Preliminary guidelines on crypto assets and money laundering issued by the Financial Action Task Force (FATF) could be a tipping point for the crypto industry. From June 2019, crypto products and their service providers will be required to register or obtain a license from the relevant authorities. They will also be required to establish effective monitoring systems for anti-money laundering (AML) compliance, and they must hold and make available to authorities, accurate information on both buyers and sellers of crypto assets.
Bad News For Cryptocriminals
Although this is bad news for the
These are still only recommendations, but the FATF which was established in 1989 following a G7 summit, has the power to shape the global regulatory agenda. The policy-making body already requires financial institutions in the 37-member countries to take action against money laundering and terrorist financing; laying down a set of 40 recommendations which countries must implement via their own legal frameworks.
Assessing The Vulnerabilities
It is not the underlying technology itself that is susceptible to money laundering (it is likely to be part of the solution). The risks lie in the ecosystem surrounding it. The fact that it is borderless, it is possible to use temporary virtual wallets and privacy coins as well as use cryptographic addresses to create anonymity are just a few aspects of crypto investment life cycle that lend themselves to criminal activity.
For example; a criminal might purchase, through a ‘clean’ intermediary, a basic cryptocurrency at a digital exchange using cash or a debit card. Following on from this, they might purchase primary coins and then alt-coins, some of which have high levels of anonymity or privacy. At this stage, they might use mixing services to swap the primary coin addresses for temporary digital wallet addresses to break the audit trail, or they might use false recipient addresses. Throughout this process, it is almost impossible to identify that user on the blockchain.
AML Is Also About KYC
Combating money laundering in crypto assets does present significant regulatory and operational challenges, however. Without knowledge of the identities of clients, their jurisdiction and the origination of their funds, it is impossible to fulfil the requirements of the AML programs and to properly analyse and report transactions. The underlying element of AML, that of client verification will therefore pose particular challenges and we might yet see a divergence in the crypto industry, between those that advocate and those that reject regulation.
Maintaining secrecy will not be an option for systems that exist within a regulatory framework. This is because the Know Your Customer (KYC) process – customer onboarding, ongoing monitoring of transactions and customer activities, risk assessments, internal controls,
In addition, KYC includes not only standard due diligence but for higher risk clients, enhanced due diligence must be carried out too. For example, cash-based businesses are considered higher risk, as are property transactions without a clear source of funds, or if there is unusual activity on an account.
Future-proofing AML solutions
But practical new approaches are being developed to incorporate AML programs. For example, Koi Trading, an OTC trading desk backed by Binance has very recently launched an AML compliance-as-a-service solution. Partnering with IdentityMind Digital Identities Platform, they offer a plug-and-play AML compliance solution that supports digital currencies.
There are also advanced technologies that can detect and analyze new sources of data, tracing the path of crypto assets and identifying information on counterparties and sources of wealth. But without compromising the data:
The FATF guidelines send a powerful message to both regulators and practitioners. If we want to see the institutionalization of this dynamic new asset class, it is vital to create transparency in our systems and adopt the high legal and ethical standards required of the traditional financial institutions.
About the Author
Maxim Bederov has nearly two decades of experience in financial services, most prominently at MLP Finanzdienstleistungen SE, one of Germany’s leading consultancies for financial planning. He was
