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What is AML and how does it apply to Crypto (anti money laundering)?

Money laundering is a global problem that affects both fiat currency and cryptocurrencies. To combat the financing of criminal activity, regulators have been quick to enact strict anti-money laundering (AML) legislation to prevent money laundering through cryptocurrency exchanges and escrow services.

AML frameworks have been enacted with measurable differences in each jurisdiction. Due to the inherently global nature of crypto transactions, crypto firms now tasked with complying with AML legislation fear that they will face complexity and end-user friction.

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what does aml mean in crypto?

aml for cryptocurrencies refers to the laws, regulations, and policies to prevent criminals from converting illegally obtained cryptocurrencies into cash.

what are the aml requirements for cryptocurrencies?

the financial action task force (fatf) sets global standards for anti-money laundering legislation. In 2014, the FATF published cryptocurrency AML guidance, and policymakers in FATF member jurisdictions acted quickly. fincen, the european commission, and dozens of other regulatory organizations have legally codified most of fatf’s cryptocurrency aml recommendations.

The onus then lies with cryptocurrency exchanges, stablecoin issuers, and on a case-by-case basis, some defi protocols and nft markets, defined as virtual asset service providers (vasps) by the fatf. Going forward, VASP compliance officers should require know-your-customer (KYC) checks and regularly monitor for suspicious activity, to thwart nefarious transactions that could be linked to money laundering and terrorist financing.

In addition, vasps are required to report suspicious activity to relevant regulators and agencies, who then analyze the flow of funds and trace illegal activity back to real-world identifiers using various tools, including blockchain analysis.

Do cryptocurrency transactions constitute a greater risk of money laundering?

In June 2014, the FATF released a report, Key Definitions of Virtual Currencies and Potential AML/CFT Risks, which highlights the following areas of concern with cryptocurrencies:

  • a high degree of anonymity: Cryptocurrency transactions can allow for greater anonymity than traditional non-cash payment methods. users may trade virtual currency on the internet, are generally characterized by non-face-to-face customer relationships and may allow anonymous financing (cash financing or third-party financing through virtual exchangers that do not adequately identify the source of financing) . they may also allow anonymous transfers if the sender and recipient are not sufficiently identified.
  • Cross-Border Transactions: AML/CFT risks are exacerbated when you are global in scope in any jurisdiction, making monitoring and compliance difficult.
  • lack of central oversight: law enforcement cannot conduct an investigation or seize assets against a single central location or entity (administrator) (although authorities may target individual exchangers for customer information that the exchanger can collect). therefore, virtual currency transactions provide a level of anonymity not possible with traditional credit and debit cards or older online payment systems.

what is a kyc process in cryptography?

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kyc programs generally consist of three components: customer identification, due diligence, and ongoing monitoring.

  1. client identification (cip)

A customer identification program, or “cip”, verifies that the customer is who they say they are through the use of reliable and independent data. verification information may include:

  • client’s legal name
  • date of birth
  • address
  • verification documentation such as driver’s license or passport
  • business licenses and business customer articles of incorporation.
  1. customer due diligence (cdd)

Customer Due Diligence, abbreviated as “cdd”, is a risk assessment of new business relationships or customers. Financial service providers assign risk scores to accounts based on background checks, customer surveys, and reviews of customer transaction history.

  1. continuous monitoring

Continuous monitoring constantly checks transactions for signs of criminal activity. When suspicious activity is discovered, VASPs are required to file Suspicious Activity Reports (SARS) with FinCen or other appropriate law enforcement agencies.

is there money laundering in crypto transactions?

According to a 2022 report from chainalysis, a leading blockchain analytics company, criminals laundered $8.6 billion in cryptocurrency in 2021, a 30% increase from the previous year. the report says that “while billions of dollars in cryptocurrency are transferred annually from illicit addresses, most of it ends up in a surprisingly small number of services, many of which appear to be designed specifically for money laundering.”

Since 2017, cybercriminals have laundered more than $33 billion worth of cryptocurrencies, most of which has been moved to centralized exchanges. By comparison, the United Nations Office on Drugs and Crime estimates that between $800 billion and $2 trillion in fiat currency is laundered annually, up to 5% of global GDP.

how does the crypto travel rule relate to aml efforts?

compliance with travel rules is an integral part of anti-money laundering efforts.

See also: A Massive 10 Trillion Crypto Game-Changer Is Closer Than You Think—Suddenly Boosting The Price Of Bitcoin, Ethereum, BNB, XRP, Solana, Cardano And Dogecoin

The travel rule for crypto assets requires vasps to send, receive and sanction screen customer personal information along with a crypto transaction above a particular threshold.

many exchanges now have aml/cft processes in place to identify and screen their own clients for sanctions as part of onboarding and ongoing client due diligence. this prevents sanctioned users from initiating transactions directly.

However, the fatf crypto travel rule now requires institutions to receive and sanction verification of the counterparty’s vasp customer information and perform due diligence on the counterparty’s vasp. With this information, vasps choose to accept or reject the transaction.

Unlike financial institutions, the crypto industry does not have a network to connect with counterparties to perform the travel rule. therefore, crypto exchanges today require a robust travel rules solution to perform adequate counterparty risk mitigation and be able to identify or block a transaction with a sanctioned person or entity.

As virtual currency transactions become more pervasive, it becomes more critical to require an additional step for vasps to verify the beneficiary of transactions. therefore, compliance with travel rules has become a critical requirement as cryptocurrencies expand and reshape the global financial network.

how can notabene help?

notabene’s next-generation cryptographic regulatory compliance software enables vasps to identify the counterparty vasp and beneficiary customer of a transaction, collect required customer identification information, and screen the beneficiary prior to the transaction, with minimal friction for the user and the compliance team. notabene then routes the data transfer accordingly to any counterparty globally, regardless of their compliance status.

Financial institutions and cryptocurrency exchanges using notabene leverage our rules engine to set risk-based rules according to their local jurisdictions mandates and their risk appetite to automate compliance transfers to exchanges whitelisted with proper aml procedures.

Our customers streamline compliance at scale, saving time and money to focus on the most suspicious transactions. In addition, your end users benefit from knowing that their transactions are secure, reliable, regulated, and compliant, and will not be routed to sanctioned individuals.

See also: TD Ameritrade and Bitcoin | Is it Offered? | BitIRA®

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