Crypto exchanges in the U.K. pose a “low” risk for money laundering and terrorist financing, says a report from the Financial Action Task Force.
The Financial Action Task Force wants the United Kingdom to “progress” with measures to formalize its domestic crypto economy.
The Financial Action Task Force (FATF), an intergovernmental financial security body, has demanded the United Kingdom step up its cryptocurrency monitoring. According to a new report released Dec. 7, the country needs increased measures to prevent money laundering and combat terrorist financing (CFT).
As part of its dedicated “mutual evaluation” on the U.K.’s Anti-Money Laundering (AML) and CFT efforts, the FATF identified the need to give its mechanisms for reporting suspicious activity a “significant overhaul.”
In addition, certain sectors of the economy — specifically real estate agents and high value dealers — do not show sufficient “understanding of their risks” vis-a-vis cryptocurrency-based money laundering or “how to effectively mitigate them.”
“Virtual currency exchange providers are not yet covered by AML/CFT requirements,” the report notes, continuing:
“This is an emerging risk and there is not yet evidence to suggest that broad scale ML/TF is occurring in the UK through this relatively small sector.”
The U.K. is currently in the midst of a regulatory shift in how it deals with various aspects of its domestic cryptocurrency industry.
Various initiatives have been greeted with mixed reviews, some parties sounding the alarm last month when it emerged certain instruments such as Bitcoin futures could end up blacklisted under new rules.
The FATF acknowledged authorities had “identified and assessed the risks associated with new payment methods” and that they were now “preparing regulations to extend AML/CFT requirements to this sector.”
Under its “recommended actions,” the body urged the U.K. to “progress plans to extend AML/CFT requirements and related supervision to virtual currency exchange providers.”
Abu Dhabi Global Market, an international financial free zone within the capital of the United Arab Emirates, has concluded the first phase of its blockchain-based KYC project.
An international financial free zone within the capital of the United Arab Emirates (UAE) has concluded the first phase of its blockchain-based Know Your Customer (KYC) utility project, according to an ADGM press release Dec. 4.
The Abu Dhabi Global Market’s (ADGM) regulatory body, the Financial Services Regulatory Authority (FSRA) along with “Big Four” audit firm KPMG have published a review of the project’s “successful” first phase in order to provide key takeaways for members of the financial industry.
The review outlines the project’s development over a period of four months, together with a consortium of major UAE-based financial institutions – including Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank, First Abu Dhabi Bank and others.
FSRA’s review of legacy KYC systems characterized them as “cumbersome, repetitive and cost intensive,” providing financial institutions with inefficient information sharing systems between siloed data sets, hampering KYC compliance and anti-money laundering (AML) monitoring.
A blockchain-based system was found to “radically simplify” the KYC process by providing an “immutable audit trail, seamless and secure data sharing,” which could moreover allow for individual clients to decide how their personal data is shared in the utility, in keeping with data protection (GDPR) and customer consent requirements.
As the review outlines, the use of cryptography and digital signatures, among other features, can contribute toward a secure, unified, and convenient system for upholding robust KYC standards across the industry.
The review also proposed the possibility of developing a commercial model of the project that could offer a fee-based rewards system to incentivize data contributors for uploading and updating their data, and charging data consumers for access.
Richard Teng, CEO of ADGM’s FSRA unit, has said the blockchain-based e-KYC project “demonstrated tangible benefits,” and would be able to “achieve significant cost efficiencies and financial inclusion driven by unified KYC standards.”
Following the successful first phase of the blockchain-based KYC project, the FSRA says it is now planning to launch its next phase, which will aim to facilitate small and medium enterprises’ access to banking services
A U.S. Department of the Treasury official has urged crypto industry players to jointly fight against fraudulent activity and the misuse of digital currencies.
The U.S. Department of the Treasury Under Secretary for Terrorism and Financial Intelligence Sigal Mandelker urged crypto industry players and regulators to prevent the illicit use of cryptocurrencies in a speech Dec. 3.
Speaking at the Financial Crimes Enforcement Conference on Dec. 3, Mandelker addressed the issue of mitigating risks related to emerging technologies, including digital currencies, which could potentially be used for nefarious purposes.
Mandelker stressed that financial institutions and cryptocurrency services providers must combat illicit activity and the risks of assisting bad actors. “The digital currency industry must harden its networks and undertake the steps necessary to prevent illicit actors from exploiting its services,” she said.
