Why is it important?
Cryptocurrency is becoming less a tool for criminals confined to dark web activity. Instead, many everyday investors are now looking to diversify their portfolio with some crypto, and there are even crypto credit cards that let you buy your groceries, clothing and even that Friday bevvy using your own crypto!
With so many emerging use-cases for Bitcoin and other cryptocurrencies, it’s no surprise that the regulators have started to look at ways in which digital assets like these should be regulated.
In NZ, cryptocurrency companies (also called Virtual Asset Service Providers, or “VASPs”) were brought in to DIA regulation with the other Phase 2 entities, and since then it’s been an
exciting (but challenging) few years.
What does compliance in crypto look like?
Any financial instrument is vulnerable to being abused for money laundering or the financing of terrorism, and cryptocurrencies are no exception! So, as have other reporting entities over time, NZ crypto companies were pushed to wade into the waters of compliance and the journey of understanding exactly how AML/CFT looks in their space.
We are always working to improve our systems and processes in this new and fast-paced industry! Part of this is also trying to work with the regulators to help them understand what AML/CFT currently (and could potentially) look like in the crypto space.
Here’s a brief glimpse of what compliance in crypto looks like to date:
KYC/CDD
Customers are on-boarded at the sign-up stage, with their ID and address verified.
EDD
Enhanced due diligence is performed where required by law/legislations, including the collecting source of funds (both fiat and crypto) evidence.
Account and transaction monitoring
Account and transaction monitoring includes (but isn’t limited to): Automatic monitoring systems & Manual monitoring techniques.
Spend limits/tiers
New customers’ spending is limited until we have collected and are satisfied with the relevant source of funds evidence. This includes both the NZD that will be used to purchase, and any externally sourced crypto a customer is looking to sell.
Compliance reviews
Accounts are monitored by compliance teams for regular checks where needed.
What are the challenges?
Lack of pre-established consumer behaviour profiles
It’s been a real challenge having to build an understanding of typical and atypical customer behaviours from scratch, with very few industry examples to help as a starting point. This has led to some fun and exciting research projects!
Constant new trends/technologies emerging
There are always new and innovative ideas being born in the crypto space, which is extremely exciting for the future of finance and economics as we know it. But it also means we’re always needing to understand the latest new thing in crypto in order to identify and mitigate any potential compliance risks.
With these new technologies come not only new opportunities for criminals, money launderers or terrorist supporters – but also constant new opportunities for scams. This is why we’ve made it our mission to educate our customers on the risk of scams, as well as teach our staff how to spot possible scams and how to support victims. This is another reason why it’s important for ourselves and the industry/regulators to keep up with new trends to identify any emerging compliance risks.
Making the legislation fit
Interpreting the legislation for cryptocurrencies (or “digital assets”) was difficult to begin with… but after some chats with and clarification from the regulators, it was possible to build our processes in a way that fit. A huge part of this was understanding the purpose for each part of the legislation, and one of the biggest resources referred to for this was the DIA’s virtual asset service provider (VASP) guidance.
What are the great benefits of crypto in terms of AML/CFT?
Better oversight of the movement of funds
The nature of crypto allows for blockchain explorers and address mapping software (such as Blockchair.com or Chainalysis) which means we can build a clearer picture of the movement of crypto being bought and sold by customers. From a compliance perspective, this has proven to be hugely beneficial as it allows for more transparency not only for where the funds are going once we send them to the customer’s wallet, but also for whether an individual is being honest in their claims.
Uncovering new trends
Some of the new technologies/ideas can be utilised for compliance tools/methods, and there’s the potential for crypto investigations to assist understanding some of the methods used by large ML/TF groups.
Bringing the dark to the light
Crypto has had a bad reputation for being used by criminals, particularly going back to its common adoption for use in making purchases on the dark web in its early days. This is why it’s important for legitimate crypto companies to do their part in bringing crypto into regulation in order to make sure it’s sustainable. We want crypto to be brought into the light to be used by everyone!
In summary
The widespread adoption of Bitcoin and other cryptocurrencies for investment and other purposes means it’s super important for crypto companies and regulators to continue exploring the emerging technologies to stay ahead of criminals – which makes compliance in the crypto space a uniquely challenging area. While they come with some compliance challenges, cryptocurrencies offer AML/CFT benefits that other financial instruments can’t offer (such as blockchain analysis), which can help to improve our understanding of the way ML/TF groups are working. For this reason, the crypto space will be one to watch over the coming years, and could provide some useful new tools and knowledge in the general area of AML/CFT compliance.
Alex McCorkindale
Head of Compliance at Easy Crypto
Read more on the ‘World of Crypto Currency‘ with Anna Rybakova from BitPrime.
Adam Hunt 
Bob Blower 
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