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Cryptocurrency Business and AML: Combining the Incompatible?

Few innovations in today’s world have polarized public opinions and national policies as much as cryptocurrencies. The radically new method of blockchain payments invented in 2008 has quickly become a global phenomenon. The reaction of governments was cautious, though. It took most of them several years to accept that the use of virtual currencies as means of exchange and wealth accumulation has to be somehow legalized. 

The findings of our recent review of virtual currency regulations and taxation across the globe are very interesting. Less than a dozen jurisdictions still maintain prohibitive policies on domestically performed virtual currency transactions and investing in ICOs. About the same number of states have not made any stipulations so far regarding the use of virtual currencies. The majority of countries welcome and encourage crypto business and have already designed or are designing relevant regulations.  Does the idea of regulation not contradict the nature of virtual assets?

Crypto and AML

The essence of the cryptocurrency business conundrum 

For several weeks Bitcoin has been hitting fresh all-time-high records nearly daily. Experts expect its further growth. Here are some examples of how the ecosystem is growing: 

  • Visa has announced plans to issue its own API for virtual currency. 
  • MasterCard is targeting several cryptocurrencies and paying special attention to developing a stablecoin. 
  • Central banks of several countries are discussing intentions to create national digital currencies. 
  • Many hedge funds have included cryptocurrencies in their diversified portfolios.
  • Morgan Stanley is largely investing in cryptocurrency. 
  • Bank of New York Mellon is designing a platform for crypto transactions. 
  • Twitter is investing in extending the online use of virtual currency. 
  • Tesla has invested USD 1.5 bln in crypto-assets and is going to sell cars for crypto money.

What we are witnessing nowadays is the crypto revolution – a leap from communication and information technologies to transactional technologies.  It can be briefly described as follows:

  • Anybody can be a participant of payment operations in virtual currencies, one can set up a mobile e-wallet or account after a quick and easy authorization in the blockchain-based system via face or fingerprint digital validation, no conventional ID verification is required;
  • There is no single issuer of digital currency that would monitor capital turnover, and the national regulators have no control over crypto transactions and decentralized crypto identities of their participants, open-source protocols enable direct peer-to-peer decentralized lending;
  • Cryptocurrency does not need to be obtained from other market participants or bought for fiat money – it can be earned independently (mined);
  • the possibility of exchanging cryptocurrency for fiat money, given the high crypto volatility, drives cryptocurrency trade akin to stock trading – you can invest in a promising digital currency and resell it at the peak of value, getting income only due to this.

The above-mentioned puzzling and far-reaching features of crypto assets and crypto transactions seem very attractive to the market participants.

However, crypto investor and consumer protection concerns are coming forth with the growing chances of jailbreaking, imposter websites, fake mobile apps, malicious bots from social networks, scamming emails, and other fraud schemes around cryptocurrency business. 

Though virtual currencies are not treated by the majority of jurisdictions as legal tender (money or currency) yet, regulators are getting more seriously concerned with the risks of cryptocurrency business in terms of tax evasion and income concealment: digital assets can be received “out of thin air”, paid anonymously, and fall out of fiscal control.

Besides, governments are challenged with the threats of terrorism financing and money laundering. As money laundering accounts for around 5% of global GDP, the need for money laundering measures is pressing. 

One of the most effective modern ways to counter organized crime is to track and disrupt funding channels. Unfortunately, cryptocurrency because of its virtual nature complicates for authorities this objective. The national AML procedures are undertaken by each state separately, but governments rely on joint efforts in combating money laundering. 

How does AML work in practice in cryptocurrency business?

The inter-governmental Financial Action Task Force (FATF) has designed a global comprehensive and consistent framework of measures and recommendations to prevent the misuse of virtual assets.

The 5th anti-money laundering Directive of the European Union (Directive (EU) 2018/843) adopted in 2018 is considered a model regulatory document. This straightforward document is mandatory since January 2020 is all EU member states. Other regions are also promoting similar AML rules for cryptocurrencies.

The focus of the FATF Standards revised in 2020 is on monitoring the performance of AML/CFT responsibilities of intermediaries between individuals and the financial system. Rule 16 obliges originators and beneficiaries of financial transactions to be identifiable, abandon anonymity of customers by sharing their data with other VASPs and report suspicious activities. It is the so-called ‘travel rule’. It was previously applicable to banks only and now is targeting all Virtual Asset Service Providers (VASPs).

