Crypto regulations to curb money laundering

Did you know that there are well over 12,000 cryptocurrencies in the world? [1] The stupendous growth of the crypto industry reached its peak in November 2021 when its value touched $2.9 trillion. Since then, the value of the crypto industry has dipped due to a range of factors including uncertainty among investors, shady crypto exchanges, and lack of regulations among others. 

If the internet was not enough for cybercriminals to wreak havoc, the advent of cryptocurrency has provided them with a new channel to exploit their murky tactics to make money. It is not surprising that cybercriminals laundered a whopping $8.6 billion in 2021 alone and around $33 billion since 2020 via cryptocurrencies [2]. Numerous regulatory bodies have rushed to the crime scene to tackle this problem, introducing stringent anti-money laundering (AML) legislation in different parts of the world.

Today, we will examine AML legislation about cryptocurrency and why it is the need of the hour. 

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AML regulations in the cryptocurrency sector

What do we mean by anti-money laundering in the crypto sector? It primarily refers to mandates, guidelines, policies, and regulations that are introduced to nip cyber crime in the bud by getting hold of cyber criminals. 

Today, financial terrorism and cyber criminals are some of the key factors that are damaging the credibility of cryptocurrencies. AML aims to eliminate these threats. 

AML requirements for cryptocurrency

The Financial Action Task Force (FATF) has laid down a few ground rules and a global standard for AML legislation. That said, many regions have responded to these guidelines by adding their regulations to maintain the sanctity of the cryptocurrency industry. The FATF rolled out the cryptocurrency AML guidelines, which compelled policymakers in FATF member jurisdictions to act swiftly. As of now, the European Commission, the United States Financial Crimes Enforcement Network (FinCen), and a host of other regulatory bodies have officially and legally codified a majority of FATF’s cryptocurrency AML suggestions. 

The FATF classifies all of these entities including cryptocurrency exchanges, stablecoin issuers, and, on a case-by-case basis, some DeFi protocols and NFT marketplaces as virtual assets service providers VASPs. To prevent malicious transactions that could be connected to money laundering and terrorist financing, going forward, VASP’s Compliance Officers must enforce KYC checks and routinely monitor suspicious behaviour.

Additionally, VASPs are required to notify the appropriate regulators and agencies of any questionable behaviour. These organisations are in charge of tracking illegal conduct to real-world identifiers using a variety of technologies, including blockchain analysis.

Does crypto carry more risk of money laundering?

Again, the FATF published a report titled “Virtual Currencies Key Definitions and Potential AML/CFT Risks. The report sheds light on a few areas of concern pertaining to cryptocurrencies. 

Transactions that use cryptocurrencies offer more anonymity than those made using conventional non-cash payment methods. Users can trade virtual currency online, as the majority of transactions don’t involve face-to-face interaction with customers, and anonymous funding is possible (cash funding or third-party funding through virtual exchangers that do not adequately identify the funding source).

• Cross-border transactions

The global reach of cryptocurrencies increases the risk of AML/CTF since it makes surveillance and enforcement more challenging.

• Centralized supervision is missing

Law enforcement is not permitted to investigate or seize assets from a single administrator or central location. However, they are allowed to target specific exchangers to access customer data they may have collected. As a result, transactions using virtual currency offer a level of anonymity that is not available when using conventional credit and debit cards or former online payment options.

Know your customer (KYC) in crypto” – how does it work?

Customer identification, due diligence, and continual monitoring are the three fundamental components of KYC processes.

1. Customer identification

The customer identification process (CIP) involves the verification of all the information provided by a customer. The verification may include the following:

• A person’s legal name
• Date of birth
• Verification documents
• Address
• Business licenses

1. Due diligence

Customer due diligence (CDD) is a risk analysis performed for prospective clients or commercial relationships. Financial service providers evaluate a client’s transaction history, conduct background checks, and consumer surveys to assign risk ratings to each account.

1. Continuous surveillance

Continuous monitoring involves analyzing transactions on a frequent basis for indications of unlawful conduct. VASPs are mandated to submit Questionable Conduct Reports to FinCEN or other relevant law enforcement agencies if they come across the suspicious activity.

