AML and KYC Guidance for Crypto Exchanges and Wallets

Blog / AML and KYC Guidance for Crypto Exchanges and Wallets

Cryptocurrencies and crypto exchanges have entered our lives recently and have grown tremendously. While the total market value of cryptocurrencies was below $ 18 billion until 2016, it has risen above $ 100 billion since 2017. With the growth of cryptocurrencies, the number of crypto exchanges also increased significantly.

In this article, we will delve into the challenges posed by money laundering and terrorist financing within the crypto industry, as well as how crypto exchanges can bolster their security measures to ensure compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. We'll also touch upon essential topics like crypto transaction monitoring, the Travel Rule in the crypto sphere, and strategies to combat crypto scams, all of which are critical aspects of contemporary cryptocurrency regulation.

Why Is The Crypto Industry Facing Money Laundering and Terrorist Financing?

The rapid growth in the crypto industry brought some disruptions to it. Criminal activities such as money laundering and terrorist financing pose a significant threat worldwide. Criminal organizations aim to hide the source of the crime by laundering the money they get from the offense. Criminal organizations and terrorist groups provide financial income to their organizations with money laundering and terrorist financing activities. They damage society, the environment, and the states by committing more significant crimes.

All efforts to prevent money laundering are called Anti-Money Laundering. Regulators established to avoid financial crimes have published regulations and guides on preventing financial crimes from past to present. The crypto industry was late to fulfill AML obligations due to the controversy of its rapid growth. Crime organizations took advantage of the complexity of crypto AML regulations. Instead of more established institutions such as banks, they attempted to carry out money laundering and terrorist financing activities over crypto exchanges.

potential AML risks associated with cryptocurrency exchanges and red flags for AML and CFT

AML & KYC Compliance Processes for Crypto Exchanges and Wallets

In the rapidly evolving world of cryptocurrency, staying ahead of financial risks is of paramount importance. It is widely accepted that the processes ofAML/KYC compliance within the crypto ecosystem, addressing key aspects such as crypto transaction monitoring, the Travel Rule in the world of crypto, and safeguarding against crypto scams is getting more critical day by day.

Regulators have recognized the unique challenges posed by digital assets and have responded by implementing robust cryptocurrency regulation frameworks. This includes specific guidelines and obligations designed to combat anti-money laundering cryptocurrency activities within the crypto space.

Understanding the intricacies of these AML and KYC compliance processes is essential for crypto exchanges and wallet providers. As the crypto industry continues to expand, navigating the complex landscape of financial security and regulatory requirements becomes paramount to ensure transparency and trust among stakeholders.

FATF Recommendations for Virtual Assets and Virtual Asset Service Providers

FATF completed its recommendations on cryptocurrency regulation on June 21, 2019. "Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers" explains how to work countries, regulators, and virtual asset service providers must take on virtual assets. According to the FATF guideline, Virtual Asset Service Providers must apply a risk-based approach and risk assessment like other financial institutions. Countries that are members of FATF are responsible for implementing these measures. These measures in the guide are expected to ensure the transparency of virtual asset transactions and keep funds related to crime and terrorism away from the crypto industry.

detailed examination of kyc and risk assessment products

Risk-Based Approach to Virtual Assets

Virtual assets such as blockchain, bitcoin, crypto assets, and virtual currencies have the potential to change the economic environment radically. Virtual assets have many potential benefits, such as facilitating, speeding up, and cheapening payments. However, its features, such as speed, global reach, and anonymity, have become a new financial tool for those who want to escape regulators and supervisors. Therefore, virtual assets face the risk of being a tool for the financial transactions of criminals and terrorists.

After discussions about virtual assets, some governments made regulations about virtual assets, while some countries completely banned virtual assets. Nations going to regulate virtual assets could not act fast enough and could not fill the gaps in the regulatory system.

5AMLD - A Guide for Virtual Asset Service Providers in Europe

It was announced that the 5th AMLD published by the European Union in 2018 would be applied to virtual currency exchange platforms and custodian crypto wallet providers. The European Union is taking solid steps together with FATF to combat financial crime. It does not hesitate to impose fines on organizations that do not meet their obligations. In the rest of the article, we will explain how virtual assets such as crypto exchanges should serve according to the European Union and FATF standards and the precautions to be taken.

