Cryptocurrency Regulation: Ensuring Continued Compliance

fraud, money launderingeven terrorist financing – these are problems that exist in the world of cryptocurrencies. The anonymity and relatively unregulated global crypto environment make it an attractive method of asset movement for criminal parties.

Cryptocurrency enables fast, reliable and seemingly seamless national or international transactions. To combat the misuse of this useful technology, a wide array of cryptocurrency regulation already exists. The only problem is that this changes from one jurisdiction to another.

So how can cryptocurrencies, financial institutions and other users of cryptocurrencies be secured constant compliance in their transactions and reduce the risk of contact with illicit behavior on the blockchain?

• Maintain AML & KYC compliance
• Combating the Financing of Terrorism (CFT)
• Ensuring security within crypto exchanges

Maintain AML & KYC compliance

Many jurisdictions operate with strong AML protections. For example, EU member states must work in accordance with Fifth Anti-Money Laundering Directive (5MLD), which was established in response to terrorist financing and political scandals, such as the Panama Papers. It works to close the gaps opened by 4MLD and brings EU anti-money laundering efforts in line with FATF standards.

Similarly, in the US, businesses must operate in accordance with FinCEN Final Rulejudgment conducting client due diligence (CDD), among other applicable federal and state laws.

Essentially, cryptocurrency companies must operate with a solid understanding of the AML requirements in their jurisdiction and potentially go a step further in their own security protocols.

Part of the broader AML umbrella is know your customer (KYC). A recent survey found that out of 216 global crypto exchanges, 69% did not have “complete and transparent” KYC procedures are in place. This is one of the reasons why cryptocurrencies have not been adopted by more companies and financial institutions.

To ensure that KYC requirements are met, businesses can ensure the following:

• KYC Requirements: minimum requirements for opening cryptocurrency and exchange accounts are always met, with verification. These requirements will be name, date of birth and address. Some AML compliance requirements will also require a bank or business identification number.
• Client due diligence: clients should be assessed based on their risk and more information collected to provide a deeper understanding of how to mitigate risks.
• Ongoing monitoring: supervise financial transactions and accounts based on all developed risk thresholds.

To learn more information on how crypto companies can stay compliant, with AML considerations and how to verify transactions for risk, watch our webinar.

Combating the Financing of Terrorism (CFT)

Unfortunately, using cryptocurrency transactions is a legitimate way to transfer money for terrorist organizations. This is why it is always useful to have an ongoing understanding of CFT so that a business can stay on its toes.

It is worth noting that the probability of indirect interaction with illicit funds when transacting cryptoassets is low. “Cold Cash Is Still King,” Yaya Funusie saiddirector of analysis of the Center for Sanctions and Illegal Financing of the Foundation for the Defense of Democracy. However, it is worth staying as safe as possible from potential transactions with these organizations.

Now, a business will use KYC to stay compliant, but there are very specific methods for practicing KYC in regards to CFT:

• Introduce a Customer Acceptance Policy (CAP): Before introducing a client, businesses must choose their desired documentation, which should be strict.
• Use a customer identification program: ensure that each customer respects and fulfills the acceptance policy.
• Implement risk management: this can be done in a number of ways, such as following regulatory updates and conducting regular audits of their CAP and CIP. However, it can also be done via using blockchain analytics which, in short, aggregates publicly available blockchain data to determine which crypto wallets exhibit either suspicious behavior or direct links to illicit activities, assigning them to typological category.

CFT compliance in most cases follows the same practice as AML, which is based on collecting the right data to ensure security. In any situation, a crypto business must understand the security of the exchange being used, know who they are dealing with, and avoid the types of transactions where illicit activity is most likely to occur, such as using prepaid cryptocurrency cards and through gambling sites.

Ensuring security within crypto exchanges

Since the launch of Bitcoin, the use and regulation of crypto exchanges has increased, especially when transacting smaller types of cryptocurrencies. However, we have already seen that many crypto exchanges do not have enough KYC or AML checks. Choosing an exchange to use must be done with a critical eye, as it can sometimes be difficult to tell if an exchange is legitimate.

In many jurisdictions, crypto exchanges must be registered by certain authorities. For example, in the EU, an exchange must obtain a license in accordance with the EU Payment Services Directive and the EU Electronic Money Directive. In the US, licenses must be obtained from the Securities and Exchange Commission (SEC).

From the point of view of anyone looking to do business through a cryptocurrency exchange, the following are worth considering:

• Check their license: good examples of licensed exchanges are Gemini and Coinbase, which are strictly regulated by their government.
• Identify their requirements: cryptocurrency exchanges with little or no AML or KYC requirements should not be trusted.
• Determine what safeguards they use: a hallmark of a trusted exchange is their list of safeguards. System and security software, compliance tools – these are good signs of a legitimate crypto exchange.

Cryptocurrency compliance will be a key focus for global finance as of now and in the future. For many organizations looking to either start using cryptocurrency or maintain compliance, this is an ongoing consideration and learning curve. Regulations around the world are constantly changing and evolving. To explore the latest developments in crypto regulation, download our eBook.

A Global View of Crypto Regulation

The regulation is not universal. In some countries it can even change from one area to another. It is a key practice for crypto businesses and financial institutions to stay current with crypto compliance, AML requirements and other financial regulations. If this is neglected, businesses face loss of face and loss of customers.

To help you stay up to date and fill in any gaps in your knowledge, read our guide. This covers a general overview of crypto regulations around the world and focuses on countries such as the UK, China, the US, Russia and Japan – areas of hotly contested crypto regulation and high volumes of crypto interest.

You can download the “Regulatory Outlook Report 2023” guide by clicking here.