FEB 3, 2024
Bitrace Talk: Account Mixed with illicit USDT - Actions & Prevention for Cryptocurrency Gray Market
by 吴说猫弟, WuBlockchain
ps: "USDT" is uniformly referred to as "U" in the following context.
This article mainly discusses with Bitrace's two principals about how to avoid receiving illicit U and the impact of increased anti-money laundering pressure on the cryptocurrency community. Bitrace is a blockchain data analysis company.
Introduction to Bitrace's Business
Since 2019, Bitrace has focused on criminal activities and user security within the cryptocurrency ecosystem. The founding team of the company has a technical background in security and is deeply interested in the security of cryptocurrency users and funds. With the development of the cryptocurrency ecosystem, the influence of funds flowing through criminal industries on the crypto ecosystem is also growing. The company recognizes that over time, virtual currencies, especially tokens like USDT, are increasingly being used for illegal activities.
Is the occurrence of unexpected illicit U becoming more frequent? What is the current trend?
Currently, we observe an increase in the exploitation of cryptocurrencies in cybercrime. Some common high-value tokens, such as Bitcoin, Ethereum, and USDT, are often targeted by hackers. USDT, due to its high liquidity, convenient transfers, and low fees, has become particularly popular. While these features benefit ordinary users, they are also exploited by criminals for rapid money laundering and transfer.
We can categorize the criminal activities using cryptocurrencies into two types: first, optimizing existing fraudulent and money laundering business models by introducing cryptocurrencies; second, creating new types of risk activities based on cryptocurrencies and infrastructure, such as hash gambling and 0U phishing.
Although these criminal activities are not universally regarded as illegal worldwide, there is still no unified standard for anti-money laundering regulations for cryptocurrencies in various countries. Due to the global nature of blockchain, when certain criminal activities involving cryptocurrencies are identified as illegal in specific countries or regions, local institutions and individuals need to be vigilant. For example, money laundering groups may extensively utilize exchanges and OTC markets for cashing out, leading to ordinary users or cryptocurrency institutions receiving funds associated with risks. This could result in accounts being flagged, funds being frozen, or even legal liabilities.
Why doesn't the illicit market use more decentralized currencies like Bitcoin as settlement currency?
There are three main reasons:
1. Abundant liquidity: Liquidity is crucial for the illicit market. Before the emergence of USDT, Ethereum was widely used due to its extensive usage and strong liquidity. With time, USDT has become the preferred choice for the illicit market due to its widespread application and high liquidity. For example, the circulation of USDT on the Tron blockchain alone has exceeded 50.8 billion, indicating the market's significant processing capacity.
2. Rich ecosystem: USDT is not only supported by centralized exchanges (Cex) but also widely used in many decentralized exchange platforms (Dex) and DeFi protocols. With a daily trading volume of over 30 billion, it reflects the massive demand for stablecoins.
3. Lower fees: Although Tron has raised fees on its chain, they remain lower compared to other public chains like Ethereum or Bitcoin. Additionally, some second-layer solutions (L2), such as Optimism, also offer low fees. Practitioners in the illicit market are highly sensitive to fees because they need to process a large number of transactions. Therefore, optimizing fees is of particular concern to them.
Will the intensity of Tether's crackdown on illicit U adjust with stricter regulations?
Over time, especially after significant events in the cryptocurrency industry, Tether and its cooperating law enforcement agencies have intensified their crackdown on illegal funds. In the past, many in the industry did not fully understand Tether's centralized nature, leading to insufficient understanding of its on-chain operations. For example, after specific events, the US government sanctioned certain cryptocurrency addresses, prompting Tether to freeze funds associated with these addresses.
This change has gradually shifted industry perceptions. Previously, criminals may have thought that they would only face risks when funds entered exchanges and were cashed out. However, they are now increasingly aware that law enforcement agencies can not only track on-chain funds but may also freeze exchange accounts due to suspected illegal fund flows or even directly blacklist them.
Therefore, not only compliant enterprises and ordinary investors need to be vigilant, but black and gray industries and criminal groups also begin to have a deeper understanding of the risks of using USDT. For example, when some guarantee platforms in Southeast Asia provide services to black and gray industries, they also begin to conduct preliminary screening of funds, refusing to accept funds involved in serious crimes (such as drugs, fraud, human trafficking).
