Anti-Money Laundering in Crypto: Why Is This Crucial for Building a Healthy Industry?

From its early years, the crypto industry operated without any official regulations and laws imposed on it. However, in 2019, when crypto exchanges were formally classified as financial institutions, the situation turned upside down.

Today, to operate within regulatory standards and avoid participation in financial crime schemes, any cryptocurrency company or business, be it a crypto exchange market maker, wallet provider, virtual assets services provider, crypto exchange, etc. must adhere to anti-money laundering (crypto AML) rules. In this article, we will discuss why crypto attracts financial criminals and how crypto businesses can protect themselves against fraudsters.

Why is Crypto Used for Money Laundering?

The main concerns about crypto being used by criminals were outlined by FATF (the Financial Action Task Force) in 2014. They included the following statements:

1. Anonymity. Cryptocurrency’s appeal lies in its anonymity, enabling users to trade virtual currency online without face-to-face interactions. This facilitates anonymous funding without requiring an identification of the funding source.
2. International transactions. The challenges associated with AML crypto risks become more complex when they extend globally. This is because monitoring and enforcing regulations across various jurisdictions become much more difficult.
3. No centralized authority. Law enforcement faces challenges in conducting investigations or seizing assets, as there is no single central location or entity to target. Consequently, virtual currency transactions offer a degree of anonymity not achievable with traditional payment methods.

Crypto AML Compliance

In 2021, FATF updated its cryptocurrency AML standards, adding the definition of virtual assets, explaining virtual asset service providers (VASPs), and proposing the rules to regulate stablecoins.

AML for crypto compliance included the following steps:

• Use a risk-based approach to evaluate and prioritize money laundering and financial crime risks.
• Integrating an AML crypto checker to identify and prevent financial crimes efficiently and timely.
• Use AML procedures that include KYC (know-your-customer) and CDD (customer due diligence), and track PEPs (politically exposed persons) and entities under sanctions.
• Stay updated on regulations specific to different jurisdictions, as regions may have diverse perspectives on crypto rules. Be aware of specific details and factors relevant to your operations in various areas.
• Adopt technological solutions to bolster compliance. Utilize technologies, like compliance tools supported by AI to simplify AML procedures and efficiently identify and prevent financial crimes.

Strict adherence to AML rules is essential for crypto companies and exchanges. It not only safeguards the integrity of financial transactions but also fosters trust, transparency, and regulatory compliance. After all, it contributes to the long-term sustainability and credibility of the crypto industry.