Importance of KYC in the crypto world

As the demand and applications of cryptocurrencies continue to grow, businesses using cryptocurrencies need to implement KYC compliance procedures to prevent illegal activity. The most effective methods for achieving this goal are identity verification, risk assessment, and ongoing monitoring.

Additionally, cryptocurrency businesses can improve their credibility with customers and authorities without hurting their bottom line by implementing new KYC requirements. Binance, the world’s largest crypto exchange discovered that around 96-97% of users complete their KYC during onboarding after making KYC mandatory for all of its users. This small drop in registrations is a tiny price to pay for the ability to function in hundreds of regulatory contexts, provide services to millions of clients, and fight all types of illegal activity.

Digital Asset Anti-Money Laundering Act of 2022 – crypto regulations we need?

It appears that the U.S. is stepping up against AML in digital assets, particularly in the cryptocurrency space. Over the past few years, discussions around new regulations, policies, and guidelines to prevent fraud and money laundering in the cryptocurrency industry have increased rapidly around the world.  In the U.S., the Department of Justice and The Treasury Department have issued warnings stating that the adoption and usage of digital assets for online theft, money laundering, trafficking, fraud, terrorist financing, and several other crimes have increased. 

It appears that the U.S. is stepping up against AML in digital assets, particularly in the cryptocurrency space. Over the past few years, discussions around new regulations, policies, and guidelines to prevent fraud and money laundering in the cryptocurrency industry have increased rapidly around the world.  In the U.S., the Department of Justice and The Treasury Department have issued warnings stating that the adoption and usage of digital assets for online theft, money laundering, trafficking, fraud, terrorist financing, and several other crimes have increased. 

A few nations including Russia, Iran, and North Korea have a shocking list of crypto-criminals who have either stolen or laundered around $1 billion in digital assets in 2022. The FATF has also waved the red flag saying that there are notable gaps in the global regulatory system, making it easier for criminals to take advantage. The Digital Asset Money Laundering Act aims to change that. 

It is expected to minimize the potential risks digital assets pose to the national security of the U.S. by eliminating loopholes and bringing the entire digital asset ecosystem under greater compliance by introducing AML frameworks and crypto regulations. 

Why do we need crypto regulations?

The U.S. Securities and Exchange Commission (SEC) chair, Gary Gensler said that crypto platforms would require stringent regulations to survive. Over the past few years, cybercriminals are waiting to pounce on crypto platforms and exploit them. 

This seems to be the exact opposite of Satoshi Nakamoto’s idea of creating a financial system that is not controlled by the state. That is exactly why he developed Bitcoin after the 2008-2009 financial crisis. Today, we need crypto regulations for a range of reasons including crypto scams, money laundering, and ransomware payments. 

Governments and crypto businesses need to join hands 

It is high time that crypto businesses understand the need to incorporate tech-driven solutions to address the money laundering in cryptocurrencies. They can either opt to outsource this task to a third party or build an in-house team to combat the problems put forward by cybercriminals. 

Besides, even governments need to work with crypto businesses, tech companies, and financial experts to thwart money laundering in the crypto space. The joint efforts of all the parties would pave the way for a safer digital assets ecosystem. Besides, crypto businesses need to focus on improving ID verification, customer onboarding, transaction risk management and assessment and other critical steps to create a safer ecosystem. 

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Feature Image Source: Photo by Kanchanara on Unsplash

Image 1 Source: Photo by Kanchanara on Unsplash

Image 2 Source: Photo by Traxer on Unsplash

[1] (2022) “How Many Cryptocurrencies Are There?” The Motely Fool [online] Available from: https://www.fool.com/investing/stock-market/market-sectors/financials/cryptocurrency-stocks/how-many-cryptocurrencies-are-there/ [accessed January 2023]

[2] (2022) “US$8.6 billion worth of cryptocurrency laundered by cybercriminals in 2021″International Security Journal” [online] Available from: https://internationalsecurityjournal.com/cryptocurrency-laundered-in-2021/ [accessed January 2023]