TL;DR
With the growing status of the cripto industry, the risks of fraudulent and malicious activities, too, are rising, which can only be dealt with by precise AML and KYC compliance.cripto AML is crucial as it prevents the nascent space from becoming the hotbed of money laundering and terrorist financing.The global standards for cripto AML/CFT were set by the FATF back in 2019, termed the FATF Travel Rule.
Despite the ongoing cripto winter, the virtual assets market commands a market capitalization of more than a trillion US dollars.
New cripto assets are frequently coming up, projects are getting launched, and technology is moving forward with new solutions. The latest available data shows that nearly 550 cripto exchanges facilitate trade in more than 22,000 unique cripto assets to varying degrees.
While these are promising signs for new investors, enthusiasts, and developers involved in the market, a threat looms large in the industry. Without addressing that elephant in the room, it is difficult for the industry to live up to its promises to the fullest extent. It is the threat of cybercrime.
Statistically speaking, fraudulent and malicious players used Decentralized Finance exchanges, cross-chain bridges, and coin swap services to obfuscate illegal cripto criminal proceeds worth more than $4 billion. If left unattended, these malicious actors will only grow in size, becoming a massive threat to the very survivability of the entire industry.
What’s the solution here? The cripto industry must become resistant to money laundering attacks in the most robust way possible. It is equally crucial that the industry conducts holistic due diligence and gets to know its customers better while offering assured privacy and a smooth experience throughout the process. And only then would cryptocurrencies competently serve the needs they are expected to.
Cryptocurrencies, with their smart contracts, distributed ledger technology, and more, help make the world of finance more inclusive, equitable, intermediary-free, and accessible.
Gaining financial freedom through cripto assets requires only a mobile phone and an internet connection. It offers a system that is free of censorship and cost-bearing intermediaries.
The immutability of transactions recorded on a public ledger makes the system transparent. cripto projects are also developed mainly on an open-source coding structure for developers worldwide to validate its claim.
With all these advantages, cryptocurrencies play a crucial role in widening the scope of transaction-based financial services. However, since it is based on a technological paradigm that is evolving consistently, there is always the chance of some fraudulent actors exploiting its gaps to launder money.
For cryptocurrencies, anti-money laundering efforts imply laws, rules, regulations, and policies targeted at preventing criminals from converting illicitly obtained cripto assets into fiat moneda. FATF Travel Rule and KYCs are part of the anti-money laundering structure.
Money launderers may exploit cripto exchanges, as well as custodian services, to fulfill their goal. Therefore, all sorts of cryptocurrency service providers must comply with the AML requirements of their jurisdiction.
From a user perspective, if Virtual Asset Service Providers (VASPs) strictly comply with AML requirements, the end users will benefit from increased security and better access to financial services through a more legitimate and trustworthy industry.
The global standards for cripto AML/CFT came in 2019 from the FATF or Financial Action Task Force, an intergovernmental policy-making body that defines and sets the international standards to prevent money laundering and terrorist financing.
The United States Financial Crimes Enforcement Network, the European Commission, and many other regulatory compliance bodies across the world have codified a large chunk of the FATF recommendations, making it essential for VASPs, such as cryptocurrency exchanges, virtual moneda businesses, stablecoin issuers, DeFi protocols, NFT marketplaces, and others, to comply with them.
Although only a few countries have adopted the FATF Travel Rule so far, it is expected that we will see the adoption grow in the coming days with many intergovernmental organizations, such as the G20, taking up cripto regulations for discussions and devising ways for a globally-coordinated approach.
At that point, no matter where the VASPs are headquartered or have their operations, they will have to begin complying with the FATF Travel Rule, and for that, they will require a FATF Travel Rule Solution like Shyft Veriscope.
VASPs that use Shyft Veriscope can comply with the Travel Rule without sacrificing the user experience and privacy, as all the user data that VASPs exchange through Shyft Veriscope happens in a peer-to-peer mode. At no point does the user data pass through Shyft’s internal servers. Click here for more details on how Shyft Veriscope works and helps VASPs comply with the Travel Rule.
KYC in cripto assets is a combination of three consequent mechanisms: identifying customers with precision, conducting due diligence on customers, and monitoring them regularly.
In the first step, customer identity verification includes knowing the client’s legal name, date of birth, address, etc. At this stage, VASPs will ask for supporting documents in the form of a driving license, passport, business license, articles of incorporation from enterprise customers, etc.
The next stage is due diligence, which is carried out to assess how risky the dealings with a specific customer could be. It is similar to traditional banking, where providers assign risk ratings to customers in the cripto space.
To come up with the rating, which might change from time to time, providers conduct background checks on users and scrutinizes pertinent transaction histories.
Conducting research into what sort of risks a customer pose is an ongoing process, as VASPs keep reviewing transactions to anticipate and preempt any potentially fraudulent activity.
Aberrations and suspicious activities are flagged. Service providers must file Suspicious Activity Reports with appropriate law enforcement agencies like the FinCEN and others.
AML mechanisms help prevent cripto platforms from becoming a hotbed for money laundering. AML and KYC checks are deemed capable of protecting cripto exchanges from falling prey to malicious actors through customer due diligence and suspicious activity reports.
