The use of cryptocurrency is growing faster than ever. According to the Chainalysis crypto crime report 2022, the total transaction volume in crypto grew to $15.8 trillion in 2021. This fast-grown industry has opened new opportunities to fraudsters but also money launderers and other criminals who are looking to exploit potential gaps of the sector.
The challenges
Crypto asset service providers face several challenges when trying to comply with AML rules. The reason is because the crypto industry operates in a very different way than traditional financial institutions.
The technology behind crypto, the blockchain, is a transparent, immutable ledger which was designed for users to be able to transact securely and without providing personal information – something very different with traditional banking. This new technology could not be missed by criminals.
Anti-money laundering (AML) authorities all over the world are looking to regulate the sector and prevent its misuse for illicit purposes. Entities offering crypto assets and services are required to comply with all applicable AML regulations, like traditional financial institutions are.
Main considerations for crypto compliance
Designing an AML program and establishing appropriate policies and procedures to prevent money laundering is a must for crypto asset service providers. When designing their AML program, crypto asset service providers need to consider the following:
- Collect Adequate information: The crypto asset provider must collect sufficient information from its customers to effectively understand the money laundering and terrorist financing risks associated with the potential business relationship and create the customer’s economic profile.
- Customer experience: The onboarding process must be designed in a way that is efficient and provide a pleasant customer experience while at the same time satisfies AML requirements. If the onboarding takes too long, the customer may get frustrated and will probably stop the registration process. Finding an appropriate KYC tool that can quickly onboard, including performing verification and screening of the client is essential for a successful onboarding procedure.
- Compliant with regulatory requirements: The information collected must be sufficient to comply with AML, MiFID II, PSD2, CRS, FATCA and other applicable regulations. Additionally, the information obtained must fulfil the requirements of regulators in various jurisdictions which often differ.
- Automation: Crypto asset service providers must use other technological systems to comply with AML and other rules other than the onboarding of clients i.e. monitoring transactions. Automation can improve customer experience, accelerate customer onboarding while at the same time reducing fraud incidents and costs.
- Security: The crypto provider must implement high security measures like traditional banks do. Biometric facial recognition and two-factor or multi-factor authentication during onboarding can further eliminate fraud risks.
To effectively comply with AML rules, a crypto provider must employ the following automated systems:
- Onboarding customers
- Digital Identity verification and Electronic Identity verification
- Risk assessment
- PEP/Sanctions screening
- Transaction monitoring systems
- Fraud prevention and theft tools
- Data security systems
- Blockchain analytic tools
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