Cryptocurrency does not exist in physical form and does not have a jointly recognized legal value; it can be exchanged peer-to-peer between two holders. Conversion into current currency is not always admissible (currency closed in place of the bidirectional or convertible currency).
Three main components characterize cryptocurrency:
- the computer code that dictates the rules of the participation protocol;
- a distributed ledger that records operations;
- a network of nodes that update the distributed ledger according to the protocol rules.
The creation of cryptocurrency is free and takes place through an Initial Public Offering (IPO). The buyer obtains the cryptocurrency through a consideration with legal tender status , the offer is launched by a node and is regulated and implemented by means of a distributed ledger.
Once acquired, it can be exchanged on the platforms until the final conversion into a current currency. The almost instantaneous exchange capacity gives the main advantages of the virtual system.
Disadvantages of Cryptocurrencies from a Regulators Point of View
- Anonymity in investing with a high risk of use for money laundering and terrorist financing purposes;
- Absence of protection for investors in terms of transparency of the characteristics of the acquired asset and the functioning of the exchange;
- Cybersecurity risks of exchange networks.
The growing diffusion in the cryptocurrency's financial markets has generated the FATF's need to adequately mitigate the ML / TF risks associated with virtual products and service providers or VASPs (IT platforms through which these products are offered/exchanged).
AML Regulations For Cryptocurrencies
The FATF has been working since 2018 to define precise international standards shared between the Member States to standardize the regulations at the international level and reduce possible cases of opportunism at the individual country level.
In 2019, the FATF finalized the issue of an interpretative note of Recommendation 15: the note modifies and supplements the current recommendation by clarifying how the FATF standards apply to activities or operations involving virtual activities, extending to these products. The requirements already requested for other regulated products. The Interpretation Note text has been finalized and officially adopted as part of the FATF Standards in June 2019, following consultations by private sector actors. With the new recommendation, Virtual Assets and VASPs will be fully regulated from the point of view of money-laundering prevention and terrorist financing like any other financial product.
The interpretative note modifies and significantly extends the standards relating to this sector in terms of:
- Definition of products and VASPs: virtual assets can be defined as "property," "income," "funds," "funds or other assets," or other "corresponding value": Member States should apply the relevant measures under the FATF Recommendations to virtual activities and virtual asset service providers ( VASP).
- Definition of ML and TF risks associated with products and VASPs: countries should identify, assess and understand the money laundering and terrorist financing risks that arise from virtual business activities and VASP activities or operations. The ML and TF risk prevention measures identified must be adequate and proportionate to prevent the risk of money laundering and terrorist financing.
- The provision of national licensing mechanisms: VASPs must be subject to licensing and registration even if they were a natural person. Competent authorities should take the necessary legal or regulatory measures to prevent criminals or their associates from holding or being the actual beneficiary of a significant or controlling interest or holding a management function in a VASP. Countries should act to identify natural or legal persons who carry out VASP activities without the necessary license or registration and apply appropriate sanctions.
- Single Registration: a country must not impose a separate licensing or registration system with respect to natural or legal persons already authorized or registered as financial institutions (as defined by the FATF Recommendations) within that country, which, based on that license or registration, are authorized to perform VASP activities and which are already subject to the full range of obligations applicable under the FATF Recommendations.
- Supervision: countries should ensure that VASPs are subject to adequate regulation and supervision or monitoring for AML / CFT. They operate in accordance with the relevant FATF recommendations to mitigate the risks of money laundering and terrorist financing arising themselves. The VASP should be subject to effective systems for monitoring and compliance with national requirements AML / CFT. The VASP should be supervised or monitored by a competent authority that should conduct supervision or risk-based monitoring. The supervisors should have adequate powers to manage or monitor and ensure compliance by the VASP with the requirements to combat money laundering and terrorist financing, including the authority to conduct inspections, compel the production of information, and impose sanctions. Supervisors must have the power to impose a range of disciplinary and financial penalties, including the power to revoke, limit or suspend the license or registration of VASP, where applicable.
- Sanctions: countries should ensure a range of effective, proportionate, and dissuasive, criminal, civil, or administrative sanctions available to treat VASPs that do not meet AML / CFT requirements, in line with Recommendation 35. The penalties should be applicable not only to VASPs, but also to their directors and managers.
AML Compliance For Crypto Exchanges - Case Study
- Registration and Exchange of Information: Countries should ensure that VASP original (first contact with customers) obtains and retain the required information for the CDD of the subscriber and the beneficiary, and that information is sent to the VASP final and made available to the authorities competent.
AML Name Screening Software for CDD Requirements
- Cooperation between countries: countries should rapidly, constructively, and effectively provide the widest possible range of international cooperation in relation to money laundering. In particular, VASP supervisors must exchange information promptly and constructively with their foreign counterparts, regardless of the nature or status of supervisors and differences in the nomenclature or status of VASPs.
In general, there is a regulatory framework currently being defined for what concerns the ML and TF aspects of cryptocurrencies. The local regulations already contain KYC, Recording, and Reporting controls. At the same time, huge steps remain to be taken regarding the regulation of the mechanisms for offering and managing exchanges with specific reference to the protection of investors/savers. Sanction Scanner is AML compatibility software that helps cryptocurrencies' compatibility processes. You can provide your AML obligations with Sanction Scanner. You can contact us for information about our AML solutions.
