How Crypto AML works?
Cryptocurrencies are one of the most dynamic, fast-changing and innovative parts of the financial services landscape. All innovation comes with risks, however, and many policymakers have identified anti-money laundering (AML) compliance and controls as one of the biggest crypto vulnerabilities.
AML in Cryptocurrency
Many of the best practices around crypto AML compliance are consistent with those in other financial services firms. A risk-based approach remains central, and a comprehensive risk assessment is a foundational step in this process. Revisiting risk assessments periodically is also critical — especially considering the current rate of regulatory change.
The money laundering typologies crypto firms must manage are also broadly like other financial institutions — money mulling, for example, is a threat common to all firms. One of the primary additional risks above and beyond fiat currency-based typologies concerns tactics used by criminals to anonymize their operations. This includes off-chain transactions.
One issue where the compliance challenges are arguably greater for crypto firms is personnel. Many experienced compliance professionals have higher salary expectations than smaller, fast-growing crypto firms can support, and these firms lack the structure and processes offered by bigger organizations. While most compliance teams sought to hire from banking, regulatory and FinTech backgrounds, 71% of crypto exchanges cited other crypto firms as their preferred hiring background. This could create limitations — not only will the hiring pool be limited, but firms will risk a “group think” approach. A well-rounded compliance team will draw on a range of perspectives.
Whatever role in the AML team they hold, relationship building is key for compliance officers in crypto firms. This is especially important for anyone interfacing with regulators but matters internally too. As crypto firms scale, compliance teams will have to navigate potential conflicts of interest and handle communicating with stakeholders who may prize growth ahead of the firm’s regulatory responsibilities.
Why crypto AML compliance is important
As governments globally continue to map out their regulatory frameworks for cryptocurrencies, firms will soon face an inflection point. Understanding where the AML compliance landscape is now — and where it’s likely to go in the months ahead — will help firms prepare. This will enable them to build valuable confidence among prospective customers and regulators.
Getting ahead of the latest regulations requires firms to conduct horizon scanning, mapping upcoming regulatory changes to compliance budgets ahead of time. This will ensure firms have the right staff in place to cope with a large volume of new requirements.
Firms must also understand new requirements and their impact. This could require an incremental change to existing rules and controls or the wholesale introduction of a new program in a new jurisdiction. Many regulatory risks — such as those associated with sanctions — are not typically crypto-specific.
Staying ahead of AML compliance requirements also means investing the time to have a dialogue with local regulators. One effective way to do this is by contributing to regulatory consultations. This helps to ensure new regulations are built with the realities of operating a crypto firm in mind.
Crypto AML Regulations in Europe
Across the European Union, crypto regulations are currently governed by the 5th Anti-Money Laundering Directive, which brought crypto-to-fiat exchanges and custodial wallets into scope. However, the EU is introducing a new AML/CFT package that will have significant implications for crypto asset service providers.
Find out how the QOOBISS KYC/AML software can be an efficient solution for your business and what are the KYC industries targeted by our product!