AML / KYC Compliance for Cryptocurrency |

Cryptocurrency is one of the fastest moving industries in the digital world, with a market valued at $ 1.03 billion in 2019 and projected to reach $ 1.4 billion by 2024 at a compound annual growth rate (CAGR) of 6.18 per cent. Bitcoin is one of the most famous names in the cryptocurrency space, accounting for $ 6 billion in daily transactions among 153 million registered user addresses.

The currency is known for its huge value fluctuations, as one bitcoin cost just 9 cents in 2010, a staggering $ 313.92 in 2015 and a staggering $ 13,421.44 in 2018 before dropping sharply to $ 3,869.47 in 2019. Thousands of cryptocurrencies started others have been circulating on crypto exchanges in recent years, such as Ethereum, Monero and Ripple, many of which leverage blockchain technology to serve as a transaction database.

These various cryptocurrencies are also known for their role in cybercrime, whether through direct theft or money laundering that has not been obtained from other schemes. Cryptocurrency-related crime totaled $ 4.3 billion in 2019, a larger amount than in 2017 and 2018 combined. The same year saw $ 2.8 billion in cash flow launched through cryptocurrency exchanges, up from $ 1 billion in 2018.

Government regulators and cryptocurrency exchanges are wildly looking for ways to regulate and prevent the laundering of stolen money through cryptocurrencies, with some methods showing more promise than others. The following Deep Dive explores how cybercriminals leverage cryptocurrency exchanges for money laundering and how government agencies crack down on exchanges that let launchers run amok.

How Currency Launchers Benefit from Cryptocurrency

Cryptocurrencies are popular for transactions where consumers wish to remain anonymous – such as when purchasing illegal drugs or adult material – and it is this same anonymity that makes them popular for money laundering. All transactions are logged into the blockchain, but typically these are done under pseudonyms or usernames that are difficult to associate with actual identities. This lack of identity information is compounded by the weak KYC procedures of many cryptocurrency exchanges, with a recent study finding that 56 percent of all exchanges did not have adequate KYC processes, and many did so on purpose to avoid compliance with AML regulations. Most of these poorly protected exchanges are located in Russia, the UK or the US, but some countries, such as Seychelles and Singapore, lack KYC procedures on a large majority of their exchanges, making them hot beds for money laundering and other cybercrimes.

Financial regulators, financial intelligence units and many cryptocurrency exchanges are expressing growing concern about the growing use of cryptocurrencies for committing cybercrimes. Seventy percent of respondents said in a recent survey that criminal activity is a top concern for professionals in the global cryptocurrency and financial industries, with this activity taking many forms. Respondents were most concerned about money laundering (84 percent), with 79 percent worried about using cryptocurrency to fund terrorist groups and 76 percent worried about its use in funding human trafficking. There was a marked gap in perceptions of cryptocurrencies risks, however: 63 per cent of banks and 56 per cent of governments felt that cryptocurrencies posed a significant cybercrime risk, as opposed to only 9 per cent of industry professionals cryptocurrency.

This opinion gap means that any improvement in the AML / KYC procedures of cryptocurrency exchanges is likely to occur through regulatory orders rather than relying on exchanges venturing for themselves.

Enforcing AML / KYC Compliance In Cryptocurrency Exchanges

World governments have already taken a number of steps to curb money laundering by requiring cryptocurrency exchanges to bring their KYC processes in line with those of other FIs. The Financial Crime Enforcement Network (FinCEN), an office in the US Treasury Department, announced in November 2019 that it would begin to strictly enforce the “travel rule” for cryptocurrency exchanges. This rule forces exchanges to verify true customer identities as well as identify any senders and recipients of cryptocurrency transfers worth $ 3,000 or more. It was originally put in place in 2013, but it was only enforced intermittently over the next six years, leaving many cryptocurrency exchanges impatient with their old KYC-less practices.

The US government worked to curb the AML’s loose cryptocurrency exchange procedures in the same year, following the example set by other financial regulatory agencies around the world. FinCEN charged the owner of a privately owned exchange for violating the Bank Secrecy Act by failing to report more than 150 transactions each worth more than $ 10,000, all of which required the receipt of a currency transaction report send it to the Treasury. The exchange’s owner was required to pay a $ 35,000 fine and was barred from running a money transfer service ever again, sending a firm warning to other cryptocurrency exchanges about the consequences of failing to comply with AML and KYC requirements.

So cryptocurrency exchanges take their AML / KYC compliance more seriously, and they even partner with third parties to help eliminate potential money launderers. Exchanges that wish to provide a safe customer experience and avoid penalty from federal authorities would do well to follow this example.