How to Check a Counterparty's Reputation When Transferring Crypto

Imagine depositing crypto to Binance or another exchange and having the transaction blocked due to suspicious wallet activity. The service representatives promise to return the funds after a detailed review lasting two months. This situation can happen to any user who doesn't monitor the reputation of their counterparties. 

In this new piece, we break down how to protect yourself from dirty crypto and keep your assets safe. We'll cover AML checks, useful tools for affiliates, and share tips for beginners. 

Potential Risks When Working with Crypto

People love crypto for its anonymity and fast transfers. But anonymity has a flip side — digital currency is actively used by criminals. All kinds of prohibited goods are sold for it on the darknet. 

According to data from analytics service Chainalysis, the volume of illicit crypto transactions in 2022 reached $18 billion. For comparison, in 2020 the figure was twice as low — $8 billion. 

Cryptocurrency can be loosely divided into clean and dirty. Ordinary users who haven't done anything illegal can only encounter dirty crypto when receiving transfers from new counterparties. 

Dirty cryptocurrency refers to coins associated with fraud, money laundering, black markets, and phishing. If such assets are transferred to a clean wallet, reputation-checking services will automatically add it to a blacklist. 

Safe and unsafe sources

Encountering dirty crypto causes problems of varying severity: from wallet blocks to having to deal with law enforcement. In some countries, cryptocurrency exchanges are required to report to cybercrime units. 

Attacks involving dirty crypto are no myth. Even experienced users can fall victim to them. In 2022, the founder of Tron Foundation, Justin Sun, came under sanctions. ETH was sent to him through a blacklisted exchange, after which his wallet on the Aave platform was blocked. 

Counterparty verification matters for anyone using centralized exchanges and sending transactions to third-party wallets or platforms whose reputation is difficult for an ordinary person to assess. Or, conversely, for those receiving transactions from such sources. 

Centralized exchanges are required to thoroughly check all user transactions, and if the system detects a transaction linked to criminal activity, the user will face a lengthy and exhausting verification process (Binance, for example, may simply ignore your messages and keep sending generic templates), even if the transaction itself was not illegal on the user's part. 

Moreover, exchanges are obligated to report such transactions to regulatory authorities, so the review process may extend well beyond a bilateral conversation with the exchange.

The rational approach is to check wallets in advance before conducting any operations with them. If a person diligently verifies their transactions, it saves significant time and provides peace of mind.

In Europe, the dirty crypto problem is not as critical. As a result, situations where a wallet's risk score after a check is high enough to justify a crypto exchange blocking the funds are rare. However, there has recently been an increase in cases where European users encounter crypto of Russian origin, which may consequently be blocked when attempting to exchange it at any licensed crypto exchange.

Our clients from South America, Africa, and Turkey encounter dirty crypto most frequently.

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Customer Success Manager DigiOfficer

Ways to Protect Yourself from Dirty Cryptocurrency

Beyond anonymity and fast transactions, cryptocurrency is also characterized by transparency. Blockchain explorers allow you to view the full transaction history of any wallet. This feature helps identify suspicious activity on cryptocurrency addresses. 

There are several ways to protect yourself from dirty cryptocurrency, though it's worth understanding that none of them guarantee 100% effectiveness. Criminals use various tools to launder crypto. Most commonly, they mix illicit funds with clean ones using specialized mixers. The algorithms of dedicated services can detect this, but fraudsters continue to find new laundering methods. 

Using Centralized Exchanges

Most cryptocurrency exchanges do not allow anonymous transfers. Basic tools, such as coin trading, are available without verification, but transfers require it. This reduces the risk of fraud. 

Also, virtually every digital asset management platform checks external transactions and moves funds to users' internal wallets after AML screening. Anti-Money Laundering is a mechanism designed to combat money laundering. It was created to fight against illicit funds. 

Every transaction on Binance, Whitepay, Bybit, and other top-tier services is verified, so theoretically there is no dirty money on centralized exchanges. However, unfortunately, even such advanced platforms cannot guarantee full protection. Fraudsters are constantly refining crypto laundering techniques, and there is a chance that when such crypto is transferred to an exchange address, it will not be blocked. 

Example of a wallet being blocked

On the other hand, using centralized exchanges has its advantages: even if laundered crypto ends up in an account, the recipient will not face sanctions. From the moment funds are credited to the exchange's internal wallet, they are considered to have passed AML verification. 

One of Ukraine's largest exchanges, Kuna, warns users about suspicious wallets even on outgoing transfers. The final decision remains with the user, but a risk notification is a genuinely valuable feature. 

AML Checkers

Crypto enthusiasts and regular affiliates have been actively adopting mobile wallets like Trust Wallet, Exodus, and TronLink in recent years. These wallets do not request documents from users and do not assess transactions. Users will have to take matters into their own hands.

If centralized exchanges are not an option for you, use AML checkers. They verify wallet cleanliness and generate a report within minutes. After scanning the transaction history, you will receive a detailed reputation assessment of the address. 

AML services differ in terms of supported networks and the cost per check. We tested these services and compiled the most useful information about them. 

1. DigiOfficer. Generates a report in seconds. On the downside — the output contains limited information, showing only the risk level. 
2. AMLbot. Checks can be performed on the website or via Telegram. The first analysis is free, and reports are informative. On the downside — the cost is high.
3. Whitepay. Profile verification is required to run a check. Reports are generated quickly. 

AMLbot is considered the niche leader, but the cost per check is quite high. DigiOfficer is more cost-effective in this regard, and the question of report depth is not critical for all users. The service displays the risk level, which is sufficient for assessing counterparty reputation. 

Another point in DigiOfficer's favor — it is a Ukrainian team with Ukrainian owners. The tool is actively developing right now and can already confidently be called one of the best solutions in terms of price-to-quality ratio. 

Use promo code PALAI to get a 30% discount. Valid until 31.12.2023

Our algorithms deliver over 99% accuracy. We aggregate fraud score data from multiple anti-fraud solution providers to deliver high-quality crypto wallet verification services. This, along with our pricing, is our core competitive advantage over other players in the market.

Extended verification results are available via API — this data is more relevant for crypto services, while regular users simply need a clean, actionable result without unnecessary details. Our format is straightforward: enter a wallet — get a result — move on.

Going forward, we plan to expand our service's functionality and introduce new products that will go beyond cryptocurrency.

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Customer Success Manager DigiOfficer

Creating backup wallets

If you need to receive cryptocurrency from a new counterparty, consider creating a new address. This way you protect your other assets and can verify the wallet's reputation after the funds are sent. 

You can also request the address before transferring funds, though not all counterparties will agree to this. When they do, it gives you the opportunity to check the wallet's reputation in advance and avoid interacting with suspicious addresses. 

We recommend not cutting corners and verifying the reputation of every crypto wallet you receive funds from. This is especially important for those using mobile decentralized applications rather than private exchanges. 

The risk of encountering illicit funds is low — but it's worth reducing it to near zero through consistent monitoring of your counterparties' reputations.