In just thirteen years, cryptocurrencies have redefined money. And over the past decade, they’ve also redefined money laundering through the hundreds of high-profile cryptocurrency-based crimes, from the PlusToken Ponzi scheme to the laundering operations of Suex. Regulators, financial institutions, and law enforcement agencies combat these activities with anti-money laundering (AML) and know your customer (KYC) policies.
In this article, we define these terms – anti money laundering meaning, how they work, and why they matter for cryptocurrency if the overall aim is to gain mainstream adoption.
Anti Money Laundering Meaning
Anti-money laundering (AML) is a broad term for laws and regulations put in place to prevent criminals from making money illegally or moving illicit funds. While many illegal activities are targeted by AML laws, some of the most important are tax evasion, public corruption, and market manipulation through mETHods such as wash trading.
Applying the definition to the world of cryptocurrencies, crypto anti-money laundering (AML) encompasses the laws, regulations, and practices designed to stop criminals from converting illegally obtained cryptocurrencies into fiat money.
Importance Of Crypto AML
Cryptocurrency remains appealing for criminals due to its pseudonymous nature and the ease with which it allows users to send funds anywhere, even despite its transparent and traceable design. In 2020 alone, funds laundered through cryptocurrency exchanges topped $2.3 billion.
Effective AML regulations have two important consequences: first, they make money laundering less profitable and more risky; second, they create new avenues through which investigators can prosecute financial crime. Effective AML processes within cryptocurrency businesses are just as essential. With continuous transaction monitoring, compliance officers can stop many of these schemes before they even start.
How Does Crypto AML Work?
The Financial Action Task Force (FATF) sets the standards for AML laws globally. FATF began publishing guidance on cryptocurrency AML in 2014, and policymakers in FATF’s member jurisdictions quickly took action; today, FinCEN, the European Commission, and dozens of other regulatory bodies have codified most of FATF’s cryptocurrency AML recommendations into law.
From there, the baton gets passed on to virtual asset service providers (VASPs) – a group that FATF defines to include crypto exchanges, stablecoin issuers, and on a case-by-case basis, some DeFi protocols and NFT marketplaces. These businesses do the heavy lifting to stop money laundering by employing compliance officers, requiring know-your-customer checks, and continuously monitoring transactions for suspicious activity.
When suspicious activity is observed, VASPs report this information to relevant regulators and agencies, which then use blockchain analysis tools like Chainalysis Reactor to investigate the flow of funds and link illicit activity to real-world identifiers.
Compliance In The Crypto Space
AML is tightly linked to Know Your Customer (KYC) requirements, which essentially involve verifying customers' identities and the sources of their income. KYC also requires financial institutions to monitor their users' activity on an ongoing basis. Like AML, modern KYC procedures are heavily automated, and many institutions use the client onboarding process as an opportunity to acquire proper identification from new customers.
Many cryptocurrency exchanges have made concerted efforts toward compliance with anti-money laundering laws as regulators started to place more focus on the cryptocurrency market. Still, there is some criticism toward KYC and AML requirements within the crypto space, as critics argue that compliance decreases their privacy and nullifies the benefits of decentralization by placing sensitive personal data in centralized databases. Proponents, however, argue that solutions can be devised that will meet regulatory requirements while still ensuring user privacy.
Closing Thoughts
That is all behind anti money laundering meaning and the wider implications in the crypto compliance space. As cryptocurrencies have expanded and reshaped the global financial network, AML and KYC have become a basic need.
One interesting trend relating to AML and KYC compliance in the cryptocurrency ecosystem is the willingness of many exchanges to self-regulate, even when they do not fall within the purview of existing regulatory guidelines. This kind of voluntary compliance both minimizes future legal risks for the crypto-related businesses and also improves the likelihood of wider adoption of cryptocurrency.