As the industry's understanding of USDT usage deepens, and Tether's capabilities in law enforcement cooperation enhance, even black and gray industries begin to realize that USDT is no longer a perfect tool for value storage. When using USDT, they also consider the necessity of laundering and transferring funds to avoid potential legal risks.
Would ordinary users be safer using USDC? Why don't black and gray markets use USDC?
Whether ordinary users are safer using USDC instead of USDT depends on various factors, including their respective infrastructure support and ecosystems. Due to its longer history and broader ecosystem support, USDT has gained wider acceptance and usage in the market. Users, including those involved in black and gray market activities, have become accustomed to using USDT.
Path dependence plays a crucial role in the reasons for choosing USDT over USDC. USDT has become the preferred stablecoin for many users due to its earlier market launch and extensive ecosystem support. Even if USDC may offer similar or better services in some aspects, users (including those engaged in illegal activities) may still prefer to use USDT, which they are more familiar with and trust.
How to reduce the risk of receiving illicit U in daily life?
1. Avoid transactions in highly anonymous environments: Try to avoid exchanging cryptocurrencies for fiat currency in highly anonymous environments, such as Telegram communities or payment platforms without KYC (Know Your Customer). These platforms are prone to attracting risky funds.
2. Stay away from online gambling: Do not engage in online gambling or engage in cryptocurrency transactions with individuals involved in online gambling. Online gambling platforms usually do not perform KYT (Know Your Transaction), and their funds pool may be used for illegal fund laundering.
3. Avoid money laundering activities: Do not participate in money laundering or score running activities, and do not be tempted to purchase so-called "illicit U" at a lower price. These funds carry high risks.
4. Use monitoring tools: Before making transactions, use monitoring tools available on the market (such as Detrust, MistTrack, OKlink, etc.) to check the counterparty's address risk. These tools can help identify the source of funds, whether they are involved in fraud, money laundering, or other illegal activities.
Will exchanges conduct KYT checks on users' funds?
1. Increased demand for KYT in centralized exchanges: Over time, many centralized exchanges have seen an increasing demand for KYT. These exchanges are communicating and collaborating with external partners (such as the company you mentioned) to enrich their risk fund databases. For some larger exchanges, they may have established relatively complete anti-money laundering (AML) mechanisms but still need specific types of risk data, especially those related to specific regions (such as Southeast Asia).
2. AML mechanisms in small exchanges: In contrast, small exchanges may not have established comprehensive AML mechanisms yet. These exchanges may seek help to build effective KYT and AML systems.
Will increased anti-money laundering pressure lead to many difficulties in cryptocurrency in terms of decentralization, privacy, etc.?
1. Impact of anti-money laundering pressure on decentralization: The example you provided illustrates the impact of anti-money laundering measures on decentralized protocols. For instance, a user attempts to launder USDT purchased at a low price through a semi-decentralized cross-chain bridge protocol but ultimately gets their funds frozen because the protocol's business address is subject to centralized exchange supervision. This indicates that even decentralized protocols may be affected by interactions with centralized systems.
2. Balancing decentralization and compliance: Your point reflects a key issue: in the context of strengthening anti-money laundering measures, both centralized and decentralized institutions face challenges in ensuring fund cleanliness. The example of guarantee platforms indicates that even though some institutions operate legally in specific regions, they may still come into contact with unclean funds by providing services to black and gray industries. In such cases, evaluating the cleanliness of an institution's funds becomes complex.
3. Evaluating the cleanliness of institutional funds: Whether an institution's funds are considered "clean" or "unclean" depends on its degree of association with illegal activities and its compliance efforts. If an institution knowingly provides services to black and gray industries, even if it operates legally in certain regions, its funds may still be considered unclean. This requires exchanges and other cryptocurrency-related institutions to handle these funds with extra care.
In conclusion, with the strengthening of anti-money laundering measures, decentralization and privacy protection in the cryptocurrency field do face challenges. This requires cryptocurrency institutions to ensure compliance with increasingly stringent regulatory requirements while maintaining decentralization and user privacy.