Onchain AML: The Next-Generation Technology for Anti-Money Laundering in the Digital Financial Era
Hong Kong's new licensing regime for centralised virtual asset trading platforms under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance came into effect on 1 June 2023. This brought the world's attention back to what was once Asia's most prosperous city, and the topic of anti-money laundering became the focus of the industry.
Money laundering was born in an automatic washing machine in the 1920s. A criminal gang led by Al Capone and Lucky Luciano purchased an automatic washing machine to start a laundry business. They mixed illegal revenue with laundry income and deposited them in banks to conceal their illicit origin. In the 1970s, money laundering expanded to the political sector, and the "Watergate Scandal" related to it led to the resignation of US President Richard Nixon. This marks that "money laundering" has become a legal term. In the 1970s, Bank Secrecy Act became the world's first anti-money laundering(AML) act, mandating that banks report suspicious transactions and cut off money laundering channels. The Act laid the foundation for AML policies, and here is where the story begins.
"Know Your Customer", Banks Became Detectives
AML is a prerequisite for various financial institutions to engage in compliant financial business. Like detectives, banks must collect, verify and monitor customer information through methods like KYC (Know Your Customer) to identify suspicious behavior and transactions in financial activities. This is the foundation of AML and the first step in detecting money laundering clues.
However, with the digitalization of the financial industry, emerging digital financial forms such as virtual assets and CBDCs have become a trend among financial institutions and governments. Moreover, they are gradually embracing on-chain financial services, i.e. Deutsche Bank actively explored blockchain technology in transaction settlement, loan review and simplified KYC to improve the efficiency of transactions and workflow. While this also brings higher requirements and new challenges to AML work for financial institutions.
The anonymity of on-chain transactions is one of the biggest challenges for AML. The traditional KYC process can not solve this problem. Financial institutions need to adopt a new generation of technical solutions to identify suspicious on-chain transactions and to improve the efficiency and accuracy of AML.
The Next Generation of Technology for 「Brain-Machine Interface」 AML
AML has always required a combination of expert experience and technology in different countries and institutions, just like 「Brian-Machine Interface」solution. As money laundering techniques evolve and change fast, new forms of money laundering may not be identified and captured by traditional automated systems, requiring the intervention of human experts. In addition, AML laws and regulatory requirements are constantly adapting and changing, requiring manual experts to track and update AML rules and processes regularly.
The first generation of AML technology began in the late 1980s with AML regulations and standards worldwide, such as the International Anti-Money Laundering Standards (FATF). AML technology for financial institutions relied mainly on manual review and simple data analysis, i.e., simple records and manual analysis to detect suspicious transactions and activities. Under this generation of AML technology, manual review is the main tool.
The second generation of AML technology, since the beginning of the 21st century, has been dedicated to solving problems such as low efficiency and easy-to-miss detection and misjudgment, and inability to carry out AML work on a large scale, emphasizing artificial intelligence(AI) technology and customer due diligence(CDD), and strengthening data analysis capability. Data mining and analysis are conducted through AI technology to detect potentially suspicious transactions and activities.
And now, with the continuous development of digital finance, the third generation of AML technology will focus on the prevention, prediction and early warning of money laundering risks, and the direction of risk management, as well as security management, will change from reactive to proactive, from post-tracking to pre-warning. The technology solution will be upgraded to analyze a large amount of transaction data on blockchains and on-chain transaction behavior using natural language processing and on-chain AML tools.
The difference between the first two generations of AML technology is that the third generation of AML technology proposes a new way of thinking, skipping the traditional KYC process and directly analyzing KYT (Know Your Transaction) for on-chain addresses and related transfer records and upgrading KYC to KYA (Know Your Address), just like the Onchain AML technology solution of OKLink. Based on more than 3 billion address labels and 43 public chains with thoroughly analyzed data, Onchain AML technology solution development is led using the long-term on-chain practical experience and profound data analysis capabilities accumulated over the years.
Although technology constantly upgrades, expert experience and past cases are essential for AML. This model of government-enterprise cooperation, including in Switzerland and the United States, can effectively enhance the efficiency and accuracy of AML efforts to protect financial institutions and the financial system.
The First Step in Digital Finance Compliance - Onchain AML
Onchain AML is the first step for financial institutions wanting to enter the virtual assets sector. In digital finance, as virtual assets are a testing field, compliance is the first step to entering this field. AML in the virtual asset sector is also the most complex, anonymous, and technically challenging task. In 2019, the Financial Action Task Force (FATF) issued guidance on AML and counter-terrorist financing for virtual assets, clearly stating that AML is the most significant risk point in the virtual asset sector.
Specifically, as the latest AML technology in the digital finance space, Onchain AML plays an essential role in achieving AML compliance. Among them, KYA, KYT, and other advanced technology tools can effectively identify high-risk transactions and suspicious behaviors in virtual asset transactions and provide real-time alerts and monitoring services to help financial institutions quickly meet AML compliance requirements. Like the most advanced OKLink Onchain AML solution, which is currently known in the industry, it can achieve five dimensions of suspicious transactions, black addresses, black address associates, high-risk identities and entity risks to scan the chain non-contract addresses in all aspects of risk.
The efficiency is also greatly improved and developed in the direction of automation. According to the latest data given by the product team of OKLink, it only takes 200 seconds for the client to have the detection result, from analyzing the address on the blockchains to the timely generation of alerts if it touches the risky address to establish automated risk management.
Onchain AML can also be used on blockchains to simplify the KYC process for traditional financial banks when they transfer or make deals with CBDCs. The future development trend of the digital finance sector will rely more on technological innovation and the application of compliance technology tools, and Onchain AML will become a critical entry ticket for financial institutions to enter the future digital finance sector.
Release ID: 89099172
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