A Guide to Anti-Money Laundering for Crypto Firms

Around The Coin: Crypto Wallets And Reg Trends

Regulation Crypto Knowledge & Training

The year 2020 was huge for cryptocurrencies, with large-scale acceptance gathering steam and institutional investors adding Bitcoin and others to their portfolios as an alternate investment. But part of crypto’s draw for many consumers — the ability to make speedy and anonymous transactions — is shared by bad actors who seek to circumvent the traditional AML/CFT checks to fund their illicit activities.

That fact has not been lost on governments and regulators.

As a result, 2021 will likely see even more rapid changes in the crypto landscape, with many of them stemming from regulators’ efforts to manage the risks associated with cryptocurrencies.

The Debate Over Unhosted Crypto Wallets

The clash between anonymity and regulation will inevitably have an enormous impact on companies dealing with crypto. FinCEN, for example, recently released its proposal to require US financial institutions and money services businesses to verify and report on the identities of customers engaging in certain cryptocurrency transactions with non-hosted wallets.

The proposed rules would essentially align reporting requirements for virtual currencies and digital assets with those already required for cash transactions. As such, any transaction that involves an unhosted wallet — an account not hosted by a financial institution and harder to link to specific individuals — and that exceeds $3,000 would necessitate identity verification and reporting, as well as all cryptocurrency transactions above $10,000. While FinCEN says the rule changes are necessary to help prevent terrorist financing, weapons proliferation, sanctions evasion and other illicit activity, the proposal to regulate unhosted wallets has proven controversial — in part, due to privacy concerns. Critics also say it would increase the regulatory burden while not effectively mitigating the risk associated with the use of these wallets.

No concrete ruling has been issued, and the comment period was reopened, then extended to March 29. Whatever the outcome, it will make a big difference as to whether or not crypto can go mainstream.

Additional Regulatory Trends in Cryptocurrency

More broadly, regulation is a critical driver of mainstream crypto adoption. In the US, there’s been a wary but slow acceptance of crypto — or at least a recognition that fluency in crypto is a critical element of the regulatory framework — with both the former acting comptroller of the currency and Biden’s pick to succeed him, Michael Barr, coming from the crypto space. In contrast, while Europe has historically been more open to and proactive about incorporating crypto into the existing AML/CFT regulatory framework, the current president of the European Central Bank, Christine Lagarde, has come out strongly against Bitcoin and the “reprehensible money laundering activity” it has conducted.

These divergent attitudes will, no doubt, influence upcoming regulations for the EU and the US. Should it be favorable, demand will continue to increase. But if it turns against crypto, you’ll see demand suppressed automatically.

Similar scenarios are playing out across the world stage as countries formulate their own approach to digital assets. But there is some degree of unification (or at least an attempt at it): by mid-2020, the Financial Action Task Force’s standards on virtual assets and VASPs, published in 2019, had been adopted by 35 of FATF’s 54 members. This trend will continue into 2021.

Ripple Effect of Increased Interest in Cryptocurrency

The confluence of these regulatory trends and greater adoption of crypto by consumers and institutions means that companies must tread carefully when onboarding and monitoring customers. The traditional friction between fulfilling AML/CFT compliance obligations and offering a seamless customer experience becomes even more apparent when there’s an explosion of new users.

Legacy processes quickly get overwhelmed and break down: to rely on internal databases and manual processes to onboard customers and, later, monitor for changes in status or transactional abnormalities invites failure. Inevitably, a company’s hundreds-strong compliance team will find themselves buried in a sea of alerts and false positives. Further, false negatives will be commonplace because the data used is stale, and human error will increase the likelihood that red flags go unnoticed.

Instead, the solution lies in embracing technology and leveraging high-quality real-time data. Implementing systems that strategically automate processes enables compliance teams to quickly yet confidently screen hundreds of customers, both at onboarding and throughout the customer lifecycle, in a matter of minutes and make informed decisions about the risks those customers pose.

The stakes are high too. Without solid screening processes in place, crypto’s legitimacy and growth potential will be undermined by terrorists and money launderers. Further, crypto firms will not only suffer financial and reputational damage if they’re found to be noncompliant. They’ll share some of the responsibility for letting criminals slip through the net.

ComplyAdvantage’s founder, Charlie Delingpole, recently sat down with Kinsa Durst, the co-host of the hit fintech podcast Around The Coin, to speak about these trends and much more. Click here to listen to the full episode. And for even more insights about financial crime trends to watch out for in 2021, read our full State of Financial Crime Report here.

Originally published March 15, 2021, updated November 18, 2021

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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