Cryptocurrencies have ascended the ranks from being a nascent concept to a legitimate commodity that banks are investing in. So much so, that regulatory bodies have had to adapt to an ever-shifting change in compliance, as they continue to assess crypto’s risk and reward.
Albeit not in the same category as fiat (state issued/sanctioned) currency, cryptocurrency is growing into a monetary system that is moving beyond being viewed as the ‘wild west of money’. From its beginnings as a reaction to the financial crash of 2007/8, through to its initial bubble in 2010 via Bitcoin pizza purchases and later hype surrounding Dogecoin prices in early 2021, it’s a regulatory minefield which compliance officers are keeping a watchful eye on.
Regulations and the Crypto KYC Landscape
As crypto exchanges become increasingly widespread, regulators are expanding their reach to manage crypto exchanges and enforce robust KYC/AML checks. This effort will harmonize identity verification and anti-fraud efforts across all financial exchange types.
Highlighting this push, in 2020 the EU set out its Digital Finance Package that encompasses digital finance in economic recovery and looks to standardize a single digital market – encompassing blockchain and AI and including anti-money laundering (AML) and counter-terrorism financing (CTF).
The US appears to be leading in the crypto KYC/AML stakes. In the US, FinCEN (charged with protecting the US monetary system for illicit use and combat money laundering and promote national security) requires cryptocurrency exchanges to carry out KYC and maintain effective AML compliance programs. Currently in the EU, if an exchange only deals with crypto-to-crypto exchanges, then the legislation does not fully cover the transactions. However, if an exchange transacts fiat-to-crypto or crypto-to-fiat activity, KYC checks and an AML compliance program are required. There will need to be harmonization across global exchanges in terms of KYC/AML regulation in the next few years.
The AML Challenges in Servicing Crypto Exchanges
While risk-based approaches vary slightly from place to place, it is an international trend to leverage enhanced due diligence and use adverse media searches to identify risk alerts, beneficial for improving AML compliance for these virtual asset providers.
The way forward with AML compliance in servicing crypto exchanges is to reduce risk by using a collated approach to data. The use of sanction data e.g., politically exposed persons (PEPs) and adverse media data should be part of this collated approach to data checks. Robust, compliant, AML screening uses rules to meet both global and local AML requirements.
Looking further into transaction monitoring, it can be used to augment AML checks and look for patterns of unusual transactions. This provides the controls needed for full AML compliance, particularly when automated to distribute alerts internally to identify suspicious transactions in high-risk jurisdictions and industries.