Money laundering is a global problem that affects traditional and crypto assets. It is a set of regulations, procedures, and technologies designed to prevent individuals and companies from converting illegally obtained funds into digital assets to hide their origin.
This article explains the need for cryptocurrency AML regulations and what they include.
What is Crypto AML Compliance?
AML measures help detect and prevent attempts to launder money through crypto transactions. Regulatory bodies in various jurisdictions require crypto exchanges and wallet providers to implement AML practices (https://whitebit.com/aml-service). It often includes customer identity verification (KYC), transaction monitoring, and reporting suspicious activities to authorities.
Crypto trading for institutions on WhiteBIT and many other regulated exchanges implement AML/CTF (counter-terrorism financing) processes. These tools screen clients for sanctions as a part of the registration process and passing CDD (customer due diligence). The goal is to ensure that cryptocurrencies are not used for illegal activities such as money laundering, sanctions bypassing, or terrorism financing.
What is the Need for AML Crypto Checks?
In 2014, the Financial Action Task Force (FATF) released a report highlighting the areas of concern with digital assets (Virtual Currencies Key Definitions and Potential AML/CTF Risk). Here are the results:
- Anonymity. Crypto transactions offer a higher level of anonymity than traditional non-cash settlements. They are conducted online without direct interactions between counterparties, allowing users to trade virtual currency anonymously.
- Cross-border payments. The risks of money laundering and terrorism financing grow when dealing with cross-border operations because watching over and enforcing rules becomes harder.
- Lack of centralization. Law enforcement struggles to investigate or seize assets because there isn’t a single central location or entity to target. However, they can go after individual exchangers to get client information that the exchangers have collected.
What is the Travel Rule in Crypto AML Compliance?
Travel Rule is a regulation within AML compliance that requires financial institutions to pass on certain information about transactions and their participants to the next financial institution when a transaction involves the transfer of funds above a specified threshold.
Originally applied to traditional banking, this rule has been extended to crypto transactions in many jurisdictions. Its purpose is to help law enforcement agencies track funds involved in potential money laundering or terrorism financing. Travel Rule ensures a traceable path of transactions that exceeds the designated threshold.
Implementing the rules of AML for crypto helps prevent money laundering and terrorism financing through digital currencies. AML practices such as customer identity verification and transaction monitoring help crypto exchanges and other VASPs ensure that cryptocurrencies are not used for illegal activities.