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The Need for Anti-Money Laundering Regulations in Cryptocurrency Markets

November 17, 2023

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The cryptocurrency industry originated with the creation of the Bitcoin network over a decade ago. The first cryptocurrency, Bitcoin and the altcoins that followed gained traction because of the expansive use cases they brought to the table. The most important of them is the ability to send and receive funds without the need for an intermediary like in the case of traditional finance. The absence of intermediaries, in turn, makes cryptocurrencies easily accessible and cheaper to transact while allowing users to maintain absolute control over their funds. 

The decentralized nature of cryptocurrency ecosystems doesn’t require users to establish their identity to own or participate in transactions involving crypto assets. The lack of third-party supervision over cryptocurrency transactions and the absence of identity requirements make cryptocurrency an attractive driver for illegal operations. The dearth of measures to control the happenings in this space is prompting regulatory action. 

Regulators around the globe have been working on legislation to keep cryptocurrency use in control. The regulatory legislation involves checks to prevent money laundering by criminal enterprises. Collectively, the laws being carved out for this purpose define the anti-money laundering regulations for cryptocurrency businesses to adopt in several jurisdictions. 

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What Is Anti-Money Laundering (AML)? 

Anti-Money Laundering or AML is a set of regulatory requirements that banks, financial institutions, and other money service businesses adhere to so they can prevent the facilitation of illegal activities. 

Essentially, AML requirements mandate institutions to verify the identity of their customers, source of the funds entering their books, monitor all transactions on their platforms, and report concerning behavior to regulators and relevant authorities. 

While AML legislation has existed for years in the traditional finance sphere governing the behavior of businesses and institutions, there was no such legislation specific to virtual assets. Cryptocurrency, being a fairly recent development, did not warrant any legislation in jurisdictions. Until 2014, regulators in several countries did not intervene in the existence and operations of cryptocurrency firms in their territories. 

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The deficiency of cryptocurrency-related regulations allowed for cryptocurrency usage linked with criminal activity to shoot up alongside its popularity as an alternate asset class. Darknet

marketplaces and other criminal outfits continue to benefit from cryptocurrency usage beyond users who merely utilize it to transact and store value. 

The Implementation of Cryptocurrency AML Regulations 

The Financial Action Task Force (FATF) consequently stepped in to bring regulatory frameworks to the cryptocurrency space as it did in the traditional finance space. The FATF is an international financial watchdog responsible for the adoption of well-defined AML regulations by several countries. It recommends regulatory guidelines which help jurisdictions and their financial setups combat money laundering by criminal enterprises. Obviously, halting the flow of funds into criminal economies is an effective way to put an end to them. 

To achieve similar control over the cryptocurrency space, the FATF began pushing out cryptocurrency-specific guidelines for jurisdictions to implement in 2014. Regulators around the world began developing legislation based on the guidelines and getting cryptocurrency platforms to implement the necessary AML framework. 

The guidelines recommend regulators mandate cryptocurrency platforms like exchanges and storage providers to implement thorough know-your-customer (KYC) protocols, monitor all transactions, and report high-risk transactions and wallets. The platforms are mandated to hire AML compliance officers and staff who constantly oversee and enforce AML compliance. 

Presently, jurisdictions with AML legislation in place require cryptocurrency platforms to possess definite plans and infrastructure to meet their AML requirements. Failing the requirements implies that they cannot secure the license needed to operate legally in that jurisdiction. Licensed platforms failing to meet the AML requirements in their operations risk losing their cryptocurrency license and face legal troubles. Therefore, regulatory compliance is now a highly important aspect of the functioning of cryptocurrency platforms. 

In 2019, the FATF added more suggestions to be enforced by regulators. The FATF released recommendation 16, more commonly known as the crypto travel rule. The travel rule requires VASPs to exchange KYC details of their customers when the parties are involved in cryptocurrency transactions that are over USD or EUR 1000. Additionally, VASPs are required to share the KYC and transaction details with their jurisdiction’s regulator. 

The Need for AML Regulations in The Cryptocurrency Sphere 

The implementation of well-formulated AML legislation is highly important to rightly guide the burgeoning cryptocurrency ecosystems within every jurisdiction. The idea of cryptocurrency usage is often associated with criminal activity by most people who possess an inkling about the assets.

While cryptocurrency transactions are a small percentage of the funds flowing through illicit economies, the generalization that cryptocurrency is meant for illicit activity prevails. Such misconceptions prevent cryptocurrency usage from reaching mainstream levels of adoption. 

However, the lack of regulation is also responsible for the propagation of such generalizations. Besides, illegal activity, although lesser than what is believed, is still a significant issue with using crypto assets. 

AML enforcement on cryptocurrency platforms will make the entire ecosystem safe for users by removing the criminal element. Users can be assured that the platforms they use are not associated with illicit activity and that the funds they interact with are clean. 

The idea that one can unknowingly receive funds related to crime and possibly face legal action is enough to keep potential users from ever using cryptocurrency. The presence of AML processes on platforms will prevent such incidents from ever occurring, allowing confidence in cryptocurrency usage to increase. 

Simultaneously, AML implementation will also benefit platforms. The presence of regulations will offer more clarity on the practices that platforms should follow and those they should steer away from. The certainty with which platforms can now operate will attract more businesses into the space and spur innovation. 

Further, platforms possessing regulatory approval signal trustworthiness and safety to cryptocurrency users and those entering the markets for the first time. Heightened innovation coupled with a trustworthy ecosystem will further attract scores of users to use cryptocurrency, tremendously driving up adoption. 

AML Regulations Can Make Cryptocurrency the Norm in Transacting 

Cryptocurrency users are subject to severe market conditions. The added uncertainties brought by scammers, funds linked to nefarious sources, and platforms operating with no regulatory checks were factors keeping cryptocurrency adoption distant. The enforcement of crypto AML legislation in jurisdictions all over is creating a better cryptocurrency ecosystem with sustainable values. Naturally, cryptocurrency is witnessing increased usage. 

The enforcement of AML regulation everywhere signals that the asset class is ready for mass adoption. The unprecedented growth of cryptocurrency-based applications and businesses reflects the potential of this new wing of finance. With AML regulations helping the industry move in the right direction, cryptocurrency can become the norm in transacting.

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