The cryptocurrency business is prone to certain risks and dangers due to the sudden burst in its popularity rapidly expanding its user base. The crypto industry is still relatively new and is not as well regulated as our centrally-controlled financial system. There are certain threats posed by illicit endeavors like money laundering and terrorism funding, which are difficult to control because of the lack of regulations. Due to the ease of cryptocurrency, criminals are able to conduct their activities on a global scale. Hence these exchanges are in the need of AML Guidelines or framework which may be termed as Crypto AML Framework.
Criminal organizations use cryptocurrency as a cover to move funds that they procure from dubious activities. This can be considered under money laundering, which is how they are able to generate revenue for further schemes. Hence, cryptocurrency inadvertently helps to fund activities that may prove to be dangerous and disruptive for the collective good of society.
Why do criminals find cryptocurrency so attractive?
The participation of various cryptocurrencies in financial crime is growing along with their popularity. Coins like Bitcoin and Ethereum are popular with money launderers and criminals due to the lack of regulatory organizations to oversee the transactions using them.
Cryptocurrency is frequently the main form of payment that criminals use for illegal operations. The use of cryptocurrency to sponsor drug peddling and human trafficking are two examples of exceedingly high-risk behaviors by criminals. This is logical given that cryptocurrencies cannot be used to link an owner to transactions as traditional fiat currency does. As a result, criminals can hide their identities and conduct business behind the digital fortress that is their cryptocurrency wallet. Due to this, many criminals now use cryptocurrencies as their primary means of exchange. However, the majority of them utilize it to legitimize their money and turn it into usable fiat currency rather than directly utilizing it to fund their activities.
Crypto AML Framework for Crypto Exchanges
The structure of the financial sector is changing with cryptocurrency on the scene, and virtual currencies like Bitcoin are reimagining how transactions are carried out. Cryptocurrency also provides a fresh new perspective on cross-border money transfers.
As seen above, one major problem regarding cryptocurrencies is their usage by thieves and criminals to launder their cash and fund terrorist activities.
As a result, authorities are aiming to tighten the laws designed to stop the worldwide money laundering pandemic. Virtual currencies and the exchanges on which they operate are being considered in every new wave of anti-money laundering laws, even being included in the European Union’s Fifth and Sixth Money Laundering Directives (AMLD 5, AMLD 6) and the USA’s FinCEN’s Final Rule.
However, there is still a long road ahead. Most functioning crypto exchanges do not yet have KYC procedures in place- which is the first step of customer due diligence. Without adhering to the most essential step of Anti-Money Laundering, it is evident that crypto exchanges do not have much interest in the identities of their clients- which can spell trouble for them.
Though some crypto exchanges have begun to implement Crypto AML and KYC measures with the authorities’ insistence, many exchanges are still hesitant to do so as it disrupts the whole concept of cryptocurrency being ‘anonymous’.
In response to the concerns regarding the cavalier attitude of crypto exchanges, AML regulators swiftly established Crypto AML requirements and guidelines tailored toward cryptocurrency. Some authorities have established entirely new Crypto AML standards, while others have incorporated cryptocurrency exchanges into their current AML policies.
The endeavor to make cryptocurrency exchanges completely compliant with thorough customer due diligence measures is still ongoing. Governments and authorities certainly have their hands full working on making cryptocurrency more accessible to the general public and dealing with completely regulating it after the sudden boom in its popularity and usage.
- Customer acceptance policy (CAP) is the phase in which a business establishes and records the characteristics of its ideal clients.
- The next step, the customer identification program (CIP), is the phase when the business verifies a (possible) customer’s identity, which corresponds to its CAP.
- Exchanges are expected to put measures in place to ensure that transactions are continuously scrutinized to verify legal compliance, spot suspicious activity, and manage risk.
- Given the turbulence in the cryptocurrency market due to the lack of regulations, attention is placed on the effective management of money and assets’ risks. Maximizing benefits and minimizing losses is key to being able to manage the high-energy and volatile nature of the cryptocurrency market.
Crypto AML recommendations by region-wise and Inter-governmental bodies
The Financial Action Task Force
Virtual Asset Service Providers are now required to use a risk-based methodology and risk assessment, much like other financial institutions in accordance with FATF guidelines. The proper execution of these measures is a responsibility that must be undertaken by all FATF member nations. These guidelines include steps aimed at ensuring the transparency of virtual asset transactions that can aid in preventing money associated with crime and terrorism from entering the cryptocurrency sector.
The United States of America on Crypto AML Framework
The Financial Crimes Enforcement Network (FinCEN) must issue the required license to all bitcoin exchange service providers operating in the United States. The exchanges must then adhere to an Crypto AML and CFT and even a Sanctions program, keep the necessary records, and report any irregularities to the authorities. Acting in accordance with FATF guidelines, FinCEN has also made it clear that all cryptocurrency exchanges must keep records of and disclose information about the issuers and recipients of all Bitcoin transactions. Under the law, AML/CFT gatekeepers, financial institutions, and money transmitters are all subject to the same standards in the US as virtual currency exchanges are, like the Bank Secrecy Act.
The European Union on Crypto AML Framework
The EU implemented the Fifth Money Laundering Directive (5AMLD) to strengthen the EU’s AML/CFT legislation. Under 5AMLD, Financial Intelligence Units (FIU) now have the power to discover the addresses and identities of virtual currency owners, which significantly strengthens reporting requirements and counteracts the anonymity associated with cryptocurrency usage.
The EU took AML standards for financial institutions one step further when they introduced the Sixth Anti-Money Laundering Directive (6AMLD) on June 3, 2021. The 6AMLD was implemented with the intent to equip financial institutions and authorities with the means to combat money laundering and the funding of terrorism by broadening the scope of current legislation, making some regulatory elements clearer to follow, and making penalties for financial crimes more rigid and unforgiving to deter money laundering.
Concluding thoughts on implementation of Crypto AML Framework
Regulators may find it challenging to identify whether or not anonymous bitcoin exchange transactions are connected to illegal activity. As cryptocurrency exchanges operate on the promise of providing encrypted and anonymous transactions, it’s no surprise that the cryptocurrency domain is being heavily exploited by criminals who wish to hide their real identities and intentions.
Alarmed by the rise in undetected transactions made by illicit actors, many AML regulators have prioritized putting laws and regulations in place that will now require crypto exchanges to conduct KYC checks and other due diligence procedures before allowing users to buy and sell cryptocurrencies or send money across borders. Major international players like the EU, the FATF, and the USA are taking efforts to include cryptocurrency and crypto exchanges in their ever-evolving AML directives.
