Crypto AML Risk Scoring is Black Magic

chicharito said:

Crypto AML risk scoring is what I would call “black magic”. In other words, it’s arbitrary, and designed for the "big club"... and you ain't in it.

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While searching for the best instant swappers for XMR, I fell into one of my rabbit-holes from this post.

The guy links to a Bitcoin Talk thread about how FixedFloat basically extorted $8,000 from someone. Tl;dr their racket hinges on weaponizing their vague terms and conditions where they are able to hold customer assets if they deem that it comes from criminal activity.

Note - they don't need law enforcement's approval to confiscate anything. They don't need an open LE case either. They "hold onto the crypto" for future LE requests, and if LE sends them an e-mail, they send over the "suspicious funds".
Not to mention how this is literally the opposite of "innocent until proven guilty", but the bigger question is... what happens if the Feds never come calling?

Who keeps the coins? Of course, good ol' FixedFloat. That's their incentive.

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Anyway, their brazen confiscations are an open secret. The most interesting find in that thread was their admin openly admitting that the “high-risk funds” went into their main hot wallet. In other words, they mixed the "dirty crypto" into the exact same wallet that is then used to send funds to other customers.

For those of you who have a bit of an understanding as to how chain analysis works, the story goes that "dirty" or "tainted" crypto mixed in with clean funds ends up increasing the overall risk score of your coins.

So for example, if you have $1000 worth of clean Bitcoin, but someone sends you $50 of dirty Bitcoin, that $50 ends up increasing the risk score for the Bitcoin in your wallet... whether by 5% or by more/less, I don't know....

But naturally, the forum users are flabbergasted by such an open admission - like are FixedFloat really that retarded? Did they just fuck up the entire operating wallet for all of their customers....?

Hahaha not quite.

In another Bestchange response thread, one of their admins admits that they work with both law enforcement and chainalysis companies, who in turn label them as an "exchange". And by labeling their hot wallet as an exchange, this arbitrarily reduces the risk score of any funds that enter their hot wallet.

Here's the direct quote:

One analytics company called Bitrace apparently had FixedFloat on its high-risk list, so FixedFloat asked them to be taken off it.

When Bitrace didn't respond, they resorted to calling the chainalysis firm as "unreliable" :D

This crazy "relabeling" incentive turns these instant swaps either explicitly, or covertly into LE honey-pots. Like think about it, we plebs do not have the magic power to go to Chainalysis, TRM Labs, Eliptic etc. and ask them to give us a "magic wallet", where all incoming and outgoing transfers magically become "clean", no matter how much dirt gets stuffed into it.

And if a person gets labeled as an exchange, with a "magic wallet" at their disposal, naturally they are incentivized to rake in as much high-risk funds as possible. Cuz they get to keep the loot!

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The most famous example of this "magic wallet" case was how Tim Draper (part of the big club) bought 30 000 Bitcoin seized from Silk Road, and of course, the "dirt" disappeared right after the confiscated Bitcoin entered the FBI's hot wallet.

Do you see what I mean? "Taint" and "dirt" in the cryptoverse is in the eye's of the beholder. It's a corrupt system, all based on "who you know".

But let's no't fall for their propaganda. There are entire swaths of countries which don't even know what chainalsysis is (Southeast Asia is the first region that comes to mind), and your crypto there is as fungible as any other crypto. That's the whole point of the technology - fungibility.

Beware that the inner-clique is looking to choke off Monero in this exact manner. If an instant swapper starts getting its payouts flagged for offering XMR, how long do you think it’ll keep offering it?

Soon, DEXs and atomic swaps will be the way to go.

Thank you for sharing this post! I went somewhat down that rabbit hole after reading your post and frankly it gave me hiccups (I have a dilated esophagus...because I ingested a toxic substance by accident thinking it was Limoncello 🤦 🤦 🤦 - Anyone know of a fix for dilated esophagus, please chime in)

I'm curious what @JohnnyDoe and others have to say about this blatant scam FixedFLoat and others are running.

Calling it "black magic" gives them far too much credit. It’s just an overpriced racket sold to compliance monkeys.
Those lazy compliance officers need an automated excuse to cover their backs.

In actual law, money laundering requires a proven predicate offense and criminal intent (mens rea). A proprietary algorithm spitting out an arbitrary 75/100 risk score because a UTXO passed within four hops of a mixer, a gambling platform, or a flagged cluster two years ago is legally meaningless. By their own logic, as coins continuously split, merge, and circulate across a transparent public ledger, eventually almost every satoshi becomes "dirty."

The stumbling block has never been criminal law, but dealing with the hallucinations of bank monkeys who treat an analytics dashboard like divine scripture to avoid doing actual due diligence. If their expensive third party software flashes yellow or red, they freeze the transaction and expect you to prove a negative.

If you don't want to get caught in their compliance traps:

• Don’t use CEXs like private wallets. Centralized exchanges exist to trade, not to store wealth; leaving your coins sitting there means volunteering for their compliance harassment.
• Paper beats algorithms. When exiting to fiat (do that only if you really have no alternatives) or purchasing real assets, a rock solid, properly structured paper trail proving lawful origin of funds will always beat whatever tea leaves a third party scoring tool is reading. If papers don’t look good enough, use photoshop, or a jailbroken AI if your skills are poor.
• Use the right tool for the job. Trying to maintain financial privacy on a transparent public blockchain while worrying about arbitrary taint scores is stupid. If you want actual privacy, buy XMR.

Remember that the financial crisis of 2008 showed that major bond rating agencies were also corrupt and opaque. Wall Street finance is every bit as bad as your typical crypto scammer, just better at it and more polished.