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Crypto-Assets and Anti-Money Laundering (AML): Things to Consider

Posted on 7 Apr 2021

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Crypto-asset businesses have been increasingly brought into the sphere of Anti-Money Laundering (“AML”) regulations as the market for these assets grow and regulators seek to step in and ensure minimum standards and accountability. In January 2020, the 5th Anti Money Laundering Directive (“5AMLD”) came into effect and brought crypto-asset exchange providers and custodian wallet providers into the scope of the AML regulations.

To find out more about the impact of 5AMLD click here to read Laven’s article.

Definition of a Crypto-Asset Exchange Provider

The definition of crypto-asset exchange provider brought in by 5AMLD is fairly broad, as any entity that provides the following services:

  • Exchanges, or arranges the exchange of, crypto-assets for money or vice versa;

  • Exchanges, or arranges the exchange of, crypto-assets for other crypto-assets; or

  • Operates a machine that utilises automated processes to provide either of the above activities.

This change in the definition under 5AMLD brought a lot more crypto-asset firms into the scope of AML regulation, whereas previously only those crypto-asset businesses who were dealing with regulated tokens or had other regulated activities were. These crypto-asset firms were required, for the first time, to apply for registration with the FCA.

If you need help with an FCA Registration, click here to find out more.

Can blockchain prevent money laundering? 

Many crypto-assets are underpinned by a decentralised register, which logs all transactions and cannot be forged since many members of the network will have copies to verify the transaction history or a token against it. This, in theory, should help to mitigate the AML risks involved with crypto-assets, as the relevant firm can verify the transaction history of a coin. However, in practice, this is not the case as the information on the register is not sufficient to identify the various holders of the token. There is also often no central authority to verify the identities of token holders, creating significant anonymity risk when dealing with crypto-assets. This anonymity, combined with the global reach of many crypto-assets, presents a major issue for the enforcement of AML rules and in preventing firms from being able to properly trace the source of funds.

The use of crypto-assets as a method of layering while laundering illicit funds is an increasing issue and one which the Financial Action Task Force (“FATF”) has taken note of. The use of crypto-assets anonymously can act as a break in the chain of ownership of the funds, making it almost impossible to determine where the funds used to purchase the initial tokens originated from.

What are the AML considerations for Stablecoins?

The FATF has also set out that there is significant concern regarding the rising popularity of ‘stablecoins’, which are crypto-assets that are backed by some other asset, often fiat currencies, and are easily convertible at a fixed exchange rate. These coins have been growing in popularity as a crypto-asset with less volatility and more utility value. However, their easy convertibility and stable value make them a better target for bad actors. The FATF, along with some national regulators, have been working towards a more coherent international response to the risks posed by stablecoins. For example, the FATF have released revised standards for the treatment of stablecoins, which focuses on the institutions that redeem and facilitate payments between users; in particular, they have suggested that national regulators bring these entities within the scope of AML regulation as is being done in many jurisdictions now.

Crypto-Asset Regulation in the UK

In the UK, the FCA has brought some crypto-asset firms within the scope of AML regulations through 5AMLD. More recently the FCA has gone further, announcing in August 2020 that crypto-asset exchange providers and custodian wallet providers will also be brought within the scope of the FCA’s financial crime reporting obligations. These firms will be required to complete the REP-CRIM return on RegData annually.

The regulation of the crypto-asset space as a whole is fast developing as larger-scale adoption, both by retail users and more recently by larger institutional users, has pushed regulators to consider and revise the treatment of crypto-assets as a whole.

Crypto-Compliance and Laven

Laven has been working with managers in the digital asset and crypto space having been at the forefront of the industry since its beginnings. We have also appeared in the FCA’s ‘Guidance on Crypto Assets’ published as a key correspondent showing our prominence in the space.

At Laven, our consultants are on hand to help identify the actions your firm needs to take to ensure you are compliant with the new regulation outlined in this report. Whether this is through assisting with new policies and procedures that need to be put in place or providing online/in-person training for staff to make them fully aware of the regulatory obligations.

Laven has also built Laven Tech, a unique Regulatory Technology (RegTech) solution that leverages advanced technology combined with our vast subject matter expertise. Our RegTech solution is designed to assist fund managers, service providers and investors to meet today’s growing demands.

Click here to get in touch