Mandelker also called on international regulators to strengthen anti-money laundering (AML) and Combating the Financing of Terrorism (CFT) frameworks in regards to digital currencies. Additionally, the Mandelker stressed the importance of supervision and enforcement of AML and sanctions obligations. Mandelker added:
“The lack of AML/CFT regulation of virtual currency exchangers, hosted wallets, and other providers — and, indeed, of the broader digital asset ecosystem — across jurisdictions exacerbates the associated money laundering and other illicit financing risks.”
The call to action followed a new approach that the agency took last week to target illicit actors, who deployed cryptocurrencies and other new technologies in order to launder and transfer ill-gotten funds. The cyber criminals allegedly used malware called “SamSam,” that affected over 200 victims, including state organizations and public institutions.
“As part of this scheme, two Iranian financial facilitators helped exchange the Bitcoin ransom payments into Iranian rial for the hackers. Last week, those two financial facilitators found themselves on OFAC’s Specially Designated Nationals and Blocked Person’s (SDN) list. For the first time ever, OFAC attributed digital currency addresses associated with designated individuals,” Mandelker said.
Meanwhile, the Estonian Ministry of Finance announced it will shortly add amendments to a recently-passed financial bill that are meant to “tighten” crypto-related regulation. The regulation reportedly introduces “virtual currency exchange service providers” and “virtual currency payment service providers,” while before there only was “alternative means of payment service provider.”
Today, the Department of Financial Services of New York (NYDFS) authorized a blockchain-based digital platform offered by a local Signature Bank. The system purportedly allows funds “to be transferred in real-time between two commercial clients of Signature Bank, eliminating any dependence on a third party.”
The South Korean Financial Supervisory Service has asked two major domestic banks to supplement their currency-related business procedures.
A South Korean financial authority has warned two major domestic banks about their lack of management of cryptocurrency transactions and anti-money laundering (AML) regulation, local online media outlet The Daily reports Dec. 4.
The Financial Supervisory Service (FSS) has reviewed Kookmin Bank and Nonghyup Bank and found “unreasonable elements related to virtual [currency] handling business.” However, the article notes that the regulation standards are not clear, and the FSS’s order applies only to some accounts that have been contracted with a real name verification service, not crypto counterparty (exchange) accounts.
The banks have also received orders for improvement and must submit the measures to the FSS within three months. The article notes:
“If the FSS considers that the content is insufficient, the FSS will be able to impose more direct sanctions in the future.”
In addition, the article states that there is a problem with the so-called “suspicious transaction extraction standard of Kookmin Bank’s virtual currency handling business.”
The FSS has also asked the National Agricultural Cooperative Federation (NACF), who owns Nonghyup Bank, to improve the related system so that suspicious transaction extraction criteria can be applied to all dealers, including the virtual currency counterparts that have not signed a real name verification service contract with the NACF.
At the beginning of this year, the FSS and the Financial Intelligence Unit (FIU) inspected six of the country’s major banks, including Kookmin Bank and Nonghyup Bank, to decide whether the institutions “carried out their obligations to prevent money laundering in managing virtual accounts.”
Also in January, South Korean financial authorities created a task force to oversee and inspect cryptocurrency exchanges’ compliance with the existing regulations.
This spring, three domestic banks, including Kookmin and Nonghyup, were inspected again by the the Financial Services Commission (FSC) to ensure the banks were conforming to new anti-anonymity regulations.
Following the inspection, the FSC released revised anti-money laundering (AML) guidelines for virtual currencies to ensure that there were no suspicious transactions and payment processing, Cointelegraph wrote Jun. 28.
Fintech firms including blockchain startups will be able to apply for the new fintech license with Switzerland’s FINMA starting from Jan. 1, 2019.
The Swiss financial regulator revealed that license pursuants, which can be blockchain-related and crypto-related firms, will be able to apply for the fintech license with the state authority starting from 2019.
The license, which FINMA notes has “relaxed requirements” under the country’s banking ordinance, allows fintech companies to accept public deposits of up to 100 million Swiss francs (CHF), or around $100 million. Within the terms of the license, companies are neither allowed to invest the public deposits nor pay interest on them.
In order to receive the license, an applicant must provide a number of details about their fintech project, including a business description, business financial plan, assets storage method, risk management, anti-money laundering (AML) policies, and others.
The license document, entitled “Guidelines for FinTech licence applications pursuant to Article 1b of the Banking Act,” has been in development since February this year, and is planned to be adopted on Jan. 1.
Earlier in November, FINMA issued Switzerland’s first crypto license, which targeted crypto asset investment funds. The license allows crypto-related firms to legally provide a number of collective investment services, as well as tracking Bitcoin (BTC) and other crypto assets, including domestic funds.
