Tether is under more regulatory pressure: how to monitor ERC-20 token transactions and mitigate ML/TF risks?

Key takeaways:

  • Tether is under regulatory pressure especially with regulators’ inspection of its commercial paper reserves this week.
  • ERC-20 tokens, digital assets relying on the Ethereum blockchain, could also carry ML/TF risks that should be mitigated by crypto businesses.

Tether, the market-leading stablecoin, has been under regulatory pressure over the past year due to its potential risks. This week, the firm behind the stablecoin is facing more pressure as the regulators are examining Tether’s stockpile of commercial paper, according to a Bloomberg report

Tether (USDT) ranks first by market capitalization among 427,880 token contracts listed on Etherscan website. Like other stablecoins, it is pegged to fiat currencies and largely volatility-resistant. As an ERC-20 token, Tether is available in Ethereum smart contracts or decentralized applications on Ethereum, it can be sent to any Ethereum address. 

ERC-20 tokens: a fast-growing corner of the crypto industry

ERC-20 tokens represent a fast-growing corner of the cryptocurrency industry. Simply put an ERC-20 token is a type of cryptocurrency that relies on the Ethereum blockchain. They are created and stored on the Ethereum blockchain unlike other cryptos, such as Bitcoin, which rely on native blockchains. They can be sent and received via Ethereum addresses using gas to pay for transaction fees. ERC-20 tokens can represent different types of things such as an asset, a utility, or fiat currency for stablecoins. (Read more: Stablecoins: Understanding ML/TF risks and Regulatory Developments)

These tokens have become more and more popular due to their extensive adaptation capabilities and also because of crowdfunding companies with their initial coin offerings (ICOs) projects, which make the best of their ease of deployment and their potential for collaboration with other ethereum token standards.

Apart from stablecoins, ERC-20 tokens prices are volatile often subject to important increases and decreases. For example, this past few weeks, the Whackd (WHACKD) token, created by John McAfee in 2019, caught the attention of the crypto industry. The token price surged following its founder’s passing away and theories around it and reached its all-time high on June 27 at $0.082111, an increase of more than 600% from June 25. As of June 30, the token is trading at $0.012814, decreasing by around 80%.

Token-related risks

Regulators are putting tokens within their scope because as with other cryptocurrencies they are often used to facilitate illegal financial transactions and represent an increased ML/TF risk or financial fraud risk. For example, fraudsters can use fake tokens to impersonate legit tokens from crypto projects and defraud crypto users in the process. This phenomenon happened with the Whackd token mentioned above. Following the price surge, fake tokens impersonating Whackd were spotted on exchanges.

Another kind of fraud for which ERC-20 tokens can be used is the soft rug pull scam. A soft rug pull is a type of scam in which the owner of a project sells the project’s native tokens and exit the project. It is quite common that people realize they are victims of a soft rug pull once the project goes dark and shuts all its social platforms.

Proceedings from such illegal activities can in turn be used for ML/TF purposes. This is why it is of utmost importance to monitor ERC-20 tokens funds and transactions to mitigate such risks.

How to monitor ERC-20 tokens?

Since ERC-20 tokens could be used in several fraud schemes, crypto compliance officers consider them in their AML/CTF policies to mitigate the risks.

Among different solutions in the market to monitor cryptocurrencies and mitigate the ML/TF risks, Scorechain Blockchain Analytics platforms provide the best quality at the most competitive pricing. Scorechain crypto risk AML software assesses the risk level of crypto wallets and transactions, with full ERC-20 tokens coverage.

On Scorechain Ethereum Analytics Platform, addresses using ERC-20 tokens for nefarious purposes are red-flagged and assigned a low score due to the fact that they represent a high risk in terms of ML/TF. They should be treated carefully.

Scorechain users can monitor ERC-20 tokens and mitigate the related risks by:

  • Analyzing the ERC-20 tokens held on wallets;
  • Checking the Risk scoring of incoming and outgoing funds;
  • Configuring Risk Indicators;
  • Setting real-time Alerts etc.

Learn more about how to assess the ML/TF risks regarding ERC20 tokens with Scorechain solution: https://blog.scorechain.com/why-is-it-crucial-to-have-anti-money-laundering-procedures-in-place-for-erc20-tokens/

You are a company dealing with cryptocurrencies and need to comply with the evolving crypto regulations? Scorechain Blockchain Analytics Suite provides a wide range of risk-AML scenarios to help you in your compliance journey. Contact us to schedule a free demo: contact@scorechain.com

About Scorechain

Scorechain is a Risk-AML software provider for cryptocurrencies and digital assets. As a leader in crypto compliance since 2015, the Luxembourgish company serves more than 100 customers worldwide in 37 countries, ranging from cryptocurrency businesses to financial institutions with crypto trading, custody branch, digital assets customers onboarding, audit and law firms and some LEAs.

Scorechain solution supports Bitcoin analytics with Lightning Network detection, Ethereum analytics with all ERC20 tokens and stablecoins, Litecoin, Bitcoin Cash, Dash, XRP Ledger and Tezos. The software can de-anonymize the Blockchain data and connect with sanction lists to provide a risk scoring on digital assets transactions, addresses and entities. The risk assessment methodology applied by Scorechain has been verified and can be fully customizable to fit all jurisdictions. 300+ risk-AML scenarios are provided to its customers with a wide range of risk indicators so businesses under the scope of the crypto regulation can report suspicious activity to authorities with enhanced due diligence.