5AMLD aim to update and enhance 4AMLD with a focus on transparency, cooperation, and technology.

AML Compliance Program of Cryptocurrency Exchanges

Crypto exchanges, much like traditional banks and financial institutions, carry the anti-money laundering cryptocurrency obligation, which necessitates the establishment of a robust Anti-Money Laundering (AML) compliance program. This program plays a pivotal role in aligning with international standards, such as the "risk-based approach" endorsed by the Financial Action Task Force (FATF) and the European Union.
The risk-based approach constitutes the cornerstone of an effective AML compliance program. However, achieving the objectives of such a program requires seamless execution from inception to conclusion. To ensure this, a qualified AML compliance officer must helm the compliance efforts of cryptocurrency exchanges.
The critical importance of this role cannot be overstated, as lapses in AML compliance can expose businesses to substantial fines and administrative penalties. Therefore, it is imperative for crypto exchanges to prioritize airtight AML compliance, including rigorous crypto transaction monitoring, to safeguard against potential breaches of the travel rule and mitigate the risks of crypto scams.
In a regulatory landscape marked by evolving cryptocurrency regulation, adherence to these stringent AML standards remains pivotal for the integrity and security of the crypto industry.

Customer Onboarding Process Under KYC and AML Obligations

Today, the customer onboarding process is the first step to creating a good customer experience. Therefore, businesses aim for their customers to open accounts quickly, easily, and smoothly. However, companies must protect themselves from risks and fulfill their obligations in the customer onboarding process. According to European Union regulations and Financial Action Task Force recommendations, Crypto exchanges have to perform customer account opening processes under AML and KYC requirements.

Know Your Customer Requirements for Crypto Exchanges

Know Your Customer procedures are for the business to recognize the person who will become the customer. If we talk about how this happens in general, the business collects customer data during customer account opening and checks the accuracy of this data. In this process, the accuracy of the data is as important as collecting the data. Because, If the data is incorrect, all checks under the AML compliance program will lose their functionality. Today, various software like Sanction Scanner helps verify this data.

Some data collected are (These data may vary from region to region):

  • Customer's full name
  • Customer's date of birth
  • Proof of customer address
  • Customer ID

Take a closer look at the case study to see how we assist cryptocurrency firms.

Implementation of CDD Procedures

Risky customers are headaches for all businesses. In fact, the definition of a risky customer is somewhat broad. While companies cannot work with some customers that seem risky, there is no situation that prevents them from working with some risky customers. Customer Due Diligence procedures are how businesses control their customers and collaborators. Crypto exchanges are required to perform a risk assessment by implementing CDD procedures.

How is the customer's risk level determined?

Cryptocurrency Sample Regulations in The World

AML Screening Solution for Crypto Exchanges and Wallets

In the ever-evolving landscape of cryptocurrency, compliance with AML regulations is paramount. Sanction Scanner's AML Screening and Monitoring Software empowers crypto exchanges to exercise comprehensive control over their customers, including sanctions, politically exposed persons (PEP), and adverse media data.

Our cutting-edge solution enables cryptocurrency exchanges to conduct a thorough global risk assessment by cross-referencing against more than 3000 sanctions and PEP lists spanning over 220 countries. By utilizing our AML Screening Service, businesses can seamlessly meet both global and local AML obligations, effectively safeguarding themselves from the specter of regulatory penalties.

At Sanction Scanner, we recognize the global nature of the crypto industry. Hence, our international sanctions, PEP, and adverse media data offerings are tailored to cater to the unique AML requirements of businesses across the world. Our commitment to AML compliance extends to aligning our solutions with the stringent guidelines of both FATF and the European Union.

By partnering with Sanction Scanner, cryptocurrency exchanges can fortify their AML compliance on a global and local scale, ensuring that they operate within the bounds of evolving cryptocurrency regulation and contribute to the overall integrity of the industry. Embrace Sanction Scanner's expertise to navigate the complexities of crypto transaction monitoring and the ever-important travel rule crypto, while mitigating the risks of encountering crypto scams.

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