What Crypto Exchanges Do to Comply With KYC, AML and CFT Regulations

The crypto market is more volatile than other markets due to factors such as anonymity, market voltatility, intensive media scrutiny, and supply and demand. Exchanges that include enhanced identity verification measures as part of their KYC checks help stabilize the market and instill confidence among investors. A customer’s crypto holdings reside on a blockchain, but how can a customer access them? A crypto wallet contains a customer’s private keys to keep crypto assets secure and accessible. Without KYC, though, money launderers could convert tainted funds into NFTs to hide their assets or cover a money trail with multiple transactions.

• However, other than having a user agreement page that says its operations comply with KYC, AML and CTF policies — as does every other exchange — it is unknown if the exchange employs a market surveillance technology or plans to do so.
• Anti-Money laundering consists of a set of procedures, laws and regulations that are created to put a stop on income generation through illegal activities.
• Criminal organizations aim to hide the source of the crime by laundering the money they get from the offense.
• Strong AML programs include foolproof KYC processes to identify and verify users.
• In order to correctly implement the AML compliance, crypto firms should look for solutions that help automate these compliance processes.

This, in turn,
can aid in the development and acceptance of cryptocurrencies as a legitimate
means of financial transaction. A customer who
wants to open a small account and make small transactions, for example, may not
require the same degree of AML controls as someone who wants to open a large
account https://www.xcritical.com/ and make large transactions. This implies
that various levels of AML controls should be used by exchanges depending on
the risk level of the customer. As KYC involves sending customer documentation to third-party verifiers, exchanges will have to cover the costs of these verification organizations.

What Is AML for Crypto?

Anti-Money Laundering screening involves the verification of an end-user by screening them against watch lists compiled by regulatory authorities such as the FATF, UN, FINTRAC, AUSTRAC, and others. It involves authenticating the user information against criminal watch lists, global sanctions, and Politically Exposed Person (PEP) lists. As a result, fraudulent customers are detected and compliance targets are easily met. In order to ensure that a cryptocurrency firm is not being exploited by criminals and being used to launder money, the following procedures must be effectively implemented. Possible innovations that come to mind include a universal KYC system where VASPs can access external records to cross-reference new users for previous flags. Also, the ability to encrypt KYC and transmittal data, but share it with law enforcement when required in line with regulatory expectations, would help to preserve the integrity of data privacy efforts.

By raising the bar and demonstrating a high level of KYC compliance, crypto exchanges can mitigate the risk of legal challenges and show regulators they are engaged and committed to ensuring compliance as international laws change. Most modern efforts to combat money laundering in the U.S. stem from the Bank Secrecy Act of 1970, which required banks to actively cooperate with federal authorities in detecting and reporting money laundering. This was followed by the Money Laundering Control Act of 1986 and the Anti-Drug Abuse Act of 1988, but KYC did not https://www.xcritical.com/blog/aml-crypto-how-do-aml-regulations-apply-to-exchanges/ fully enter the picture until the Patriot Act of 2001. Part of this controversial legislation aimed to stem the flow of funds to terrorist organizations by requiring FIs and other money handlers to thoroughly vet their customers and partners under penalty of law. KYC is a set of procedures critical to assessing customer risk and is legally required to comply with Anti-Money Laundering (AML) laws. Secure hot & cold wallet options include our full node server setup or optional BitGo, Fireblocks, Metaco, Copper, or GK8 custodial service integration.

Cryptocurrency and anti-money laundering enforcement

Cryptocurrency exchanges would need innovative ideas like these to survive the incoming onslaught of increased regulatory oversight. As the crypto market gains mainstream traction, increased compliance has become inevitable. Many central banks are also in the process of launching official digital currencies – it will be interesting to see how free-market cryptocurrency exchanges adapt to these challenges going forward. Many cryptocurrency users oppose increased regulatory scrutiny, for reasons ranging from ideological to criminal. It must be noted that money laundering through cryptocurrencies only accounts for a fraction of total transactions – around 2% in 2019. In the European Union, financial institutions are required to follow the Anti Money Laundering Directive (AMLD).

However, these days’ customers have to verify their accounts before they can trade on these platforms. Especially, in South Korea the Government has already banned all cryptocurrency trading accounts. In October 2018, the Paris-based global financial watchdog, Financial Action Task Force (FATF), updated its Recommendation 15 and brought virtual assets, including cryptocurrencies, in the scope of Anti-Money Laundering (AML) regulations. As a result, all companies that deal with cryptocurrency transactions became obligated to comply with AML standards, as previously enforced on other financial institutions. To combat crypto-related crime, many jurisdictions got down to regulating crypto exchanges and other crypto services, just like in the traditional financial sector.

KYC Lowers the Risk of Financial Crime

The goal is to better protect and maintain the assets and privacy of consumers in the onboarding processes. Cryptocurrency Regulation
With billions of dollars being poured into the cryptocurrency market from various sources, financial institutions and government feel the need to monitor the space closely. However, KYC and AML rules many times go against one of the largest foundational philosophies of the blockchain which is the underlying technology behind cryptocurrencies. Cryptocurrency transactions should be anonymous which a big headache for regulators as there is a lot of fear that criminals might take advantage of the current system in place.

Not only is the process time-consuming, but the wait-times for manual verification can also be lengthy — In some cases, up to 30 days. Former Acting Director of FinCEN, Jamal El-Hindi, stressed the importance of AML compliance for stabilizing crypto exchanges over the coming year. As many of the barriers to mass adoption revolve around mistrust, more staunch AML programs can only serve to show exchanges as legitimate entities. The documents needed vary between platforms, with larger withdrawals often requiring users to submit more documentation. In general, photo government-issued identification, such as a passport, driver’s license, military ID, etc. is needed as well as proof of address. When a user first registers, full KYC isn’t necessary, however, the applicant must give a full legal name, date of birth, address, valid phone number, social security number, and their email.