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User Profiling Can Help Regulators Identify Illegal Crypto Activity, Says FATF

Paddy Baker
Updated ·2-min read

The Financial Action Task Force (FATF) has recommended regulators profile cryptocurrency users so they can better identify criminal activity.

  • FATF, whose guidance is heeded in more than 200 countries, said in a report Monday that it had identified certain behaviors and characteristics that serve as red flags for regulators trying to detect illegal or illicit transactions.

  • One of the primary methods, the international financial watchdog said, is to compare a user’s transaction activity with that of his or her profile.

  • This can include instances where a deposit or transaction amount is inconsistent with a user’s available wealth or historical financial activity, perhaps signaling money laundering, a scam or a money mule (where someone transfers illicit value on behalf of somebody else).

  • For instance, it might be suspicious if a young user, with no known business interests, started receiving large amounts in payments of a commercial nature from various parties all around the world.

  • Other red flags include whether the person in question is much older than the average age of a crypto user, as well as if the person has a criminal record or has been active on websites and public forums associated with illicit activity.

  • The new report comes over a year after FATF recommended national regulators mandate virtual asset service providers (VASPs) – e.g. exchanges or wallet providers – retain and share identifying information on parties involved in transactions over a certain amount, known colloquially as the Travel Rule.

  • In Monday’s report, the financial watchdog said other red flags include instances where users send crypto to exchanges with no known know your customer/anti-money laundering (KYC/AML) checks, or where they are sending transactions that are just below the Travel Rule threshold.

  • Regulators might also look at users who exchange digital assets on public and transparent blockchains (such as Bitcoin or Ethereum) for privacy coins, like monero or zcash, which obfuscate or withhold transaction activity from third parties.

  • Indeed, monero is one of the favored cryptocurrencies for hackers, as it mixes transaction data together making it easy for them to offload stolen value on unsuspecting exchanges.

See also: FATF Plans to Strengthen Global Supervisory Framework for Crypto Exchanges

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