The advent of all thing’s web based has meant a plethora of payment mechanisms, and for those of us in compliance and traditional financial service provider roles crypto is seen as the new kid on the block with a taint of suspicion attached to it.
Like all new kids its experienced challenges as it fights these suspicions, battles against a lack of understanding and wading through unclear (or non-existent) regulations. However, this crypto kid is growing up fast and has many benefits, so let’s not stifle its growth.
Crypto is new to almost everyone and by educating ourselves and evolving our thinking, we can grow with it. And just as we do with other transactional mechanisms, if we protect against the risk posed by criminal elements wanting to harness new ways to hide money laundering or other criminal activity we can embrace it as a legitimate payment mechanism.
The challenge and attraction of crypto
Crypto has in the past been seen as an easy way to hide money laundering and crime, and as early adopters, criminals have certainly tried every avenue open to them but that is not the case today. In fact, the way criminals use crypto is no different to how criminals use traditional payments. If they want to get around a system to commit a crime they will.
The truth is, it’s actually easier to see and track transactional activity with crypto and view validation across blockchain analytics. Prosecutions in crypto which have occurred across the globe have often been because of the ability to track blockchain and transactions. In addition, the conversion of crypto to fiat currency and vice versa requires CDD at the onramp and offramp stages which provides transparency of the parties involved.
As reporting entities we’re well used to know your customer (KYC) activity, and the importance of understanding customer data and interpreting trends. This doesn’t change for crypto and will continue to be key whatever the payment mechanism.
2. Risk assessment can identify legitimate assets
Like any business, recognition of risks are crucial to operating crypto. Virtual asset service providers (VASPs) want to ensure that their clients are accessing legitimate assets and so a thorough risk assessment for every new product that surfaces is critical. This will help inform providers and links back to the tradition of know your customer.
If you are dealing with a new service provider in a day to day sense you need to be assured you are getting the product/service advertised and this is no different with virtual assets. The way in which risk is assessed will be different but like traditional assets, is critical to the process.
The key areas that I see in my AML consultancy world that most challenge VASPs are:
- when does a client become a client;
- the travel rule; and
- who is our supervisor?
It’s important that these challenges are talked through so that as a reporting entity you are totally sure of your position.
So when does a client become a client?
Well, consider the recommended risk based approach you’d take when onboarding any new client and your crypto compliance procedures should reflect this. Whilst legislative requirements may differ around the world, to avoid penalties from authorities don’t fall short on your procedures. Ensure you carry out customer due diligence, and use PEP and sanction screening alongside thorough identity checks.
Dealing with the travel rule
The Financial Action Task Force (FATF) states that the travel rule “requires VASPs and other financial institutions to share relevant originator and beneficiary information alongside virtual asset transactions.” However, this is proving a challenge globally with jurisdictions having different legislative requirements.
The FATF is attempting to make progress with this rule but jurisdictions are still not passing relevant travel rule laws.
We may not have got it right yet, but we need to stay open and agile as we deal with the complexities of cryptocurrency, and we continue to learn how best to meet the emerging challenges of travel rule compliance.
Who is our supervisor?
It’s clear that supervisors have different views and there is no definitive classification on where reporting entities sit within New Zealand. But supervisors are open to establishing good relationships with entities and working through challenges together. We should be open to developing these relationships and use networks to share information and educate.
Remember, crypto is a fast moving sector where information which may have been right a number of years ago, is no longer valid. We need to take control of our own education to ensure we are not flying blind.
3. It’s like eating cake
It’s like eating cake! I have to attribute this analogy to a Chainalysis webinar I recently watched, but this sums up the crypto world – ‘you can’t eat a cake all at once…it’s best eaten one slice at a time.’
Each crypto discussion I have is like eating another slice. The good thing about this is the cake goes on forever as we continue to be curious, new assets are introduced, and new tools are developed to help manage the assets.
Each slice may have a slightly different texture, and new recipes are coming out continuously, but with each slice, we develop, learn, and find out something new.
Embrace crypto innovation
Cryptocurrency isn’t going away, it is only going to become more and more common no matter what industry you’re in. So embrace it. Yes it has its challenges, some of which we’re still learning about, and we need to get the legislation right, but it’ll be worth it.
It wasn’t so long ago that cash and cheques were our only payment mechanisms, now look at how far we’ve come by embracing innovation and technology – let’s do it again.