Crypto Anti Money Laundering Rules – Threat Or Opportunity?

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Crypto Money Laundering Rules

The Hidden Effects of Crypto Money Laundering Rules

Ever since Emperor Vespasian held up a gold coin that originated from taxing urine and mentioned that it smelt just as clean as others, the separation of money from its origin has been on regulators' minds.

The accelerating flows of digital money around the globe, in addition to the increasing hazard of horror attacks and effective crime cartels, have given the dialogue an added seriousness and led to a flurry of rules and guidelines from national governments and supra-national groups.

stem the flows of illicit fundsCertainly, these were, at some stage, going to influence cryptocurrencies given the concern of numerous authorities that bypassing third parties would make it much harder to stem the circulations of unauthorised funds.

Exhibition A: AMLD5, a Europe-wide law that will end up affecting crypto businesses around the globe. Current signs from other jurisdictions likewise point to increased attention around this issue. As normal with intruding compliance regulation, the short-term pain in regards to higher costs and lower privacy is a concern, and there are indications that regulators still do not completely comprehend how the innovation works.

However longer-term, even the most burdensome requirements will wind up evolving and are most likely to promote sector development in unforeseen ways.

AMLD5 Watch Begins*

In June of 2018, the European Parliament and Council published an update to the bloc's anti-money laundering (AML) instruction. Called AMLD5, the due date for its application is January 2020, less than a year away.

strict know-your-customer (KYC)Under the brand-new guidelines, all crypto exchanges and wallet custodians operating in Europe will have to implement strict know-your-customer (KYC) onboarding practices and will require to register with regional authorities. They will also be needed to keep an eye on transactions and to report suspicious activity to the appropriate bodies.

In addition, nationwide authorities, including tax collectors, will be able to obtain crypto user information from the appropriate exchanges.

The concern about improper transfers is not just limited to Europe. Last week US-based crypto exchange Bittrex was rejected a BitLicense due to KYC and AML shortages in its onboarding treatments (an evaluation the exchange repudiates).

On a more comprehensive scale, in December of last year, leaders from the G20 nations reiterated their pledge to develop extensive AML guidelines for crypto assets. And the Financial Action Task Force (FATF), an inter-governmental body set up in 1989 to deal with money laundering, is due to publish standards and enforcement expectations for crypto exchanges around the globe by June of this year.

Financial Action Task Force (FATF) cuts deeper than swords

self-reporting by virtual currency ownersA draft of the FATF proposals was launched in February. In a comment published last week, cryptoanalytic company Chainalysis reacted to this draft, mentioning that it is not always possible to recognise the recipient's details, and in most instances, an exchange does not understand if the location is an exchange wallet or an individual one.

The EU Commission, on the other hand, seems to be familiar with this and has actually been mandated to present, by early 2022, a further set of modification propositions concerning self-reporting by virtual currency owners, and the keeping by member states of main databases with users' identities and wallet addresses. You can estimate the pushback that this will likely get.

Some of the more vociferous objections to the intruding oversight explain that it overcomes the function of cryptocurrencies, which were designed to prevent control by central authorities and avoid the risk of censorship.

Others have actually revealed concern that these guidelines will divert transactions to the less transparent crypto-to-crypto and/or decentralized exchanges that fall outside the scope of AMLD5.

And there's business risk, too: Operating costs are a concern for any project, and the growing problem of reporting requirements might slow down the development and professionalization of market facilities.

Make It Your Strength

Yet while the issues are valid, the heightening AML attention is most likely to assist instead of hurt the sector.

a digital representation of valueFirst, the AMLD5 consecrates in law what is probably the first “authorities” meaning of virtual currency: “a digital representation of value that is not released or guaranteed by a central bank or a public authority, is not always attached to a lawfully established currency and does not have a legal status of currency or money, but is accepted by natural or legal individuals as a way of exchange and which can be moved, stored and traded digitally.”

Making use of the phrase “methods of exchange” could end up providing business owners and legal representatives support from which to construct additional innovation, and regulators a base from which to establish more detailed meanings.

Another plus is the likely increase in banks' confidence when handling crypto exchanges. One of the primary reasons virtual currency companies have such a hard time getting bank accounts is the banks' concern over money laundering claims. Eliminate those, and the greater operational ease that features having access to a banking network is most likely to motivate further infrastructure growth and development. This, in turn, might improve the sector's credibility and liquidity, in addition to making the market value less unpredictable.

It might likewise lead the way for eventual custody by standard financial institutions of cryptocurrencies themselves, which would, even more, improve demand for cryptocurrencies for both transactional and investment functions.

Wear It Like Armour

Development in the liquidity of cryptocurrencies will enhance more than their price: It will likewise increase interest in and feasibility of utilizing the underlying technology for tracking purposes.

As Chainalysis pointed out in its FATF comment, reliable use of blockchain innovation would make it much harder to launder money utilizing cryptocurrencies than digital fiat money and would allow market individuals to, all at once, work together with law enforcement while abiding by trends in privacy legislation.

Sharing a wallet address with market individuals in other jurisdictions is not the same as sharing personally recognizing info and does not activate violations of Europe's stringent personal privacy laws. This would make it much easier for police to keep an eye on and examine suspicious activity while safeguarding user personal privacy until a decision is made that more information is required.

transaction history preserved on public blockchainsWhat’s more, the transaction history preserved on public blockchains gives greater credibility to data integrity and protects evidence from manipulation or human error. With blockchain-based assets, prosecutors could have access to a much deeper data trail than with fiat currencies. And a long enough time horizon, combined with sophisticated analytics, should provide a more holistic view of patterns, enabling enforcement officials to develop preemptive strategies that could further reduce the cost burden of the surveillance.

With this, we may even get a world in which regulators see cryptocurrencies as the “cleaner” choice. This could motivate them to recommend their adoption for money transfers across borders, rather than concentrating on putting up barriers to their usage. This might also cause more mainstream support for development around money, even from central banks, which in turn would accelerate the improvement of the banking market as we know it.

Indeed, what is perceived by many as crypto’s biggest threat could end up being its greatest opportunity?

Money boats image via Shutterstock

The article above originally appeared in Institutional Crypto by CoinDesk, a free newsletter for the institutional market with news and views on crypto infrastructure delivered every Tuesday.

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