AML Requirements for Cryptocurrency Exchange

AML Requirements for Cryptocurrency Exchange

AML Requirements for Cryptocurrency Exchange Software

The increase in the adoption and integration of Cryptocurrencies has great advantages and great disadvantages. Every exchange or wallet service provider faces challenges that emanate from within the system as well as from external market forces.

Cryptocurrencies are virtual; however, that virtual nature should not be a loophole for funning of illegal trades. That’s the core fact every party has to comply with the set AML Requirements for Cryptocurrency Exchange Software

What is AML (Anti Money Laundering?)

Money laundering refers to simply ‘cleaning dirty money.’ Taking a scene from ordinary fiat; a racket could be dealing with narcotics but finds ways to route the proceeds from crime into the mainstream financial intermediaries. When money lands within an ordinary bank, no one suspects that it comes from proceeds of crime. And that keeps fueling the trade.

Therefore, anti-money laundering narrows down to the creation of detection and prosecution mechanisms that inhibit illegal businesses.

Financial intermediaries and AML Requirements for Cryptocurrency Exchange Software

The main point of departure from Cryptocurrencies and ordinary fiat emerges with the nature of the intermediation behind each. Ordinary fiat is under constant regulation by the respective central banks that issued them. But what is the case for Cryptocurrencies? Cryptocurrencies central intermediary is the Blockchain itself, whose authority is derived from consensus by users.

There being no geographical limitation or scrutinized exposure of the natures and intent of transactions yields the real benefits and vulnerabilities. Governments are not at ease with the natures of value transfers that can be exploited. Under some rare circumstances, it’s also emerging that some governments with ulterior motives have rolled out Cryptocurrencies. That’s to bypass sanctions paced by international bodies.

Cryptocurrency Exchange Software- Minimum requirements in AML context

As a service provider, Cryptocurrency Exchange Software providers must be aware of the context within which they exist. At no point should they find themselves at the center of accusations related to financial crimes. A service provider has an opportunity to tap into the market by addressing the compliance gaps at a better level.

Here are two themes to explore for cryptocurrency Exchange Software providers:

  1. Know Your Customer(KYC):

Knowing your customer is the actual scenario with most commercial banks. Of course, they perform under the umbrella of the parent central bank. All customer records fall within individuals or corporates. And even in the cases of corporates, the financial regulations will cite that the individual board members be known.

All records of transactions are verified and red flags checked through. In any cases of follow-ups, central banks bear the upper hand in access to information relating to selected transactions. However, the Know your customer scope is not as exhaustive as should be. Perpetrators of Crime are easily able to channel resources through the banking institutions around.

Undertaking business as a regulated Cryptocurrency Exchange Software offers business services by enforcing KYC. It gives greater credibility to have internally set policies and regulations enforcing AML for all trading parties.

KYC has four main levels:

  • One is the Customer acceptance policy or CAP; it’s at this stage that a firm documents the demographic scope of the customers to trade with.
  • Second is the Customer identification program or the CIP, where potential customers are matched with the acceptance policy.
  • Continuing monitoring of transacting parties in line with the regulations. This is the core part that ensures that compliance is enshrined. Any suspicions regarding transactions are followed up upon.
  • The management of risks within the stakeholder’s matrix to ensure that the expectations of each party are adequately fulfilled within  the objectives of the  business relationships
  • AML and Combating Finance Terrorism (CFT):

Countering the Financing of Terrorism talks of the measures that act as deterrence towards the facilitations meant for the perpetration of violence against any human subjects. Within the context of Anti-money laundering, Cryptocurrencies are a darling when it comes to the transfer of resources whether within or across borders with the ulterior motive of fanning the violence.

The main problem with money is that you cannot mark good money from bad money. Essentially, AML Requirements for Cryptocurrency Exchange Software are faced with problems beyond strategic deficits. Businesses make attempts to explore newer avenues and Crypto schemes offer traceless mechanisms to siphon resources in more clueless modes between parties with the intent to finance terrorism.

  • Collaboration within the Regulatory Environment

There are institutions at national and cross border contexts to facilitate AML. For instance,FinCEN comes with huge databases and collaborative efforts; they encourage information sharing that facilitates AML through KYC and CFT efforts.

Some exchanges have deployed technologies that facilitate customer onboarding. Bitfinex, based in Hong Kong deployed Irisium’s technology for surveilling their markets. The technology detects any fraudulent transactions within their exchange.

What needs to be done?

Cryptocurrencies have a promising future, but the AML Requirements for Cryptocurrency Exchange Software render potential inhibitions to that. In the wake of challenges which can be routed to the deficits posed by Cryptocurrencies and specifically with regard to AML; some governments have placed bans on the use of them as modes of transacting. That places the exchanges in a bleak mode.  The regulators attempt models to ensure that compliance at all levels is fault proof with no room for exploitable vulnerabilities.

On another hand, entrepreneurs are ruthless in exploring avenues to transfer value. And with bans on ICOs, explorations seem to have geared towards IEOs. In some circumstances, Cryptocurrency exchanges have closed down and shifted to jurisdictions that are considered to be more havens to them. A huge portion of customers need to transact even when they have domiciles with thin crypto-banned nations.

Compliance remains key with the set regulations that mean carrying on business within acceptable set standards for knowing your customer and combating the financing of terror.

Parting note:

Software’s are invisible, but we can see and evaluate what they achieve. Every software developer and vendor must invest beyond the ordinary curve to safeguard every stakeholder within their business. The players within Cryptocurrency arenas are not an exception.

The benefits of a legit business outweigh the dire consequences of ignorance that can emanate from the exploits of poor adherence of the minimums for AML Requirements for Cryptocurrency Exchange Software.

One of the best avenues is to get listed within jurisdictions and exploring every effort to do business that is in the interest of the larger society.