Dirty Bitcoins. How to Protect Your Savings?
What is AML?
Anti-money laundering (AML) procedures are well known to cryptocurrency users. But these policies were around long before Bitcoin was discovered, much less the millions of shtikoins whose traders regularly face the need to check their coins for “cleanliness.”
The material has been prepared e4pool And Tony⚡️For 21ideas.org
The term “money laundering” was first used in the 1930s during Prohibition in the United States, when organized crime groups began buying up legitimate businesses, such as bars and restaurants, and using them to clean up their ill-gotten gains. Over the next several decades, governments developed regulatory frameworks aimed at curbing such activity. These efforts led to the creation of various international bodies, including the Financial Action Task Force (FATF), which sets standards for combating money laundering and terrorist financing on a global level.
Following AML practices involves going through KYC (know your customer) procedures and a whole host of other policies – “letter salads”. However, even following all the conditions for depositing funds put forward by exchanges does not guarantee that your funds will not be blocked by centralized third parties under the pretext of “compliance with regulatory requirements”.
“When you order a check, you are buying someone’s opinion about a particular address… even if the AML check shows 10%, it is still your risk.”*
The problem, according to trading platforms and other services that deal with cryptocurrencies, is that even if you are a law-abiding citizen, you can end up being the victim of scammers and receive “dirty” coins from them.
Where do dirty bitcoins come from?
Active propaganda of such a pseudoscientific concept as “dirty” bitcoins began not so long ago, only 3-4 years ago, simultaneously with the emergence of paid services offering anyone to check their Bitcoin address for “cleanliness”. Previously, such services were used only by businesses – various exchanges and exchangers.
According to the ambassadors of this type of service, “dirty” bitcoins are nothing more than “coins” received from some illegal entities. This myth is usually accompanied by the following highly dubious arguments:
Up to 40% of Bitcoin transactions are linked to criminal activity.
All bitcoins can be traced back to the moment they were created by a miner in a block.
According to answer Elizabeth Bisbee, director of investigations at one of Chainalysis' divisions, responded to a court request in the case Romana Sterlingovathe blockchain tracking methods have not been verified by third-party experts, and the company itself has no data on errors or false positives of their software. Thus, we receive an assessment of the “purity” of bitcoins from a private company that does not disclose its methods for these assessments, “as this could cause irreparable damage to Chainalysis’ business.” In the same case, a report expert Cyphertrace, another blockchain tracking firm, which stated that the discrepancy between the two companies' data was 60%. Obviously, there is no point in talking about any objective percentage ratio of “dirty” and “clean” bitcoins.
The claim that it is possible to trace the origin of all bitcoins due to the transparency of the blockchain is also incorrect, since there are transaction obfuscation techniques such as CoinJoindestroying or confusing the history of the movement of “coins”. The true owners of the addresses cannot be established only by external observation, since chain analysis is based on heuristics, that is, assumptions that are not without the possibility of making mistakes.
In addition, AML analysis does not go too far, but only checks 4-5 transactions (hops) back. The reason is that if you look further, it will require, firstly, significantly more computing power due to the growth in the number of connections between transactions, and most importantly, a much larger number of transactions will become “suspicious”, and exchanges simply will not be able to afford to close deposits for a critical number of their users. You can learn more about this from video Andreas Antonopoulos, where he explains the concept of Ricochet's hop-adding feature in Samourai Wallet.
Why check bitcoins for “purity”?
The so-called AML services offer a solution to the problem they themselves invented – paid checks of your addresses (or “counterparty” addresses) and transactions as a method of protection. They motivate this necessity by the following:
If you transfer “dirty” bitcoins to a centralized exchange or exchanger, your account may be blocked and your funds “frozen”.
The exchange will require additional information, forcing you to go through the KYC procedure and also justify the origin of the funds.
Exchanges are required to do this under FATF regulations.
First, I would like to emphasize the above, reminding that even the data of the largest firms engaged in chain analysis can differ significantly (and do differ). Moreover, there are already dozens of such companies, some of which invent AML analysis from scratch, while others simply buy checks from larger companies and resell them to the average consumer. Thus, there is no single assessment of the same address, and therefore no guarantee that a transaction from it will not be considered “suspicious” on the side of the custodial service.
“Since we have our own services, we can change the markup as we want. […] in fact, we give users the appearance that they have checked… from our side they have received information that will be quoted on the exchange to which you transfer funds.”
AML checker is not only useless, but also harmful. You sacrifice your privacy by buying snake oil. In addition, you finance with your own money a “sneaking creature” that seeks to violate Bitcoin fungibility and the creation of a “separate coin layer” that only recognizes bitcoins held by centralized services that collect personal information about their customers. Just ask yourself how many “dirty” bitcoins have passed through FTX’s Binance? And why do AML firms consider Binance addresses “clean”?
KYC procedures harmful and ineffectiveso you should avoid services that practice them. But the most unpleasant dirty trick you can fall for is the so-called “KYC shotgun”. As part of this fraudulent scheme, the exchanger provides an address for a deposit without requiring your personal data, and after receiving the transaction, under the pretext of “high risk” during AML verification, it begins to demand your passport and other documents. The service simply blackmails the client, holding his bitcoins. And even after passing KYC, they can simply return your funds minus 3-10%, without even fulfilling their part of the exchange deal.
