Virtual Assets and Cryptocurrency AML Flashcards

Which of the following is a primary red flag indicator of potential money laundering in cryptocurrency transactions?

Answer: Multiple small cryptocurrency purchases that aggregate just below reporting thresholds

Structuring — breaking transactions into amounts just below reporting thresholds — is a classic red flag whether conducted in fiat or cryptocurrency, as it suggests deliberate avoidance of AML controls.

What are 'privacy coins' such as Monero (XMR) and Zcash (ZEC), and why are they of heightened concern for AML compliance?

Answer: Cryptocurrencies that use cryptographic techniques to obscure transaction amounts, sender, and receiver addresses

Privacy coins use cryptographic methods (e.g., ring signatures, zk-SNARKs) to shield transaction details, making blockchain analytics extremely difficult and raising the risk that illicit funds cannot be traced.

In a decentralized exchange (DEX), what is the primary AML compliance challenge compared to a centralized exchange (CEX)?

Answer: DEXs typically operate without a central operator to collect KYC data or file SARs

DEXs facilitate peer-to-peer trading via smart contracts without a central intermediary, meaning there is typically no entity responsible for performing KYC, monitoring transactions, or filing suspicious activity reports.

What is 'dusting' in the context of cryptocurrency, and how can it relate to AML concerns?

Answer: Sending microscopic amounts of crypto to multiple wallets to de-anonymize their owners by tracking subsequent transactions

Dusting attacks involve sending tiny ('dust') amounts of cryptocurrency to many wallets; when recipients move these funds, their wallet clusters can be linked, potentially de-anonymizing them — a tactic sometimes used by investigators or malicious actors.

Which approach do blockchain analytics firms (e.g., Chainalysis, Elliptic) primarily use to link cryptocurrency wallet addresses to real-world entities?

Answer: Clustering wallet addresses based on shared inputs and known exchange deposit patterns

Blockchain analytics firms cluster wallet addresses using heuristics such as common-input-ownership (wallets spending from the same transaction are likely controlled by the same entity) and tagging known exchange deposit addresses to attribute wallets to real-world entities.

Non-Fungible Tokens (NFTs) present a money laundering risk primarily through which mechanism?

Answer: Wash trading — selling NFTs to oneself at inflated prices to layer illicit funds

Wash trading in NFTs — where a seller transfers an NFT to themselves or a colluding party at an artificially high price — allows illicit funds to enter the market as 'sale proceeds,' effectively layering and integrating dirty money.

What does the term 'unhosted wallet' (also called 'self-hosted' or 'non-custodial wallet') mean in the context of VASP regulation?

Answer: A cryptocurrency wallet controlled directly by the user without a third-party custodian

An unhosted (non-custodial) wallet is one where the individual holds their own private keys without relying on a third-party VASP, posing AML challenges because regulators cannot easily impose KYC requirements on transfers to or from these wallets.