Micapass, a regulatory technology startup from Vilnius, Lithuania, which offers a seamless AML compliance tool, secured a €240K investment this month from innovation lab “SUPER HOW?” and Baltic startup accelerator “Firstpick.”
The startup aims to use the investment to continue developing its solution that prevents bad actors from entering the protocol.
Exploiting weak Anti-Money Laundering (AML) crypto policies, crypto criminals are taking advantage of decentralized finance protocols and using them for illegal activities. According to Chainalysis, $23.8 billion in cryptocurrency was sent from illicit addresses in 2022.
Despite a decreasing trend in 2023, ransomware continues to pose a significant threat.
Crypto crime can affect anyone, especially considering the risks associated with large-scale money laundering and terrorist financing,” said Gintarė Košubienė, CEO and co-founder of Micapass. “The growing use of DeFi protocols for crime funding is a precedent to develop new anti-money laundering crypto compliance practices.”
Current anti-money laundering limitations in decentralized finance
The rise of decentralized finance usage, involving over 6 million unique addresses, complicates current AML practices in tracking illegal crypto movements. The Chainanalysis report showed that more than 40% of funds transferred using DeFi protocols are associated with illicit funds.
“While transaction data on the blockchain is publicly accessible, bad actors complicate AML tracking by routing their transactions through intermediary services, enhancing funds movement complexity and making wallet attribution with real sanctioned individuals complex,” states Ms. Košubienė.
Rising demand for new solutions for the regulatory technology landscape
The changing crypto regulatory environment influences the growing demand for reg tech companies – KPMG’s Pulse showed that such companies received $18.6 billion in 2022. RegTech is predicted to be the most active FinTech subsector for 2023.
“Seeing the global need for streamlined AML crypto compliance solutions, more businesses are developing mechanisms that can be easily integrated with DeFi protocols and ensure continuing AML/KYC monitoring. Micapass team will use the investment to develop a fully decentralized compliance tool with AI-based suspicious activity alerts and multichain support,” says the CEO of Micapass.
“In general, investors’ trust for the relatively young reg tech market shows the clear demand for solutions helping blockchain users to navigate the complex regulatory compliance terrain.”
Future of AML process in cryptocurrencies
“Privacy is a fundamental component of blockchain, and decentralization ensures there’s no third-party AML company storing users’ data. It seems like a challenge to undergo the screening process if we’re thinking of it as a task for institutions. If we shift this process
to the client side, one can undergo the KYC process once and be accepted by different DeFi protocols,” stressed Košubienė. “To make the whole AML compliance in cryptocurrencies easier, the outcome of the KYC process can be shared using a digital verification of legitimacy. In this case, the private user’s data stays off the chain and there’s no need to repeat KYC screenings on different protocols.”
New compliance solutions will respond to changing global crypto regulations
With the growing concern about crypto-related AML practices, the decentralized nature of DeFi poses a challenge to regulatory coordination between countries.
Europe is taking the lead by forcing Markets in Crypto-Assets Regulation (MiCA) and taking measures that will require compliance with money laundering and terrorism financing practices. The UK is making proactive steps to create a stable regulatory framework for cryptocurrencies, while the US is facing a regulatory slowdown with operations being held across different states.
“The lack of global consensus hinders current AML crypto implementation, yet regtech companies can help develop solutions applicable in the upcoming regulatory environment that will prevent sanctioned entities from entering the protocols,” emphasized the CEO of Micapass.
“Having the KYC screening process transferred to the client side, we can ensure that users receive digital proof of being good actors keeping their private data off-chain,” explains Ms. Košubienė.
The future of AML practices in cryptocurrencies rests on the compliance tools development to provide more legitimacy to the unregulated crypto market. Developing compliance technology can accelerate governmental initiatives to regulate the market and reduce the crimes financed with cryptocurrencies.