Self-Hosted Cryptocurrency Wallets

Self-hosted wallets give criminals direct custody of illicit funds outside regulated platforms, allowing them to bypass centralized KYC and freezing measures. This impedes investigators' ability to trace or halt transactions. The primary objective is to ensure minimal external oversight and maximize anonymity for illicit proceeds.

Certain self-hosted wallets incorporate inherent privacy features (e.g., CoinJoin protocols, stealth addresses, zero-knowledge proofs) that obscure transactional data. These features further impede AML/CFT measures by complicating the attribution and freezing of illicit assets.

Self-hosted (non-custodial) wallets function as an unregulated peer-to-peer channel without mandatory KYC or centralized oversight, enabling criminals to transfer illicit funds across borders while circumventing institutional controls and monitoring.

• Provides IP logs, device usage patterns, login timestamps, and alerts on suspicious behavior.
• Helps detect unusual login patterns, rapid address changes, or dispersed wallet usage indicative of potential money laundering through self-hosted wallets.

• Captures all customer wallets on file with regulated platforms, including whether they meet KYC standards.
• Helps confirm that certain external wallets remain outside custodial compliance, aligning with the 1591 indicator.

• Includes verified customer identities, beneficial ownership details, risk scores, and account profiles.
• Aids in identifying new or unexplained usage of self-hosted wallets, sudden changes in external addresses, and questionable explanations for sources or uses of funds, which may signal high-risk activity.

• Provides on-chain records (addresses, transaction IDs, timestamps) indicating wallets with no direct linkage to custodial providers.
• Helps detect self-hosted wallets lacking formal KYC oversight, revealing potential illicit usage routes.

• Provides trade details such as asset types, trading pairs, executed volumes, timestamps, counterparties, and price data, enabling the detection of frequent cross-asset conversions from or to self-hosted wallet addresses.
• Helps AML investigators identify unexplained or anomalous asset switching that may indicate layering or obfuscation of illicit funds in non-custodial wallets.

• Contains location-based transaction records, including origin, destination, and geolocation metadata.
• Assists in detecting cross-border or multi-jurisdictional flows to and from self-hosted wallets, highlighting potential structuring or layering across different regions.

• Escalate scrutiny for customers frequently sending or receiving cryptocurrency through self-hosted wallets, especially those with privacy features.
• Verify the legitimacy of funds by examining transaction histories and requesting detailed explanations of the purpose or source.
• This deeper analysis flags potentially illicit layering or cross-border transfers that bypass regulated exchanges.

Require customers transacting with self-hosted wallets to disclose their wallet addresses and provide cryptographic proof of ownership, such as a signed message. Cross-reference these addresses against known high-risk or watchlisted addresses to reduce anonymous inflows and outflows. By formally documenting the link between a customer and a self-hosted wallet, institutions strengthen traceability.

Implement targeted monitoring rules to detect patterns unique to self-hosted wallets, such as abrupt surges in volume, repetitive cross-asset conversions, or rapid transfers across multiple addresses. By flagging transactions to or from unregulated wallets that lack custodial oversight, institutions can identify suspicious flows designed to evade traditional KYC controls.

Use specialized analytics tools to trace cryptocurrency flows into and out of self-hosted and privacy-focused wallets. Specifically, track CoinJoin or stealth transactions, identifying chain-hopping or intermittent layering patterns. By mapping wallet histories, institutions can detect illicit funds moving through unregulated addresses that bypass conventional oversight.

Provide specialized training on the hallmarks of self-hosted and privacy wallets, including red flags such as instant coin conversions, stealth addresses, or chain-hopping. Teach staff to spot unusual wallet usage patterns and rapidly escalate suspicious activity for deeper analysis, ensuring front-line awareness of non-custodial wallet risks.

Designate customers who frequently use self-hosted or privacy-focused wallets as higher risk, triggering stricter transaction thresholds, additional due diligence inquiries, and closer ongoing monitoring. This tiered approach ensures resources are focused on individuals using unhosted wallets with a higher potential for anonymity-driven laundering.

Leverage external data, dark web intelligence, and blockchain tracing services to identify if self-hosted wallet addresses are tied to known criminal groups or illicit marketplaces. Compare declared usage or sources of funds with external evidence to detect misrepresentations and hidden associations.

Participate in industry-wide intelligence exchanges to circulate known high-risk self-hosted wallet addresses and emerging privacy tools exploited by criminals. Collaborate with peers, regulators, and law enforcement to coordinate enforcement actions and block suspicious transactions before funds move across multiple unregulated wallets.

Restrict or block transfers to wallet addresses flagged for CoinJoin usage or other anonymizing protocols. Require additional justification if a customer consistently routes funds through unhosted wallets with no clear economic purpose. By constraining or halting interactions with high-risk privacy services, institutions limit the layering of illicit proceeds.

• Self-hosted wallet software tailored for privacy coins (e.g., Monero, Zcash) integrates anonymity features such as stealth addresses or ring signatures directly, impeding investigators from tracing transaction flows.
• By moving funds into a privacy coin wallet they control, criminals sever key links to the original source of illicit proceeds, frustrating standard blockchain surveillance.
• In many cases, they also combine CoinJoin or similar mixing protocols within non-custodial wallets, further increasing anonymity and complicating AML/CFT compliance efforts.

• Criminals leverage self-hosted (non-custodial) wallet applications to maintain full control over private keys, bypassing KYC checks typically required by custodial services.
• Because there is no central authority to freeze or monitor the wallet, illicit actors can move funds across borders with reduced scrutiny, complicating attempts by regulators or law enforcement to trace transactions or identify beneficiaries.
• The pseudonymous nature of these wallets enables layering and obfuscation of fund sources, as transfers can occur rapidly between multiple addresses under the user’s exclusive control.

• Even though transactions are publicly recorded, using self-hosted wallets for Bitcoin or other transparent cryptocurrencies avoids mandatory identity checks tied to centralized exchanges.
• Criminals can anonymously acquire and hold these coins in their own wallets, then transfer or 'chain-hop' to obscure origins or convert them into privacy-focused assets.
• The lack of custodial control also thwarts freezing or seizure attempts, allowing illicit funds to flow worldwide with minimal regulatory friction.

• Allow users to fully control private keys themselves, bypassing centralized oversight or mandatory KYC checks.
• Facilitate cross-border transfers between pseudonymous addresses with minimal external monitoring, impeding freezing or blocking of illicit assets.
• When privacy-enhancing features such as coinjoin or stealth addresses are built in, beneficial ownership and transaction trails become significantly obscured, hampering AML/CFT investigations.

Professional money launderers incorporate self-hosted wallets to:

• Layer funds through rapid transfers between wallets under their control, separating transactions from the original source.
• Integrate privacy-enhancing features (e.g., coinjoin) to obscure beneficiary details and hamper investigative efforts.
• Exploit the absence of centralized oversight to avoid freezes or blocks on illicit proceeds, creating significant challenges for financial institutions attempting to trace or interdict suspicious activity.

Illicit operators use self-hosted wallets to:

• Maintain exclusive control over private keys, bypassing identity verification measures.
• Transfer illicit proceeds across borders without centralized monitoring or account freezing.
• Fragment funds into multiple pseudonymous addresses, complicating transactional tracing for financial institutions.