What Risks Cryptocurrency Holds to Financial Institutions and the Regulatory Landscape?
Cryptocurrency is a digital currency that’s intended to be used in buying or selling goods and services. Cryptocurrency comes in multiple forms, and it can disrupt the financial institution. As the utilization of cryptocurrency increases, so do the risks to the financial industry. The risks may include fraud losses and regulatory compliance. Fortunately, the Anti-Money Laundering act of 2020 (AMLA 2020) requires the Bank Secrecy Act to be implemented throughout the crypto industry. As crypto exchanges are being used for the sale and purchase of goods and services, the crypto businesses are now considered Money Service Businesses (MSBs). As crypto exchanges are being considered as MSBs, it states that crypto exchanges have to follow:
- The travel rule
- All the BSA Regulations including CDD, SARs, CTRs
How regulators will implement these regulations will be the next step moving forward. Several methods can be applied to the financial services industry to make sure that compliance is followed as per the regulatory directions.
Crypto’s Risks to Financial Service Industry
There isn’t any way to bring change in the industry without a significant amount of risk. The reason behind the huge amount of risk in the crypto industry can be credited to the widespread adoption of poor AML, KYC, and other fraud prevention methods. The reasons for this are multiple:
- Enhanced Due Diligence (EDD) isn’t required on crypto exchanges or ATMs at this time.
- Regulators have to build new regulatory guidelines within the AMLA 2020 that requires crypto exchanges to operate as MSBs, although crypto exchanges don’t fit perfectly into the current framework. Additionally, crypto exchanges/ATMs being categorized as MSBs allow anonymous transactions of up to $1,000. Unless these customers exceed the $1,000 limit, then the only information required is limited to a phone number or email address.
- Crypto exchanges don’t fit into the definitions of MSB because they’re more like a financial institution in the way they operate.
- Financial compliance professionals and crypto ATMs/exchanges have limited knowledge of each other. Crypto operators aren’t incentivized to monitor and report AML and fraud policies, that’s the primary reason why the need for compliance is weak in the industry.
- Lack of FinCEN enforcement of crypto exchanges.
It’s not only in the U.S, but illegal crypto exchanges are operational throughout the globe.
Risks to Crypto Consumers
Consumers face the most risk when it comes to the crypto industry. Crypto is a volatile industry and it exists in a non-regulated 24-hour financial market and is uninsured by any authority. Trending schemes and scams in the crypto industry are:
- Money laundering through crypto exchanges
- Romance scams
- Fake investment scams
- Crypto for human trafficking, organ trafficking, and adult services
- Crypto for art and antiquities money laundering
- Fake crypto exchanges
- Crypto pump and dump
- Blackmailing scams
- Ransomware
What to Do to Eliminate Risks?
To prevent money laundering using crypto exchanges and ATMs, as well as to assist law enforcement, there are multiple detections and compliance strategies that can be used to reduce the risk from the crypto industry.
The first step to reducing risk from the crypto industry is to thoroughly screen your customers, and authenticate whether they are who they claim to be. Regulatory bodies have to pay extra attention to sanction lists, PEP lists, and high-risk countries. Complete due diligence should also be done on all clients that are onboarded to the institution. Complete due diligence also includes:
- Conduction through KYC/KYC checks
- Collecting beneficial ownership information for businesses (including parent and intermediary companies)
- Conducting risk analysis on politically exposed people
- Monitoring transactional activities
- Adverse media screening
All these tactics from onboarding to investigations can significantly improve the potential risk in your organization allowing you to improve compliance and reduce fraud losses. One of the major issues with the crypto industry is the lack of education in the regulatory industry. To reduce the risk of fraud, educating the crypto exchanges and businesses is essential in eliminating the risk of fraud. Investing in technologies like online document verification software and online KYC verification software is vital to reduce the risk of fraud and screen customers thoroughly.
As of right now, crypto regulations are not perfect, but changes in future regulations will help in the betterment of the industry. There are currently crypto compliance working groups that are being formed to fight fraud in the crypto industry.
