06.04.2022Insight

How can crypto businesses overcome AML hurdles?

How can crypto companies maneuver regulatory changes to drive growth in the EU while lowering operational costs?

The Fourthline Team author thumbnailBy The Fourthline Team
How can crypto businesses overcome AML hurdles?

As the cryptocurrency ecosystem continues to expand into the financial mainstream, more and more companies are looking for ways to offer access. But the rapidly changing and often ambiguous regulatory environment can hinder their success.

While it may seem daunting for some crypto businesses to navigate a path through a regulatory framework that has not been purpose-built for the sector, leveraging the right Know Your Customer (KYC) and Anti-Money Laundering (AML) solutions can actually be a big step towards gaining a competitive advantage. Here's how.

Crypto high on the regulatory agenda

Bitcoin entered mainstream discourse in 2017 when it increased in value by almost 2,000%. Since then, regulators have moved from a position of if they need to be involved in this growing space to how they should intervene.

EU Parliament Committees back tough traceability rules

On March 31, 2022, the EU Parliament's Committee on Economic and Monetary Affairs (ECON) and the Committee on Civil Liberties (LIBE) backed the Transfer of Funds Regulation (TFR) under which crypto firms would have to obtain, hold, and submit information on those involved in transfers.

Under the original proposal put forward by the Commission in July 2021, this would only apply to transfers worth 1,000 euros or more, but under the committees' agreement, all transfers would be in scope.

Meanwhile, the EU Markets in Crypto Assets regulation package (MiCa) has now entered a phase of discussions called "trilogue" between the Commission, Parliament, and Council. While a few disagreements could still bog the process, European legislators are under political pressure to wrap MiCa up before France hands over the EU presidency in July 2022.

The UK wants to “lead the way” in crypto

The focus on AML for cryptocurrencies is not just limited to the EU. In the UK, crypto businesses have been part of the regulated sector for money laundering purposes, and have been required to register with the national financial watchdog since January 2020.

However, the Financial Conduct Authority (FCA) reported that a ‘significantly high’ number of cryptocurrency firms had failed to meet the regulations aimed at curbing money laundering and set up a temporary register to allow crypto firms to continue trading while seeking full and legal authorization.

The deadline for registration was March 31, 2022, but the FCA announced an extension last week "for all but for a small number of firms where it is strictly necessary to continue to have temporary registration".

The watchdog’s deadline extension comes as the U.K. announces plans to mint its own NFT and a number of steps it will take to bring digital assets under more regulatory scrutiny.

The burden of compliance

The combination of increased reporting obligations, additional law enforcement tools, and heightened penalties make it essential for cryptocurrency firms to institute strong compliance programs, update their AML manuals and policies, conduct regular self-assessments, and adequately train their employees. The burden of compliance is firmly on their shoulders but it is not an easy undertaking, and many are finding increasing risks and costs of compliance unmanageable.

To date, the regulatory framework has not been supportive. Crypto companies were left guessing as to how policies would relate to them and which authority would enforce them.

Bitcoin, for example, has suffered from regulatory ambiguity, notes William Luther, assistant professor in the Department of Economics at Florida Atlantic University. For approximately four years after its launch, regulations relating to Bitcoin lay dormant in the United States. When new policies were drafted, they were often imprecise and sometimes even conflicted with one another. Finally, certain regulations were selectively enforced, catching both entrepreneurs and their customers off guard.

Regulatory ambiguity has certainly dampened innovation and entrepreneurship in the cryptocurrency space in the years since its inception. As our article explains, finding the balance between achieving their core goals and adhering to KYC requirements has not been easy for any crypto player. But with the authorities’ renewed focus on stamping out crypto money laundering activity, this is actively improving.

Turning KYC into a competitive advantage

Customer due diligence (CDD), KYC, and AML requirements can take up a lot of human resources that crypto businesses simply do not have, especially start-ups. This is where Regtech can save valuable time and cost.

Thanks to AI-powered technology, a fast and secure customer journey is fully achievable for companies of all sizes. Ongoing investigation and reporting functionalities allow cryptocurrency businesses to highlight and single out instances of potential money laundering, put a halt to them, and maintain compliance standards, while still offering customers a great user experience during and after onboarding.

At Fourthline, we provide our clients with the freedom and flexibility to implement solutions on a modular basis so companies can add further digital identity solutions (for example document or biometrics verification, watchlist screening, and proof of address).

We also offer deep knowledge of the differences in regulatory setup between European member states, ensuring local compliance and easy growth throughout the European Union.

By working with the current regulatory framework, understanding the intentions of different rules and legislation, and harnessing the right compliance solution that doesn't compromise on user experience, crypto businesses can thrive. They can even help shape the ongoing conversations about regulation in the industry and turn what they used to consider a burden into competitive advantages.

Koen de Lange, Regional Sales Director
Want to learn more? Contact one of our fraud & compliance experts

Get in touch with Koen de Lange, who brings years of investment banking and econometrics expertise to his role as Regional Sales Director.

Contact Koen