Leaders of the G20 group gathered in Buenos Aires over the weekend and cryptocurrency was on the agenda.
A final communique was published on Sunday to sum up the meeting and part of it called for unified regulations and a global approach to digital currencies. As reported by FXstreet the organization confirmed its commitment to using all political tools, including digitalization of the global economy and crypto assets, to promote global growth.
The publication also stated that G20 leaders are seeking to “build a taxation system for cross-border electronic services.” They are reportedly already working on such a system and aim to introduce it next year when Japan will be the president of the summit. After considering proposals from each member state a final version of the regulations are expected to be implemented by 2020.
G20 participants have agreed to develop a unified approach to crypto regulation in compliance with the standards of the Financial Action Task Force (FATF);
“We will continue to monitor and, if necessary, tackle emerging risks and vulnerabilities in the financial system; and, through continued regulatory and supervisory cooperation, address fragmentation. We look forward to continued progress on achieving resilient non-bank financial intermediation. We will step up efforts to ensure that the potential benefits of technology in the financial sector can be realized while risks are mitigated. We will regulate crypto-assets for anti-money laundering and countering the financing of terrorism in line with FATF standards, and we will consider other responses as needed,”
Earlier this year high ranking officials in the French and German governments issued a letter calling for more discussion on regulating cryptocurrencies. Japan, which has recently updated its ICO regulations, has also called for a more unified global approach to digital currencies. Leading companies in the industry have also called for a code of conduct regarding digital assets.
Back in July the G20 asserted that cryptocurrencies do not pose a threat to the global financial system. However they have persevered in monitoring developments in the nascent industry. As with most nations and central banks the greatest concern is money laundering so AML and KYC regulation will be at the forefront of any discussions and decisions.
The G20 is an international forum for government officials and central bankers from the world’s 20 largest economies. Member states represent 85% of global economic output, 66% of the world’s population and 75% of international trade.
Crypto markets did not react directly to the news but have retracted by a few percent on the day as they drop back to $130 billion.
The Estonian Ministry of Finance is about to add amendments to the national AML regulation, bringing tighter cryptocurrency regulation.
The Estonian Ministry of Finance will shortly add amendments to a recently-passed financial bill that are meant to “tighten” crypto-related regulation, Estonian financial newspaper Äripäev reports Nov. 28.
According to the article, a new version of the Anti-Money-Laundering (AML) and Terrorist Financing Prevention Act came into force this week in Estonia, conforming legislation to the EU’s so-called “Fourth Money Laundering Prevention Directive.”
The regulation introduced this week reportedly introduces “virtual currency exchange service providers” and “virtual currency payment service providers,” while before there only was “alternative means of payment service provider.”
Still, the Financial Supervision Authority (FI) has since announced that cryptocurrencies and the companies offering crypto-related services introduce money laundering risks, which is reportedly the reason for the new amendments, according to Äripäev.
Canada is also looking towards more regulation to prevent crypto from being used for money laundering, as the Canadian House Finance Committee recommended during its review of the Proceeds of Crime Money Laundering and Terrorist Financing Act (PCMLTFA) in mid-November.
Cryptocurrency is a “poor form of money” for most terrorists, says director of analysis at U.S. think tank FDD’s CSIF Yaya Fanusie.
The U.S. Congress Subcommittee on Terrorism and Illicit Finance has discussed various methods of terrorism financing with cryptocurrency, according to an official press release on the U.S. House of Representatives Financial Services Committee September 7.
In order to monitor threats and methods of terrorist financing, the hearing considered major means of transferring funds by terrorists, including traditional financial institutions and semi-formal methods, such as the hawala exchange system, as well as cryptocurrencies.
However, while al-Qaeda, the Islamic State, and other terrorist groups have all attempted to raise funds through crypto, they have not had great success, as Congress concluded in the meeting.
Yaya Fanusie, director of analysis for the Foundation for Defense of Democracies (FDD) Center on Sanctions and Illicit Finance, stressed that most terrorists, especially those that serve on “jihadist battlefields,” are currently living in environments where crypto is not operable, which means that fiat use is preferable for buying goods.
Fanusie pinpointed fiat money as the most anonymous method for funding, claiming that it is very popular among terrorists.
While Fanusie stated that crypto is a “poor form of money for jihadists” and “cold hard cash is still king,” according to a Forbes article, he still acknowledged that “there are multiple examples of terrorist cryptocurrency funding campaigns.”
