How to Keep Your Crypto Wallet Clear of Any Illegal Activity
When you send cryptocurrencies to (or receive coins from) a destination wallet, do you really know who you are transacting with?
Of course I do, you might say.
But did you know that you could get in trouble if the aforementioned destination wallet was previously involved in illegal activity?
In a scenario where the person you exchanged cryptocurrencies with was involved in a hack or a scam, or even worse, money laundering or terrorism, that very transaction could bring a host of uncomfortable consequences to your financial and personal life.
If you accept cryptocurrencies from a wallet known to be previously associated with illegal activity, a number of things can potentially happen.
1) Forensic investigations could lead back to you
Even if you weren’t personally involved with said illegal activity as an accomplice or a beneficiary, law enforcement can trace funds to/from your wallet during their forensic investigation (as in the famous Silk Road case). Law enforcement agencies and tax authorities are now receiving training on how to trace cryptocurrency funds traversing through the blockchain, and it’s only a matter of time before this becomes a standard operating procedure in forensic investigations.
2) Obstacles to cashing out
Banks, or exchanges with fiat gateways, can also cut off your exit when trying to cash out your cryptocurrencies. These financial institutions are under enormous pressure by government authorities to boost due diligence on all banking customers under new anti-money laundering regulations. Although banks are not in the business of policing financial activity, they do not want to lose billions of dollars in compliance fines if they inadvertently allow money launderers to cash out their cryptocurrencies.
3) Reputational damage
Plus, if you are a Virtual Asset Service Provider (VASP), you could get “sanctioned” as per the travel rule under new guidelines recently issued by the Financial Action Task Force (FATF). Others may not want to transact with you if your wallet does not have a “clean” history. This bears a reputational risk on your part as others want to protect themselves from inadvertently transacting with wallets with a history of suspicious or illegal activity.
There are two things you need to do to protect your wallet from theft and reputational damage, and everything in between.
First, if you are the recipient of cryptocurrency funds, you need to know how to make sure incoming funds are not from wallets associated with hacks, scams, fraud, or illegal activity. This means you must know and investigate their wallet address before you give out your own.
Second, you also need to know whether a destination wallet is associated with illegal activity before remitting your funds, lest you be perceived by the authorities as the one who is funding said illegal activity.
In practice, this can be difficult or even nearly impossible for you to enforce on your own.
Fortunately, however, there are tools available today that involve whitelists of safe wallet addresses and blacklists of addresses known to be involved in illegal or fraudulent activity.
These whitelists and blacklists are stored in the Threat Reputation Database (TRDB), and you can use a browser extension to quickly check a wallet address before transacting with it. The UPPward Chrome or Firefox extension will alert you if a wallet address had been previously involved in suspicious or illegal activity, giving you a chance to back out of the transaction.
Another tool that just became available as of October 2019, the Crypto Analysis Risk Assessment (CARA) uses machine learning to assess the risk level of a wallet address based on learned cryptocurrency behaviors of people who abide by the law and those who don’t.
Published at Wed, 16 Oct 2019 03:34:54 +0000
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