careful
reviews of business models are completed in order to recognize companies that
offer less money laundering risk.

In the Toronto event, central banker James Chapman from the
Bank of Canada displayed the platform the central bank created to simulate
central bank loans to banks. The central bank used the Ethereum blockchain, the
world’s second largest blockchain by market cap, to create a system where the
central bank can create virtual currency, loan it to banks and destroy it.
There is no immediate plan to adopt such a platform, but the government’s
interest in the technology should serve to remind the reader that the
technology is likely here to stay.

The Way Forward

The blockchain industry has quickly matured since the
creation of the first blockchain in 2009. Entrepreneurs have largely replaced
the rebels who once touted the need for a completely deregulated currency that
functioned outside the purview of government, law enforcement and regulators.
Compliance is now recognized as a fact of life by most successful companies and
AML regulations are an important part of this recognition. The presenters and
organizers of the Chicago and Toronto events propagate the need for open
dialogue on blockchain and cryptocurrency in order to bridge the gap between
the industry, law enforcement and regulators. Educating AML professionals and
law enforcement of the various risks and solutions that exist in this space
helps to ensure that innovation does not come at the expense of public safety.
Communicating trends and indicators of crimes and risks associated with
blockchain technology and cryptocurrency transfers helps to enhance reporting
standards and criminal investigations and increase public safety. It is
important that AML professionals continue learning about this technology. 

Leonardo Real, CAMS, manager—AML, Bank of Montreal, Toronto,
Ontario, Canada,

Advisor: Joseph Mari, CAMS, senior manager for major
investigations, Bank of Montreal, Toronto, Ontario, Canada,

  2. Luke Parker,
    “Ten Companies Using the Blockchain for Non-Financial Innovation,” Brave
    NewCoin, December 20, 2015,
  3. Section
    314(b) of the USA PATRIOT Act provides financial institutions with the ability
    to share information with one another.
  4. Referenced
    from on April 10, 2016,
  8. Luke Parker,
    “Controversy Arises as New Blockchain Alliance Engages with U.S. Law
    Enforcement,” Brave NewCoin, October 24, 2015,

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