The expert further stated that in order to combat the potential successful use of crypto fundraising campaigns by terrorists, the U.S. government bodies that are responsible for terrorist finance investigation should become more skilled in analyzing cryptocurrency transactions. Fanusie noted:
“By preparing now for terrorists’ increasing usage of cryptocurrencies, the U.S. can limit the ability to turn digital currency markets into a sanctuary for illicit finance.”
At this point, Fanusie appeared to recommend that the authorities should focus on minor crypto exchanges that trade alternative tokens or “privacy coins” instead of major exchanges that have significantly boosted their anti-money laundering (AML) and know-your-customer (KYC) policies over the past few years.
Earlier this year, risk management giant LexisNexis partnered with crypto exchange Blockbid in order to introduce security solution for exchanges dubbed “Trade with Confidence,” which intends to prevent terrorism financing, among other illicit activities.
In January 2018, Rep. Ted Budd (R-NC) of the House Financial Services Committee introduced a bill that aims to fight terrorism by offering rewards for information that leads to convictions of cryptocurrency-supported terrorism.
Paul Brody is EY’s global innovation leader for blockchain. The views expressed are his own.
At the beginning of this year, I wrote a column predicting that companies would find the allure of public blockchains irresistible. While a world of private blockchains provides many enterprises, regulators and central banks with the comfort that there are accountable, centralized entities involved, these permissioned networks will never match the innovation or network effects that public, permissionless networks offer.
If the world of enterprise commerce remains committed to private networks, then they will have only substituted one intermediary (financial institutions) for another (software companies and hosting organizations). However, it is possible, and essential, to bring these two worlds together, and to do so on public, permissionless and decentralized networks.
In order for public networks to deliver on their promise, two key things must happen. First, regulators must provide a clear set of rules around how tokens, assets and smart contracts that exist on public blockchains will be assessed. And second, companies must implement these regulatory rules in the decentralized environment of the public networks.
The first of these is off and running. Regulators in the U.S., Europe and around the world are defining what is an asset, a currency or a security. It shouldn’t be expected that all regulators will come to precisely the same conclusions, but it does look like some early convergence is taking place: Utility Settlement Coins are being characterized as securities while cryptocurrencies are being treated more like currencies or assets.
One gap that we regard as particularly important going forward is how tokenized fiat currency will be regulated: If you have a $1 token on a public blockchain, and that is backed by one U.S. dollar in an escrow account, will that be a security or a currency and what rules might apply? So far, no regulator has specifically addressed this emerging category of blockchain tokens.
The second is that whatever the regulatory rules are, they must be implemented in tokens and smart contracts. In particular, it’s important that while the blockchain as a whole may be decentralized, a central bank should be able to issue and cancel its own currency on a blockchain and companies should be able to manage their own assets when they are tokenized.
Know your carton?
To illustrate how important this is, let’s come back to the question of how companies will do business with each other on public blockchain networks: The exchange of product or asset tokens for money tokens. Once a company starts to tokenize its inventories and assets and use those in contracts and financial services, they are disintermediating traditional financial entities. They are also, consequently, taking on some of the regulatory responsibilities of those intermediaries.
Tokens, if they have value, can be moved around as easily as money, for example. While a consumer packaged goods (CPG) company may never have had cause to think about this before, once they tokenize packages of detergent, those tokens have an effective exchange rate with real money and other goods that makes them perfectly suitable for any kind of deal, legal and otherwise. That means even CPG companies will become responsible for know-your-customer (KYC) and anti-money-laundering (AML) compliance.
Is this a deal-breaker for public networks and enterprises? No, it isn’t.
One of the great benefits of smart contracts and blockchain tokens is that they are programmable. Going forward, audit, KYC and AML regulations can and will be written into smart contracts and tokens. Combined with exchange controls and other checks, it will be possible to control how and when tokens are used on public blockchains without resorting to the centralization of the blockchain as a whole. This will even include canceling and issuing new tokens to handle theft and loss.
There are, no doubt, many who will mourn the end of public blockchains as systems wholly outside of regulatory control. For blockchains to deliver on their promise, this is inevitable, but how this happens matters a great deal.
If regulatory compliance is delivered through centralization, then there will be a great loss to innovation and we may see the dream of a re-decentralized internet die. I didn’t call my original paper on blockchain technology “Device democracy” for nothing. It’s my dream, too.
There is another option, however: regulatory compliance within a decentralized framework. An opt-in model based on voluntary agreement to smart contracts means that companies can use blockchains for business without embracing undue risk. But at the same time, individuals and startups can continue to pursue radical experiments without having to ask anyone for permission.
Hardhats image via Shutterstock
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