Since their inception, cryptocurrencies have exploded as an alternative way to trade currency. However, many stakeholders still do not understand cryptocurrency or its impact on anti-money laundering (AML). That needs to change as cryptocurrency adoption continues to grow. The majority of cryptocurrency transactions are for legitimate purposes. However, cryptocurrency’s place outside the traditional financial system gives it a unique appeal to criminals. As such, those in the AML world need to understand this asset class, its risks, and how to mitigate them.
In this article, we attempt to shed light on cryptocurrency AML risks and how to stay compliant.
Why is AML compliance important for Cryptocurrencies?
As the adoption of cryptocurrencies continues, firms are getting serious about AML compliance. Authorities have been trying to fight the AML risk that crypto posed for years. Thus money laundering rules for crypto businesses have become a necessity.
The complexity and inconsistency of the cryptocurrency landscape has motivated governments’ efforts to develop a regulatory framework around the world. Crypto businesses must encourage efficient regulation and supervision in order to improve investors’ trust against this emerging asset class.
It should have been noted that crypto assets are subject to AML regulation since 2018 (refer to the 5th AML Directive and recently issued FATF recommendations). Thus, there is a massive shift in terms of the regulations of this sector.
Potential AML/CFT Risks per FATF’s assessment
The FATF conducted research into the characteristics of cryptocurrencies to make a preliminary assessment of the AML/TF risk associated with this asset class. An important step in assessing the risks and developing an appropriate response, is to have a clear understanding of the various types of cryptocurrencies and their nature and function. This report establishes a conceptual framework of key definitions, which could form the basis for further policy development.
The legitimate use of cryptocurrencies offers many benefits such as increased payment efficiency and lower transaction costs. Cryptocurrencies facilitate international payments and have the potential to provide payment services to populations that do not have access or limited access to regular banking services.
However, other characteristics of cryptocurrencies, coupled with their global reach, present potential AML/CFT risks, such as:
- the anonymity provided by the trade in cryptocurrencies on the internet
- the limited identification and verification of participants
- the lack of clarity regarding the responsibility for AML/CFT compliance, supervision and enforcement for these transactions that are across several countries
- the lack of a central oversight body
Cryptocurrency sceptics and public officials have expressed concerns about cryptocurrency’s anonymity, but this is a misconception. Cryptocurrency is in fact pseudonymous rather than anonymous. Users’ cryptocurrency balances and transaction histories have unique addresses and are easily viewable on public blockchains.
National Risk Assessment published by CySEC
On the 21st of December 2021, the Cyprus Securities and Exchange Commission (CySEC) released Circular C478 publishing the National Risk Assessment (NRA) report. This is the first-ever NRA with respect to Crypto Assets and Crypto Asset Service Providers (CASP).The NRA indicates that the CASP sector will experience fast growth in the coming years, as more entities and individuals wish to engage in crypto-asset related activities globally. Therefore, by adopting specific regulatory provisions, implementing appropriate policies and procedures, and acquiring specialized knowledge and expertise, CySEC will ensure robustness, high transparency, and adequate management of many ML/TF risks based on a well-designed legal framework in and out of Cyprus.
In general, the NRA has shown that CySEC and CBC have currently none or limited experience and expertise with crypto-asset activities. In this regard, very few policies and procedures have been established to mitigate the ML/TF risks arising through crypto activities.
Nonetheless, a set of recommendations are proposed in the NRA assessment report to the key authorities to take into considerations as following:
- The creation of a database related to the crypto-asset activities.
- The creation of a CASP register with information related to the UBOs, management and fitness standards. In this way the register will be a source of robust and reliable information available to the public, ensuring high transparency within the CASP sector.
- Utilise AML Compliance blockchain forensics and transaction monitoring databases which will allow effective off-site supervision.
- MOKAS to categorise crypto-asset related reports in SARs and STRs.
- International cooperation for incoming and outgoing ML/TF requests related to crypto-asset activities.
It is believed that by taking into account the above recommendations, Regulators will enhance their monitoring and supervision processes.
See full assessment report here
Cryptocurrencies are here to stay
Sceptics have been predicting cryptocurrency’s demise for more than a decade and have continuously been proven wrong. Uncertainty and volatility are common to the emergence of any new asset class and that has certainly been true for cryptocurrency. However, a lot of officials have acknowledged their significance and the potential role that cryptocurrency will play in the world’s financial future.
We need to observe how government regulation of cryptocurrency will evolve as the asset class continues to grow. So far, FATF member states have regulated cryptocurrency businesses similarly to traditional financial institutions using traditional AML practices. Furthermore, governments are considering central bank digital currencies (CBDCs), which would act as digital versions of countries’ national currencies.
As cryptocurrency adoption continues to grow, so will scams, fraud and other cyber and ransomware extortions involving cryptocurrency. Criminals will deploy a greater level of sophistication to move funds across borders to evade detection.
How can CX Financia help you?
If your business is involved in any of the services and activities related to cryptocurrencies which includes for example offering trading of cryptocurrencies, investing into cryptocurrencies, exchanging of cryptocurrencies, operating cryptocurrency or crypto trading platforms etc. will be most likely subject to the CySEC’s Directive and the requirements specified therein. CX Financia is in the strong position to discuss the AML/CFT requirements and to provide advice as to:
- which requirements are necessary and relevant,
- drafting relevant policies and procedures,
- the implementation into operational structures of the requirements and
- the ongoing monitoring of their effective functioning.
CX Financia is here to help you register in order to conduct crypto asset services in a proper manner. Learn more about how to register with CySEC as a Crypto-Asset Service Provider (“CASP”) here
Engage CX Financia to successfully register as a CASP to conduct your virtual asset holding and management services. You may contact us at firstname.lastname@example.org