Here we should dwell in more detail on the following question: on what grounds, in fact, do they extort personal data from you and take away part of your money?
In the best case, the user is provided with a link to the result of the check on one of the many AML services; in the worst case, they are simply informed that the client’s assets are connected to criminal activity.
The results of the AML checker cannot be a reason for blocking funds, moreover, the AML assessment is a characteristic provided for the service, not for the client. The service is free to buy software from an AML firm and set thresholds to its requirements, upon exceeding which it wishes to refuse service to the client.
Blocking your account is an initiative of the exchanger, not its responsibility. No risk percentages drawn by arbitrary closed-source software give the buyer of the “services” of this service the right to “freeze” your funds. The very concept of “freezing” is also nothing more than a trick: subsequently, the services are happy to send “dirty” bitcoins to their consolidation addresses.
“There is currently no legally defined percentage above which you can be asked for information. […] It will be up to the crypto exchange itself to decide: to determine the threshold after which they will block [средства] and ask additional questions. This information (about the “acceptable percentage of dirt” – editor’s note) is always confidential, meaning that crypto exchanges never disclose it to anyone. […] These percentages may change every six months.”
FATF provisions are recommendations and do not have legal or statutory force.
“FATF actually comes up with regulations on the fly […] The FATF recommendations are just that – recommendations. There are recommendations to comply with the Travel Rule… does anyone comply with them? I, for one, don’t see anything like that. This will only work if […]if everyone believes in it.”
But that's not all: according to a recent “Proposing regulations aimed at combating money laundering and terrorist financing”, after more than three decades of following FATF recommendations by traditional financial institutions and services, 99% of criminal proceeds avoid confiscation.
Moreover, the biggest money launderers are the largest licensed banks such as HSBC and lawyers who hold judicial positions. The workings of this system are described in great detail by Brandon Garrett in his book “Too Big to Jail” (download).
“If we want to be like the banking system and banking products, we need to adhere to the FATF recommendations”
Do you really want to be like the banking system and banking products?!
How to protect yourself from AML scam?
Even if you actively use AML checks and are sure that your bitcoins are absolutely “clean”, there is no guarantee that they will not become “dirty” tomorrow. AML firms set the marks retroactively. For example, if you received transactions from an exchange that was later made “sanctioned”, you become the owner of “red” marks. People interested in continuing the AML madness call this a fashionable term “retrospective marking” so that the nonsense they voice sounds professional and raises fewer questions from inexperienced users.
There is no guaranteed protection against this, as it is a one-sided game. Therefore, just avoid such scammers. And if you have already become a victim of an AML scam and do not want to give your data to crooks, make your case public – if possible – on independent platforms.
If you want to exchange dirty (without quotes) fiat for Bitcoin or shtickoins, such platforms as Robosats, HodlHodl and others services that do not require KYC/AML procedures. Lightning payments are not yet affected by this malignancy, so you can use on-chain/Lightning atomic swaps. Atomic swaps with other blockchains are available at KomodoDEX, Samourai Swaps, UnstoppableSwap. There are also several Bitcoin-supporting shieldcoin DEXs, such as ThorSwap.
The best way out regarding these policies is to avoid services that follow them. Direct exchange within a narrow community or on p2p platforms is the solution. Also, many businesses and shops – both online and offline – accept bitcoin, not taking into account the destructive tools imposed by fans of the fiat standard.
Moreover, exchanging coins within a circular economy or even within a narrow community makes the work of AML services useless, because with each transaction made, even the “dirtiest” coins are magically cleaned. Take a look at the screenshots below, where in 6 simple transfers of funds to their own addresses, the “dirtiest” coins, marked by the service as received from a “mixer” and showing 90% danger, are transformed into absolutely clean and law-abiding funds from an “unlicensed exchange”:
Note that this example did not involve any complex “coin whitening schemes” or specialized tools; it was a simple sequential transfer of funds to their own new addresses. This process can be very easily automated and has been provided, for example, as a service called Ricochet by the Samourai wallet team.
AML is a scam!
Ultimately, we hope that even the most ignorant reader will find it obvious that AML policies are essentially a scam, organized by a larger bandit in the form of high-ranking officials and lawyers holding judicial positions. And the development of this, like any other destructive instrument, must be fought.
Of course, crude approaches to such a fight can end badly for ordinary citizens, and lobbying for policy change is not for everyone. However, refusing to use malicious coin verification services, choosing p2p platforms over centralized exchanges, and supporting local businesses and online stores that do not promote delusional narratives that threaten one of the most important properties of money – fungibility – is already a serious step towards supporting permissionless and uncensored money and, therefore, free trade.
Support for developers of freedom and technology educational projectsenlightening the masses, also cannot be overestimated.
* Quotes presented in the article belong to “AML experts” who participated in “Big AMA session on AML”, and also from the video “Dirty Crypt“.
