Crypto Anti-money Laundering Measures in 2023: What Experts Say

Crypto experts are hopeful that an increased regulation, especially crypto anti-money laundering  and know-your-customer (KYC) measures will help companies and customers both in the long run, especially amid regulatory scrutiny affecting the industry.

This past month, the Bulgarian crypto lender Nexo for example found itself in the spotlight as the Bulgarian Prosecutor’s Office and the State Security Service launched an investigation against the company on charges such as money laundering, organized criminal group, tax crimes, providing banking services without the necessary license, computer fraud, and violations of the international sanctions against Russia.

The Bulgarian authorities claimed that their actions were a part of an international investigation, but these haven’t been backed by any foreign partners.

According to Nexo, the Bulgarian prosecution has been misinterpreting facts regarding the financing of terrorist activities, happening through transactions on their platform.  The company also says that all money laundering allegations against them are baseless.

Additionally, the crypto lending platform settled their administrative dispute with the US authorities last week, ending all inquiries of US regulators into Nexo that have been ongoing since the company decided to stop offering its Earn Interest Product (EIP) in the US.

However, as the industry saw the collapses of crypto giants such as FTX, LUNA and Celsius among others last year, consumer trust in the industry has been shaken.

What crypto companies need to do now, is to change this perception by complying and adhering to existing regulation, experts are adamant.

According to Bosnian entrepreneur and crypto expert Vedad Mesanovic, for crypto companies to be able to operate legally then they would need to follow certain rules. In the European context, presently there is the MiCA Markets in Crypto-Assets Regulation, which is one of the first attempts for having a comprehensive regulation of crypto markets, and extends to money laundering, consumer protection, accountability of crypto companies, and environmental impact.

“Crypto companies must comply with a complex web of regulations that vary from country to country. Regardless of their operating model or intentions, without proper licenses and AML compliance, they are at risk of being shut down by regulators or facing significant fines. The blockchain market is so new and uncertain that it is natural for crypto companies to face these challenges. However, it is also important to note that this process of maturing and change was destined to happen in this space,” Mesanovic tells The Recursive.

Shift in the perception of the industry

Taking into account all of the significant developments that happened during 2022, there is also a shift in how regulators and law enforcement agencies approach the industry.

“There are more and more preemptive reactions, as the nature of virtual currencies enables instantaneous global transactions, and in particular to the relation with the existing anti-money laundering, and financing of terrorism provisions,” crypto expert and Vice President of the Serbian Bitcoin Association, Arvin Kamberi tells The Recursive.

The transparent design of blockchain also allows for tracking of transactions so law enforcement agencies use this to control the online exchanges and trading platforms.

“Some cryptocurrencies put privacy and anonymity in the center of their design (like Monero) but virtual currencies are ‘Internet money’ and online tracking is efficient in particular if/when they are used to purchase the offline goods or convert to national currencies,” Kamberi adds.

While the Nexo investigation is yet to produce any relevant findings, such cases could be good for the industry in the long run, some experts are arguing.

“Situations like Nexo are good for the industry because regardless if they have wrongdoing or not, it brings a certain level of regulatory scope and attention that is needed for an emerging asset class like blockchain to keep progressing the asset class forward,” Semir Gabeljic, Director of digital asset hedge fund Pythagoras Investments tells The Recursive.

Thus, such an unregulated landscape was always a disaster waiting to happen, Mesanovic argues.

“Recent developments with companies like Nexo, FTX, and Celsius were waiting to happen in an unregulated industry that is still maturing and changing. Business visions and ideas aside, many entrepreneurs rushed into the cryptocurrency space with a single intention – to get rich quickly. Such endeavors almost never end well. And then you have VCs who are recklessly throwing money at promising “visionary crypto geeks” while media companies are promoting their success, hoping to accelerate the crypto adoption. Combining all these events can only create a disastrous outcome,” Mesanovic says.

Complex and evolving issue that can benefit the industry

While regulation of the crypto industry is a complex and evolving issue, after all that has happened during 2022, it is likely that this would bring the much needed positive effects in the sector.

On one hand, regulation can increase trust and adoption of crypto by providing greater protection for consumers and investors, reducing the risk of fraud, and increasing transparency and accountability in the industry.

Therefore, crypto anti-money laundering – AML, and “know your customer” – KYC measures should be a must for any crypto platforms looking to do business globally. However, while in some countries there are strong KYC measures, in others, such as the Seychelles for example, there are more lax regulations, which could be attractive for some industry entities looking to exploit this.

“Contrary to common understanding, cryptocurrencies are not so prominently used for money laundering and financing terrorism. As the Europol’s report ‘Tracing the evolution of criminal finances’ suggests, cryptocurrencies are mostly used for trade of illicit goods and services, and fraud. Almost all countries in the world adopted a regulation to enforce virtual currency traders to follow the global AML and KYC procedures. This field becomes tidier,” Kamberi explains.

On the negative side though, over-regulation could stifle innovation and limit the potential of crypto to disrupt traditional financial systems. It could also lead to increased compliance costs and bureaucracy, which could make it more difficult for small and startup projects to survive.

“In order to improve public trust, fintech companies need to monitor transactions and know the identity and understand the intentions of their customers. But they also need to ensure that this data is not shared with outside parties and that people are not discriminated against in the process based on some inputs,” Mesanovic adds.

Overall, the long-term effects of regulation on crypto will depend on the specific regulations put in place and how they are enforced. A balanced approach that allows room for innovation while also providing necessary oversight and protection would be beneficial for the crypto industry in the long run, experts explain.

“Good crypto anti-money laundering practices include checking every single investor, whether onshore or offshore, specific regulatory requirements to invest to depending on their jurisdiction which include forms such as the W-8 and proper documentation to ensure that the investor is not on sanctions list or sanctioned country. Essentially, strong internal control processes stemming around AML/KYC and documentation. Crypto investors should avoid onboarding to any platform that is deemed a “gray” area regarding AML and KYC onboarding and look for alternatives,” Gabelljic says.

What crypto companies and projects could do themselves at this point would be to introduce and implement robust security measures to protect customer data and assets, and by complying with any future regulatory requirements.

“Cryptocurrency landing platforms are the business models created during the climax of the cryptocurrency value. These are not the landing platforms as seen in the regulated financial markets. They often use decentralized blockchains and FinTech solutions to move around user funds in schemes of ‘farming’ ‘staking’ ‘pre-mine’ etc. Many of them were based on the premise of a ‘never-ending bull market’ for bitcoin, and faced dire consequences during the value drop of the cryptocurrency market (look at the 3Arrows, Luna, Celsius) and billions lost in days, leaving a market in shambles,” Kamberi concludes.