Geolocation Helps Crypto Exchanges’ Fight Financial Crime

Cryptocurrencies are gaining an ever-increasing number of adherents on Wall Street, Main Street and, bit by bit, in everyday commerce.

And it’s no surprise that they’re also gaining the attention of fraudsters, intent on leveraging a key feature of the crypto ecosystem, especially exchanges. That feature is anonymity, and they use it to exploit vulnerabilities, launder money and finance terrorism.

But there are solutions in motion. Elizabeth Cronan, vice president of Government Relations at GeoGuard, said high tech has the potential to help the bad actors get away with it all — or stop them in their tracks. In one common tactic, VPNs are leveraged by fraudsters to compromise crypto traders and the exchanges upon which they trade.

“There are real and inherent risks when an individual is using some type of malicious VPN or other type of tool to mask their location when they are engaging in the crypto environment,” she said.

Those high-tech tools, she said, can act as a “shield” the fraudster can use to mask their illicit activity. VPNs can be used to both spoof location and prevent device tracking, and thus create challenges for law enforcement to investigate and stop those criminal activities, which can range from money laundering to terrorist financing.

If the exchanges and platforms that enable crypto trading “don’t have the appropriate tools in place to detect if someone is trying to transact behind a VPN, they run the risk of enabling a transaction to be conducted from a sanctioned nation,” Cronan said. Enabling those trades can have serious consequences, such as fines from agencies like the Treasury Department’s Office of Foreign Assets Control (OFAC), as evidenced by recent OFAC enforcement actions against BitPay and BitGo.

Reliable Insight Requires Accurate Location Data

In the end, she said, it’s critical that the organizations involved in the crypto space have accurate, reliable insight into where individuals are truly located.

OFAC, she added, is likely to continue its scrutiny on transactions flowing to and from sanctioned jurisdictions. Elsewhere, Treasury Secretary Janet Yellen has said cryptos are at risk for being misused, which signals a “tighter” regulatory environment moving forward.

“She clearly sees [crypto vulnerability] as something that needs to be addressed with a sense of urgency,” said Cronan.

Against that growing urgency, “It’s no longer enough to simply rely on an IP address for sanctions compliance,” she said. IP addresses are vulnerable to manipulation and spoofing, and they are definitely not a reliable or accurate indicator (when solely relied upon) of an individual’s true location.

Instead, the collection and use of multiple geolocation data points that can be verified and authenticated is required to accurately and reliably determine a person’s true location, according to Cronan.

Analyzing and verifying the authenticity of geolocation data will create regulatory efficiencies, while making sure that companies and exchanges remain in anti-money laundering/Bank Secrecy Act (AML/BSA) compliance as well — starting from the initial point of onboarding and onward to the transaction process. With a nod toward geolocation, she said that “lessons that we’ve learned from across our regulated online gaming and sports betting markets can be applied across a number of verticals in the financial sector — with particularly transferable takeaways in the crypto space.”

Masking one’s location, after all, is frequently a foundational building block in creating a false identity that in turn “appears” on a platform in order for a bad actor to engage in illicit financing activity, she said. Getting in front of that process by preventing the location fraud at the early onboarding stage will significantly reduce the overall rates of fraudulent activity.

“If you are able to effectively address location fraud, you are going to have meaningful impact when addressing all forms of fraud on your platform,” she told PYMNTS.