How to Use Blockchain to Prevent Money Laundering

As the world becomes increasingly more digital year after year, even more so in 2020 thanks to the coronavirus, the technological enhancements in almost every aspect of life have been growing at an exponential rate.

Financial institutions today invest a far greater percentage of their revenue in new technologies like artificial intelligence, machine learning, and blockchain in order to digitize their operational activities as much as possible which in turn helps reduce cost and increase security.

Not only does doing so make transacting more reliable, but it also helps combat potential crimes like money laundering by collecting, tracking, and storing large amounts of data that is to be reported to regulatory authorities.

In this article, we are going to be looking at blockchain technology and see how it helps increase compliance by adhere to financial regulations and Anti-Money Laundering programs.

What is Blockchain Technology?

In a nutshell, Blockchain is essentially a distributed ledger system. In order words, it’s a database that records financial transactions and verifies stored data. Blockchain technology allows for a good alternative to the traditional banking system. Let’s take a look at some the qualities of blockchain technology that makes it different:

  • Decentralized
  • Transparency
  • Immutability
  • Anonymity


Arguably, the most fundamental quality of Blockchain technology that differentiates it from the traditional banking system is the fact that blockchain is a decentralized platform and doesn’t require a middle entity for a transaction to take place between two parties. Let’s take a look at an example to understand this better.

When you buy a certain product, say a t-shirt from your local store, the money passes through 3 parties: you (sender), your government (intermediary), and the seller (recipient). Here, the actual control of the money that you own is not in your hands but rather in the hands of your government as it can declare the currency note obsolete at any time. It is, therefore, a centralized system.

However, blockchain technology allows for direct transactions between two parties using a global network of computers referred to as “nodes,” eliminating the need of an intermediary, Hence, making it a decentralized platform. Via blockchain, the power is distributed to the actual owners of the money instead of a centralized entity.


Transactions made using the blockchain technology are fully transparent i.e. publically viewable by anyone at any time by simply searching for the address of a given transaction online using ‘blockchain explorers’.

This quality is especially useful for increasing accountability as it allows people to supervise and track their transactions. In the case of traditional banking system, the transactions made and recorded can easily be manipulated and tampered with by an inside party because of lack of transparency of transactions to the general public.


To transact using blockchain technology, each party is assigned a cryptographic public and private key i.e. an address and a password. The public key is like your bank account number. You share it with the person(s) that you wish to transact with. The private key is your password to your wallet. It is never to be shared and kept hidden at all times.

The reason this quality is so praised is because it gives people peace of mind since they don’t have to register and verify their personal government ID with any bank or financial institution in order to make a transaction – unlike the traditional banking system – allowing for anonymity of the user.


A transaction once made and recorded on the blockchain renders itself immutable i.e. it cannot be altered or tampaered with by any 3rd party. This is done by bundling transactions together in a “block.” A block is then linked together with other blocks to form a chain.

Hence, the name “blockchain.”

How does Blockchain prevent Money Laundering?

Since the inception of cryptocurrency in 2009, thanks to Bitcoin, criminals have repeatedly tried to use it to launder large amounts of money obtained from illicit activity. Since their identities are hidden, it becomes harder for regulatory bodies like the FATF (Financial Action Task Force) to catch them.

Money laundering, in a nutshell, is the process by which money obtained through illicit activity, say bribery or terrorist financing, is ‘cleansed’ by processing it in a sequence of banking transactions so as to make it appear as if the money came from a legitimate source.

As a matter of fact, the total amount of money laundered globally every single year amounts to a whopping estimated total of US $2 trillion. That’s roughly 5% of the world’s entire GDP! To combat money laundering, blockchain technology could be an ideal tool because every transaction done leaves behind a permanent trail that’s impossible to be altered – making it easier for authorities to track the original source of the money.

Currently, digital exchanges and financial institutions all around the world are developing frameworks that increase compliance and introduce greater levels of regulations in their system to comply with KYC and new AML (Anti-Money Laundering) guidelines as the old ones have been criticised to be ineffective.

Unlike current banking models where consumer data is given to large corporations without much consideration for personal security and control, blockchain technology is a much more trusted network where data would only be shared to verified and trusted sources.

Key Takeaways

The global financial model is changing, out of innovation but also out of necessity. The older AML guidelines and policies have been ineffective, resulting in poor management and low compliance which puts consumers at a risk of being compromised.

Financial institutions and governments around the world have started investing in blockchain technology as an alternate strategy. It is important to note that blockchain isn’t necessarily a global platform.

It can also be created for private use by individual financial institutions with a predetermined set of users. The participants within the network can seamlessly initiate and undertake transactions and access data.

Blockchain is, perhaps, the closest to an ideal solution we have so far to fight crimes like money laundering as its encryption technology allows for greater levels of security of transactions and safety of the parties involved.

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The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.