Money laundering is a huge threat to the global economy and unfortunately, cryptocurrency has become the magnet for fraudsters looking to launder money with minimal friction. Ever since it started growing, the crypto industry has become holy ground for money laundering and terrorist funding.
To disrupt the flow of money laundering and terrorist funding, regulatory bodies all over the world are implementing anti-money laundering measures. These measures can help prevent money laundering using cryptocurrency exchanges and wallets.
Robust internal AML programs include full-proof KYC procedures to identify and verify users. Using this, authorities have to root out suspicious activities in the crypto industry. This will also lead to more expensive customer onboarding for customers in the crypto industries and make the process full of friction. Manual verification processes won’t work for the crypto industry that is slowly getting regulated.
Fortunately for the crypto industry, there are thousands of FinTechs that can help achieve compliance while still offering a positive customer experience.
Over time, the financial industry is evolving and cryptocurrencies are rapidly changing the way transactions take place. For international monetary exchanges, virtual currency is taking the place of traditional currency.
However, this comes with its fair share of challenges, a major issue is that criminals launder money using anonymous crypto exchanges. The fifth anti-money laundering directive makes it clear that crypto exchanges and wallets have to operate under anti-money laundering regulations.
This means a robust AML program helps identify and protect against suspicious activities. Crypto exchanges and wallets need to integrate KYC & AML regulations in the onboarding workflow to protect against financial crime.
Currently, most crypto exchanges don’t have proper AML strategies. A recent study states that 69% of crypto exchanges don’t have a complete and transparent KYC procedure in place.
Understanding AML Regulation
The term anti-money laundering or AML dictates a set of rules and legal regulations that are built to identify fraudsters and prevent illegal activities. It includes activities such as trading illegal goods, tax evasion, drug, and human trafficking, and laundering ill-gotten funds.
To prevent money laundering and other financial fraud, regulatory bodies make it a legal obligation for banks and the financial industry to conduct due diligence checks while onboarding customers. The unregulated nature of the crypto industry has given birth to a whole new type of financial crime, where criminals can launder money and cover their tracks.
This is a huge issue on cryptocurrency gambling websites, money laundering crypto mixer platforms, and exchanges.
For businesses operating in the crypto exchange, AML programs are a must, for protection against fraud and to stay compliant with growing regulations. This means the implementation of an effective AML program that includes a customer Acceptance Policy (CAP), Customer Identification Program (CIP), continuous monitoring, and risk management.
The CAP refers to the identification of new customers using official ID documentation. CIP is the process of verifying a customer from this documentation and against official databases. Ongoing monitoring allows crypto exchanges to identify suspicious transactions and ensure customer details aren’t outdated.
In the USA, FinCEN puts all types of crypto exchanges the same way. This means that all cryptocurrency exchanges must carry out all KYC and implement effective AML programs, regardless of the type of cryptocurrency.
Money laundering has become a global issue and the losses incurred to the global economy due to money laundering equal almost 5% of the global GDP. These procedures help financial institutions to mitigate and manage fraud. So how is KYC useful for crypto exchanges?
For cryptocurrencies to become a streamlined service, there need to be some regulations set in place to eliminate fraud. By implementing KYC procedures, exchanges can demonstrate that they are trustworthy and have the right regulations set in place to prevent fraud.
Proper KYC procedures reduce the chances of financial crime as users are identified and verified. Having robust KYC programs can help weed out criminals and high-risk candidates, which in turn reduces the likelihood of illicit activity occurring through exchange or wallet.
AML and KYC regulations are important for stabilizing crypto exchanges for upcoming years. For customers to truly trust a system, they need to know the system in assessing risks to protect the users.