AML KYC Compliance & Regulation of Crypto-Assets Against Financial Crimes

Digital or virtual assets have become the latest obsession around the world. With the rise in cryptocurrencies, crypto exchanges also gained significant popularity. According to recent figures provided by Forbes, the total market cap of all crypto assets is USD 1.06 trillion. However, the rapid boom in the crypto industry has impacted the finance sector to a great extent because it opened new pathways for financial criminals to commit money laundering and terrorist financing. Therefore, updating the compliance regulations became the need of the hour for governments worldwide. This implied that the crypto marketplace must be aligned with AML KYC compliance to prevent financial crimes. 

KYC Verification for Anti-Money Laundering Compliance in Crypto Sector

Regulatory authorities have published guidelines to comply with AML through transparent KYC verification procedures. Every financial organization must comply with these regulations, be it the banking sector or the crypto exchanges. However, it took time for the crypto industry to adopt AML KYC compliance because of its sudden growth. Thus, financial criminals switched to the crypto marketplace for illicit economic activities, such as money laundering and terrorist financing, instead of more regulated banks. According to the BBC, USD 8.6 billion of cryptocurrency was laundered in 2021. This displays the ease of committing financial malpractices through crypto exchanges, thus emphasizing the need for AML KYC compliance in this industry. 

Money Laundering Using Cryptocurrencies

For effective AML KYC compliance, it is essential to understand how criminals commit money laundering using cryptocurrencies in the first place. Their general pattern includes some specific attributes. Firstly, the anonymity of cryptocurrencies at the point of creation provides an advantage. Secondly, account creation takes a few seconds and is free of cost. Lastly, it is convenient to justify sudden wealth through cryptocurrencies because of rapidly fluctuating exchange rates. 

KYC AML Regulations for Crypto Industry

The cryptocurrency market and crypto exchanges must enforce robust KYC AML regulations to prevent themselves from becoming a channel of illicit monetary transactions. They must ensure compliance with AML laws provided by the government. For instance, in 2020, the European Union introduced the Digital Finance Package encompassing a digital finance strategy and legislation on virtual assets and the crypto marketplace. Similarly, the United States is the leading stakeholder in the crypto AML KYC compliance measures. If your cryptocurrency exchange service is based in the U.S., you must comply with the KYC AML regulations outlined by the US Financial Crimes Enforcement Network (FinCEN). This is critical in preventing heinous financial crimes like money laundering and terrorist financing. Moreover, it would save your company from hefty noncompliance fines. 

KYC Requirements for Bank Versus a Crypto Exchange

The identity verification procedure for AML KYC compliance in banks includes authentication of ID cards, proofs of address, and biometric verification. The KYC requirements for banks during customer onboarding are: 

  1. The Customer Identification Program (CIP) is the first requirement in the procedure. It confirms the identity of a customer to be legitimate. For example, In the U.S., CIP is a mandatory procedure before allowing customers to conduct financial transactions. 
  2. Customer Due Diligence is the second crucial step in this regard. CDD is essential to effective risk management and vigilant surveillance of high-risk customers.
  3. Ongoing monitoring is the third essential requirement for a bank’s KYC procedure. Banks seek a program for monitoring their customers continuously or at regular intervals. This is also known as perpetual or ongoing monitoring. 

The AML KYC compliance programs in the crypto industry are not much different to those of banks. They comprise similar requirements, encompassing customer identification, due diligence and perpetual monitoring.

  1. CIP: The crypto exchanges must collect specific client details to ensure efficient KYC procedures. The customer’s legal name, address, birth date, verification documentation like a passport or driving license, and business license.  
  2. Client Due Diligence: It is a business or client risk assessment, and crypto organizations assign risk ratings to clients based on various factors such as transaction history. 
  3. Perpetual Monitoring: Continuous monitoring is performed by reviewing the transaction activities regularly. Like banks, crypto exchanges monitor their customers to detect any suspicious activity leading to financial crimes. The Virtual Assets Service Provider (VASP) must file reports with relevant law-enforcing agencies if any such action is discovered. 

Online KYC Solution For Financial Institutions

Manual KYC procedures adopted by crypto exchanges and other financial organizations require more time, effort, and resources, both human and material. Their most significant disadvantage is that they are prone to human error, which may end up in violation of AML KYC compliance. Therefore, by transitioning to an automated or online KYC solution, your crypto organization can speed up the KYC procedure while eliminating any possibility of human error. Similarly, it proves to be time and cost-effective.

Digital KYC Verification through Video Calls

Digital KYC verification through video calls is another efficient process resulting in effective AML KYC compliance. It is a service that refers to the one-on-one or face-to-face interaction between financial organizations and their customers being carried via a video call. Your crypto organization can reap the benefits by seeking this service from SaaS providers. Video KYC would allow you to verify your customers through various means, like liveness checks.

In sum, AML KYC compliance is equally crucial for the crypto industry as banks and other financial organizations. It is more significant for the former because it is more susceptible to financial crimes like money laundering. Hence, crypto exchanges must meet regulatory requirements for transparent and effective CFT and AML KYC compliance.

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