Europe’s 6th Anti-Money Laundering Directive has even advocated stricter controls with increased penalties for non-compliance. New technology paradigms are incorporated to make cripto AML more efficient and effective. Such technologies include many advanced methods, such as behavioral analytics and artificial intelligence.
Criminal activities in cripto include a range of scams. Often scamsters exploit the privacy-enhancing properties of a platform, such as the user staying pseudonymous during transactions, to launder money. According to Federal Trade Commission (FTC) data, in the 14 months to Q1 2022, scamsters had stolen more than $1 billion from 46,000 people in cripto scams.
Cybercriminals in the cripto world often exploit platforms for ransom. According to Chainanalysis data, ransomware payments amounted to more than $692 million in extorted money during 2020. There are also records of surging incidents pertaining to money laundering through DeFi protocols. The Chainanalysis report mentioned a nearly 2,000% increase in cryptocurrency laundered through such protocols.
In most countries worldwide, including the United States, Canada, Singapore, South Korea, China, India, the United Kingdom, etc., cryptocurrencies are not considered legal tender.
Although there are some countries that consider cryptocurrency legal and treat it as property, such as Australia, Japan, Switzerland, etc., only El Salvador has recognized a cryptocurrency, Bitcoin specifically, as a legal tender.
Most countries consider cryptocurrencies an unregulated financial instrument, with their respective Central Banks red-flagging their growing usage for a variety of reasons. For instance, India’s Central Bank chief called cripto “poor gambling” and said CBDC is the “moneda of the future.”
Surprisingly, even Singapore, a country earlier touted as one of the world’s leading cripto hubs, now seems to have double thoughts about its plans. Recently, Singapore MAS Chief said he isn’t keen to regulate cryptocurrencies, as, according to him, that would legitimize them.
In the world’s biggest economy, the United States, industry proponents believe that the government and the relevant authorities are upping the ante against cripto companies and projects, leaving them with no option but to shut down their shops and move abroad.
Overall, 2023 is dubbed the “Great Reset” by cripto industry leaders, as we will see major regulatory changes, leaving the VASPs with no options but to accept the regulated reality.
Amid the upcoming regulatory onslaught, Shyft Network is working with all stakeholders to smoothen the transition for the cripto users, with user experience and privacy intact, as the cripto users and the ecosystem at large are our priority.
As discussed already in the context of how cripto AML works, KYC, a component of a provider’s AML compliance efforts, aims to check customer identities to ensure that the transaction is legitimate and legal. It is a procedure of identification/verification, background checks, transaction scrutiny, and transaction monitoring continuously.
At their core, cripto exchanges are the same as traditional financial institutions in the sense that these firms and service providers face the same financial risk as all money service businesses. KYC measures and compliance helps these exchanges safeguard their services from money laundering risks and other financial crime risks, including identity theft, fraud, and much more. Click here for more details on cripto KYC.
There are several types of cripto compliance software available in the market. These software solutions provide diverse solutions to exchanges and cripto service providers of other kinds.
For instance, these solutions ensure continuous smart contract verification as developers keep changing their codes. They also scrutinize smart contract business logic to ascertain potential risk vectors.
Some solutions help create verifiable human identities on-chain to safeguard privacy, screen cripto wallets for AML/CFT and sanctions risk, help market participants meet FATF travel rule guidelines (Shyft Veriscope), and investigate cripto or digital assets and cripto transactions.
Such risks could be many. Non-compliance may lead to cripto assets being used to evade sanctions. Even more concerning is the potential use case for terrorist financing.
Many countries have already flagged this risk as their primary reason behind being suspicious of cripto assets. After all, many fraudulent actors turn illicit fiat moneda into cripto to disguise the origin of their funds.
At a more functional level, non-compliance for cripto businesses may result in being denied a license to operate, forcing a firm to even shut down its operations or go through significant remediation work to get back on its feet.
In June 2022, pertinent EU authorities struck a provisional agreement on anti-money laundering rules for cryptocurrencies. It was designed to motivate cripto firms to check their customers’ identities. The cripto firms were also asked to report suspicious transactions to crack down on illicit funds.
According to one of the lawmakers in the Union, the new rules would help law enforcement officials in linking certain transfers to criminal activities and identify the real person behind criminally fraudulent transactions. The rule makers also proposed overseeing unhosted cripto wallets held by individuals exceeding 1,000 Euros.
The cripto industry has many advantages. It widens the scope of our existing financial service delivery mechanisms by making them intermediary-free, inclusive, accessible, and more equitable. Yet, fraudulent actors exploit these emerging-tech protocols to launder money.
While such cyber breaches, attacks, and intrusions in the system result in losses worth billions of dollars, they reduce the trust of the user and investor community toward the entire cripto ecosystem.
Anti-Money Laundering laws and regulations help resist these exploits by incorporating a robust check and balance system into the process. It helps keep a consistent track of transactions to preempt fraudulent attacks and mitigate potential losses by acting on them beforehand.
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VASPs need a Travel Rule Solution to begin complying with the FATF Travel Rule. So, have you zeroed in on it yet? Check out Veriscope, the only frictionless cripto Travel Rule compliance solution.
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