Crypto Market Turmoil Highlights Personal Risks for Compliance Chiefs

Blockchain creates an audit trail that documents the provenance of an asset at every step on its journey. In industries where consumers are concerned about environmental or human rights issues surrounding a product — or an industry troubled by counterfeiting and fraud — this helps provide the proof. With blockchain, it is possible to share data about provenance directly with customers. Traceability data can also expose weaknesses in any supply chain — where goods might sit on a loading dock awaiting transit.

• It requires providers of digital wallets, custody services and exchange services between cryptos and fiat currencies such as ATMs to be registered.
• First, it is important to know which regulatory agencies are relevant to your company.
• Overall, cyber-criminals have laundered more than $33 billion worth of cryptocurrency since 2017, with most of the total over time moving to centralized exchanges.
• Peru has actively embraced the industry with a view of achieving a regulatory approach that is in line with international organizations.
• These non-legal smart contracts present questions on who is liable if there is an error in the code which causes one party loss.

Therefore, the allocation and attribution of risk and liability in relation to the blockchain network and the transactions processed on the network must be carefully assessed and documented within each layer of network participation. Organisations that operate in New York are required to maintain a licence, known colloquially as a ‘BitLicense’, if they https://xcritical.com/ engage in ‘virtual currency business activity’. In essence, New York creates an ex ante licensing requirement before cryptocurrency-based business activities can be undertaken. The Central Bank of Kenya issued a public notice in December 2015 warning that bitcoin and other cryptos are unregulated and not guaranteed by any government or central bank.

Can you buy crypto without KYC?

Lithuania requires crypto firms to register with the country’s Center of Registers. Registrants must adopt comprehensive KYC and AML procedures and are expected to inform the Financial Crime Investigation Service about large transfers. Companies that are registered as virtual currency exchange operators are not supervised as financial service providers. They have no right to provide any financial services, including investment services.

The challenge in such a new and disruptive area will likely take years to finalize. Adding to the challenge is the ambiguous nature of digital assets themselves and the lack of standardized definitions, thus creating questions of overlap and jurisdiction. New proposed rules from the SEC related to alternative trading systems have raised speculation in the crypto industry that the regulatory expansion could include blockchain and cryptocurrency platforms. The FSB raisedpotentially serious concerns about financial stability in a recent paper. Given the international and diverse nature of the crypto-asset markets, it has advocated that regulatory authorities prioritize cross-border and cross-sectoral cooperation.

Data & document management

It clarified that ordinary tax rules apply, and that cryptocurrency mining would generally not be subject to VAT. Generally, profits and losses from crypto transaction are taxable as normal income. There is some uncertainty as to capital gains tax and whether сompliance for brokers they are held as “investments” under “Badges of Trade” and related case law. The GFSC has also said it would be cautious about approving applications for ICOs, and also about the establishment of any kind of digital currency exchange within the jurisdiction.

The legal framework is being heralded as one of the most comprehensive regulatory structures and standards in the world while also welcoming to the industry. Following several large crypto-exchange hacks, South Korea passed the “Act on Reporting and Using Specified Financial Transaction Information,” also known as the Financial Transaction Reports Act , which requires VASPs to register and comply with AML regulations. The BSP has published and updated FAQs for the public related to virtual currencies.

Integrate your internal processes with compliance technology

In the food industry, blockchain can help ensure food safety and freshness, and reduce waste. In the event of contamination, food can be traced back to its source in seconds rather than days. If cryptocurrency exchanges embrace KYC and customer verification methods, then the market will become more stabilized. This will increase the value of the market and will attract new customers to the space. KYC is important in financial contexts because criminals employ a range of strategies to evade AML/CFT controls. Thankfully, by building a rich and accurate risk profile of each customer, a crypto exchange can easily identify users that are misusing their services, and prevent crimes like money laundering and terrorism financing.

Additionally, for 83% of companies, it’s only a matter of time before they get breached, making it essential toavoid cyber criminals. Though crypto regulations are a work in progress, here are the most pertinent regulations framed by some US agencies. While all the connected devices can access and update the shared data in real-time, promoting transparency, they can’t delete or change the information once it’s stored on the blockchain. This is not due to a lack of information but an individual’s hesitance to learn and truly understand a new concept. According to the Treasury’s estimates, the difference between taxes owed to the U.S. government and those actually paid totaled nearly $600 billion in 2019. Gensler told Yahoo Finance that the SEC has successfully deterred other suspicious crypto firm activities.

Certified Enterprise Blockchain Professional (CEBP)™

Simplifying and speeding up licensing approvals, regulator audits and internal compliance teams’ ability to handle complex workflows can provide a competitive advantage. Being aware of and consciously embracing the underlying concepts of crypto compliance will let you be in the know when it comes to your consumers. This will assist you in identifying and weeding out high-risk customers, preventing illicit activities, and tracing addresses to the OFAC’s sanction list. Third parties often need access to essential information, such as data stored in the wallets, to offer crucial services, including asset servicing, fund administration, audit, and more. So businesses need to configure ways to keep their consumers’ private keys and crypto addresses safe while partnering with third parties. Now, you might be wondering how these sobering statistics relate to cryptocurrencies and, by extension, your business.

On November 14, 2021, an anti-money laundering order regulating transactions in digital currencies came into effect. The new law is seen as the first step toward the need for entities dealing in digital currencies to have a permanent operating license. Indonesia’s Financial Services Authority said it has “strictly prohibited financial service institutions from using, marketing and/or facilitating crypto asset trading,” the regulator said in a statement posted on Instagram. The People’s Bank of China banned financial institutions from dealing in cryptocurrencies in 2013 and later expanded the ban to cover crypto exchanges and ICOs.

Central bank digital currencies

Rather the usual intent is to regulate the activities that the technology helps facilitate. However, neutral drafting can make it difficult to interpret how regulation should apply and which participants should be caught. It is, therefore, necessary to carefully assess the nature and activities of a blockchain network and its participants and determine where that platform and its participants should sit within the regulatory landscape. Issued by the New York Department of Financial Services to crypto asset exchange, Coinbase, serves as a reminder of regulators’ growing interest in ensuring that crypto asset companies meet their anti-money laundering and sanctions compliance obligations. In 2019, the SEC released a ‘Framework for “Investment Contract” Analysis of Digital Assets’, which spelled out how the agency’s staff are likely to approach digital assets under Howey, though it is careful to state that it is not a binding standard.

AML compliance process for crypto companies with the help of AI

In the following sections, we will delve deeper into the specific steps exchanges can take to enhance the asset life cycle, attract institutional and retail investors, and position themselves for success in the evolving world of digital assets. To succeed in this evolving landscape, exchanges must not only meet regulatory requirements but also offer a variety of features appealing to different investor types. This includes tools for risk management, liquidity provision, and portfolio management, alongside educational resources and research for users. Furthermore, exchanges must explore new markets and asset classes to diversify their offerings and attract new users. Although tokenisation of traditional assets shows significant benefits for the industry, it still represents a technological challenge to implement on a wider scale. When it comes to solving for KYC, crypto companies are best-served by IDV solutions that offer robust international coverage, a streamlined user experience, automation, and multiple verification types for differing risk profiles and use cases.