FATF defines VASPs as natural or legal persons who engage in crypto-crypto or crypto-fiat currencies exchanges, transfer, safekeeping, sale of virtual assets. So, this broad category of crypto services providers includes exchanges, custodian wallet providers, ICOs, virtual asset money transmitters, brokers.

The FATF binding international AML standards include among many prescribed measures the licensing of Virtual Asset Service Providers (VASPs) in the jurisdiction(s) where they are incorporated or operate. Licenses oblige VASPs to maintain the policies of customer due diligence, recordkeeping, and suspicious transaction reporting for AML/CFT purposes need to be maintained by VASPs. Any resistance or unwillingness to notice and report the wrongdoers can be qualified as facilitation to money laundering, a criminal offense.

Knowing a customer by sight and by name is not enough for AML, a licensed VASP needs to be sure that the customer is not on a sanctioned list of any kind, not politically exposed, monitor the history of customer transfers. So, KYC requires time, cooperation, research, and technological solutions. That is why there are plans to create a ‘global list of VASPs’ and a global registry of cryptocurrency transactions.

The global implementation of FATF standards regarding AML/CFT obligations in the virtual currency sector is at an early stage yet. However, FATF has reported recently that VASP licenses (or registration) are already issued in nearly 30 countries and serve this course. 

Licenses certify the credibility, adequate financial capacity, and trustworthiness of KYC procedures and the AML/CTF policies maintained by VASPs. So clients perceive such licenses as a guarantee that fraudsters won’t get hold of their money.

InternationalWealth experts offer our clients consulting and help in obtaining the VASP licenses in several countries, as well as in the selection of correspondent and other offshore accounts with banks, payment systems, and neo-banks for crypto-business.

How does the crypto business change for the sake of AML compliance?

The trend of rapid legalization of digital currencies in recent years all over the world has triggered a chain reaction of changes in the industry. 

  • Large exchanges either refuse to cooperate with clients from jurisdictions or individuals that are under international sanctions or set more stringent restrictions for them.
  • Multiple crypto-exchanges operating in several jurisdictions act in each country of presence in compliance with its local legislation.
  • There is a growing demand for third-party analytical services to monitor the risks associated with the AML provisions.
  • Businesses across the world actively cooperate with governments by discussing the design of more detailed AML legal regulations for the industry.
  • Exchanges have become more transparent for the tax and law enforcement agencies.

If you are planning to launch a legitimate trustworthy cryptocurrency business abroad you are welcome to turn to InternationalWealth legal and financial experts for help. You can start by booking an individual online consultation on the subtleties of laws and regulations in the jurisdiction of your choice, learn how to register your offshore business, VASP license, foreign accounts.  Please write to our e-mail address given above to share your interests, questions, arrange the appointments, and make the first confident step towards your goal!

What is AML in the cryptocurrency business?

The Anti-Money Laundering /Combating the Financing of Terrorism fight was started in 1989 at a G7 summit in Paris. However, after the virtual currency was launched in 2009 and has reengineered the way that transactions take place, the AML agenda has gained new dimensions. Criminals launder their money through anonymous cryptocurrency exchanges. To prevent the spread of this plague, FATF has designed and promoted global standards helping to screen, flag, and report suspicious customers. One of the important measures recommended by FATF is the licensing of Virtual Assets Service Providers by national authorities. Licenses oblige VASPs to maintain KUC procedures, keep records of transactions, and report suspicious clients for AML/CFT purposes.

Why is the crypto business interested in AML compliance?

Money laundering has ballooned globally. There are over 6000 cryptocurrencies, and each type presents a different type of risk. Only joint AML efforts can curb and fight this. As the growing number of countries legalize and license business activities with cryptocurrencies, Virtual Assets Service Providers become part of the AML measures countering criminal activities, illegal trade, corruption of public funds. VASPs are bound to and interested in foolproof KYC procedures, records of crypto transactions, reports on suspicious activities. VASPs’ compliance with AML requirements protects them and their clients against criminal offense. By obtaining licenses VASPs can demonstrate their trustworthiness. Without AML it would be impossible to grow in this crypto market.

Is the elimination of anonymity under the AML discouraging to customers?

As a rule, no. Anonymity is critical for criminals. In 2019, over USD 4 billion was stolen from cryptocurrency users and exchanges. Law-abiding citizens do not need it. AML procedures breed trust between customers and VASPs that criminals are kept away from their funds. VASPs holding licensed or registered by national authorities are going to be more competitive due to this trust.

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