As blockchain and digital currency become more popular, we see more people trying to use both technologies to circumvent regulations and law enforcement officials. The increase in individuals looking to use digital currencies to evade the law has led to many innovative solutions, such as the creation of blockchain analytic tools and entire teams dedicated to combatting blockchain and digital currency-related crimes.
We recently had a chance to talk with Vikas Agarwal, a partner at big four consulting firm PricewaterhouseCoopers (PwC) and the lead of the PwC Financial Crime practice. In our conversation, we learned how legacy consulting firms and financial crime units have seen digital currency-related cases evolve over the years, how they approach these cases, and what they believe are the best solutions to these blockchain and digital currency induced problems.
Agarwal and his team are responsible for helping clients across the fintech, finance, and payment service provider industries build and manage efficient and effective compliance programs that meet the regulatory requirements without compromising on the customer and employee experience. As blockchain and digital currency picked up more traction, Agarwal’s team began to see a rise in the number of blockchain and digital currency-related cases that came across their desk.
“It’s been a few years now that we have been supporting crypto service providers with understanding compliance obligations and building robust programs,” said Agarwal.
“One of the first engagements we did was 5 or 6 years ago when one of the leading crypto providers asked us to assess their financial crime obligations. This was when the space was still new and regulations nascent.”
Since then, blockchain and digital currency-related cases have continued to roll through the PwC financial crimes department, to the point that Agarwal and his team have seen a bit of a trend, or rather, ‘common’ cases.
“Some of the most memorable ones are when we are able to identify a bad actor who transacts across multiple virtual assets to avoid detection. We have seen some of these and have helped clients identify them,” he explained. “One of the other ones involved the use of proxies to register in crypto domains that conceal identity. Followed by the use of hardware to transfer cryptos across international borders, converting to crypto with higher anonymity and then exchanging these for illegal products.”
How blockchain can be used to prevent cybercrimes
However, just as blockchain and digital currency can be used to facilitate crime and evade regulation, blockchain technology can also be used to prevent these types of cybercrimes from taking place and to catch the individuals committing crime.
“When channeled properly, blockchain technology can be used to prevent money laundering. Every transaction performed leaves an audit trail and that is impossible to alter. The source of funds can be very well established. In short, a blockchain model is a solution for the problems induced by the same technology,” Agarwal said.
Blockchain creates a public, immutable and auditable ledger, which means that anything an individual does involving a digital currency will be logged forever on the blockchain. What can be difficult is identifying the individual(s) who own or operate a digital currency address used to facilitate crime. But fortunately, there are a variety of blockchain analytic tools and financial crime teams that are here to assist their clients in pinpointing the source of illicit activity.
When asked what some of the best solutions to blockchain and digital currency-related crimes were, Agarwal said:
“A culture of compliance and threat monitoring that is backed by advanced analytics—it’s important to recognize that the crypto users are looking for alternative ways of transacting. While we want them to be protected, we also want to ensure that the customer experience is maintained, and we are enabling business growth.”
Agarwal also believes that blockchain-based solutions can combat the blockchain-related crimes we often see.
“Using blockchain technology, robust KYC processes can be established that can facilitate real-time data exchange and reduce processing costs. [It can be used to create] a robust identification mechanism: Individual accountability can be established using blockchain technology by ensuring verified identity for each party. Individuals will then be accountable for every single action.”
“Blockchain-based AML solutions can utilize the power of smart contracts to facilitate the creation of algorithms to automate fraud detection processes. And we can avoid operations burden by sequentially programming a series of requirements at every stage to automatically block transactions based on red flags we define. The power of blockchain coupled with smart contracts helps us gain immense control and oversight on every single digital currency transaction performed.”
Agarwal and his team at PwC have even tested out a few blockchain solutions in their department.
“We have an audit platform that’s built leveraging blockchain. As a team, we are looking at options to leverage AI to build better solutions for monitoring financial crimes and detecting bad actors. There are many solutions available that help address some of the common problems we observe but [this] space is a constantly evolving one,” Agarwal said.
“Digital transactions are often anonymous and a majority of the time they don’t need typical banking channels to conduct transactions, thereby adding to the complexity. The data on blockchains is immutable. The in-house AI models developed were able to detect patterns in large volumes of data that are impossible for a rule-based engine to capture. These algorithms adapt to changes in criminal activities, and they learn from trends/patterns,” Agarwal said, noting that PwC “had good success in this area,” with multifold advantages such as:
- The availability of open source technologies enabled us to save licensing costs
- The improvement in detection patterns reduced false positives thereby saving operations burden, and
- The AI models are self-learning, and they can unearth patterns that are impossible to be detected using traditional systems. When these AI models are coupled with blockchain concepts, we can build a robust system by borrowing the power of decentralization, transparency, and immutability that blockchain brings with the self-learning capability of AI models.
Although blockchain and digital currency are still emerging technologies, they have a bright future ahead of them. Although a fraction of the world is interested in using these technologies to facilitate crime, an even greater percentage is interested in using blockchain and digital currency to find innovative solutions that will increase efficiency in a variety of industries. What Agarwal finds most promising about blockchain is its ability to bring transparency to industries.
“Blockchain use cases are tremendous. The immutability and transparency properties will ensure that not just the AML aspect but the entire life cycle of monitoring starting from establishing robust KYC processes to performing AML monitoring using smart contracts can be addressed. One downside to this concept is adaptability on a large scale owing to the amount of costs involved (e.g, ETH gas fee) with the majority of players in this area operating at proof-of-concept level.”
“Given the stringent PII requirements for traditional banking systems, the process needs to be matured. Nevertheless, borrowing the technology and customizing it is an effort worth taking, owing to the tremendous scalability, immutability, adaptability, decentralization, and transparency it brings. Distributed ledger technology ensures that more transparency can be established between various stakeholders including financial institutes and regulators.”
Blockchain and digital currency have the potential to optimize many industries, the inherent properties of a blockchain such as low transaction fees, transparency, and scalability in the case of the BSV enterprise blockchain can be implemented into a variety of sectors to lower operating costs and increase operational efficiency. Agarwal believes blockchain and digital currency will have a place in the world but acknowledges that the industry needs to mature before we see widespread implementation, nonetheless, ignoring the technologies completely will leave enterprises in the dust of their competitors.
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