Cryptocurrency and Anti-Money Laundering Regulations in a Fluid State
The rise in the popularity of cryptocurrencies has significant implications for global anti-money laundering regulations.
Recent years have seen regulators introduce more measures to ensure transparency in financial transactions and anti-money laundering practices. At the same time, the use of cryptocurrencies has risen dramatically, to the point that they are becoming an increasingly recognised part of the financial landscape. However, in a world which is placing an emphasis on transparency, cryptocurrency and its focus on privacy is a difficult fit.
The result is a clash between ideologies. For those supporters of cryptocurrency, its ability to offer a degree of privacy and anonymity is a major part of the appeal. From the perspective of regulators though, that anonymity represents a massive opportunity for fraudsters. To the regulators, cryptocurrency is a sector which needs to be brought swiftly into check.
Regulatory change
The arrival of the EU’s Anti Money Laundering Directive 5 (AMLD5) placed obligations on crypto exchanges and wallet custodians operating in Europe to implement strict KYC onboarding procedures. The EU has also attempted to implement new measures requiring cryptocurrency firms to gather and hold information on who is involved in transfers. On top of this, the EU is drafting a wider framework for the crypto sector known as MiCA (Markets in Crypto-assets) to regulate all issuers and companies dealing in crypto assets. But, the sector has stepped up its attempts to persuade the EU against these additional measures. In a letter signed by more than 40 crypto business leaders, the sector warned that the provisions could ‘put every digital asset owner at risk’.
Security
Cryptocurrency could positively disrupt and improve anti-money laundering measures in a way that safeguards security. One approach could be to open an account at a centralised entity using a public key verified by a trusted authority. In this way, only one entity is therefore trusted with details.
Moreover, the idea that cryptocurrency is anonymous is not entirely true. They are only pseudonymous. Cryptocurrency balances and transaction histories are associated with unique addresses, known as public keys, which are easily viewable on public blockchains.
The public and immutable nature of blockchain transactions arguably make them more transparent than ordinary financial transactions. Indeed, frustration at the lack of true privacy within most cryptocurrencies has led to increased enthusiasm for so-called privacy coins which provide true anonymity.
Cryptocurrency regulation is in a fluid state
Cryptocurrency exchanges also point out that they have successfully taken steps to limit wallets associated with people targeted by sanctions over Russia’s invasion of Ukraine to counter the perception that they could be used to circumvent sanctions.
Regulation, therefore, is in a fluid state. Authorities are trying to develop a coherent approach. In doing so, their work is often hampered by a lack of understanding about how cryptocurrencies work. It leads to a great deal of uncertainty for any financial institution dealing with cryptocurrency.
Much about this sector will depend on the decisions that regulators take over the next few years. It is even more vital than ever, therefore, to stay up to date on the evolving regulatory situation and to maintain transparency in all transactions. Whatever happens in this sector, demonstrating the measures taken to protect against money laundering and other types of fraud will improve the confidence of customers and regulators alike.
