February 15, 2023

AML and KYC Compliance in Crypto Industry

AML and KYC Compliance in Crypto Industry


  • With the growing status of the crypto industry, the risks of fraudulent and malicious activities, too, are rising, which can only be dealt with by precise AML and KYC compliance. 
  • Crypto AML is crucial as it prevents the nascent space from becoming the hotbed of money laundering and terrorist financing. 
  • The global standards for crypto AML/CFT were set by the FATF back in 2019, termed the FATF Travel Rule.

Despite the ongoing crypto winter, the virtual assets market commands a market capitalization of more than a trillion US dollars. 

New crypto assets are frequently coming up, projects are getting launched, and blockchain technology is moving forward with new solutions. The latest available data shows that nearly 550 crypto exchanges facilitate trade in more than 22,000 unique crypto assets to varying degrees. 

While these are promising signs for new investors, enthusiasts, and developers involved in the market, a threat looms large in the industry. Without addressing that elephant in the room, it is difficult for the industry to live up to its promises to the fullest extent. It is the threat of cybercrime.

Statistically speaking, fraudulent and malicious players used Decentralized Finance exchanges, cross-chain bridges, and coin swap services to obfuscate illegal crypto criminal proceeds worth more than $4 billion. If left unattended, these malicious actors will only grow in size, becoming a massive threat to the very survivability of the entire industry. 

What's the solution here? The crypto industry must become resistant to money laundering attacks in the most robust way possible. It is equally crucial that the industry conducts holistic due diligence and gets to know its customers better while offering assured privacy and a smooth experience throughout the process. And only then would cryptocurrencies competently serve the needs they are expected to.

The Important Role of Cryptocurrency

Cryptocurrencies, with their smart contracts, distributed ledger technology, and more, help make the world of finance more inclusive, equitable, intermediary-free, and accessible. 

Gaining financial freedom through crypto assets requires only a mobile phone and an internet connection. It offers a system that is free of censorship and cost-bearing intermediaries. 

The immutability of transactions recorded on a public ledger makes the system transparent. Crypto projects are also developed mainly on an open-source coding structure for developers worldwide to validate its claim. 

With all these advantages, cryptocurrencies play a crucial role in widening the scope of transaction-based financial services. However, since it is based on a technological paradigm that is evolving consistently, there is always the chance of some fraudulent actors exploiting its gaps to launder money. 

What are the AML Requirements for Cryptocurrency?

For cryptocurrencies, anti-money laundering efforts imply laws, rules, regulations, and policies targeted at preventing criminals from converting illicitly obtained crypto assets into fiat currency. FATF Travel Rule and KYCs are part of the anti-money laundering structure. 

Money launderers may exploit crypto exchanges, as well as custodian services, to fulfill their goal. Therefore, all sorts of cryptocurrency service providers must comply with the AML requirements of their jurisdiction. 

From a user perspective, if Virtual Asset Service Providers (VASPs) strictly comply with AML requirements, the end users will benefit from increased security and better access to financial services through a more legitimate and trustworthy industry.

Crypto AML Regulations: Global Approaches

The global standards for crypto AML/CFT came in 2019 from the FATF or Financial Action Task Force, an intergovernmental policy-making body that defines and sets the international standards to prevent money laundering and terrorist financing. 

The United States Financial Crimes Enforcement Network, the European Commission, and many other regulatory compliance bodies across the world have codified a large chunk of the FATF recommendations, making it essential for VASPs, such as cryptocurrency exchanges, virtual currency businesses, stablecoin issuers, DeFi protocols, NFT marketplaces, and others, to comply with them. 

Although only a few countries have adopted the FATF Travel Rule so far, it is expected that we will see the adoption grow in the coming days with many intergovernmental organizations, such as the G20, taking up crypto regulations for discussions and devising ways for a globally-coordinated approach. 

At that point, no matter where the VASPs are headquartered or have their operations, they will have to begin complying with the FATF Travel Rule, and for that, they will require a FATF Travel Rule Solution like Shyft Veriscope. 

VASPs that use Shyft Veriscope can comply with the Travel Rule without sacrificing the user experience and privacy, as all the user data that VASPs exchange through Shyft Veriscope happens in a peer-to-peer mode. At no point does the user data pass through Shyft's internal servers. Click here for more details on how Shyft Veriscope works and helps VASPs comply with the Travel Rule. 

How Does Crypto AML Work?

KYC in crypto assets is a combination of three consequent mechanisms: identifying customers with precision, conducting due diligence on customers, and monitoring them regularly. 

In the first step, customer identity verification includes knowing the client's legal name, date of birth, address, etc. At this stage, VASPs will ask for supporting documents in the form of a driving license, passport, business license, articles of incorporation from enterprise customers, etc. 

The next stage is due diligence, which is carried out to assess how risky the dealings with a specific customer could be. It is similar to traditional banking, where providers assign risk ratings to customers in the crypto space. 

To come up with the rating, which might change from time to time, providers conduct background checks on users and scrutinizes pertinent transaction histories. 

Conducting research into what sort of risks a customer pose is an ongoing process, as VASPs keep reviewing transactions to anticipate and preempt any potentially fraudulent activity. 

Aberrations and suspicious activities are flagged. Service providers must file Suspicious Activity Reports with appropriate law enforcement agencies like the FinCEN and others. 

Why is Crypto AML Important?

AML mechanisms help prevent crypto platforms from becoming a hotbed for money laundering. AML and KYC checks are deemed capable of protecting crypto exchanges from falling prey to malicious actors through customer due diligence and suspicious activity reports. 

Europe's 6th Anti-Money Laundering Directive has even advocated stricter controls with increased penalties for non-compliance. New technology paradigms are incorporated to make crypto AML more efficient and effective. Such technologies include many advanced methods, such as behavioral analytics and artificial intelligence.  

What are the Potential Criminal Activities in Crypto?

Criminal activities in crypto include a range of scams. Often scamsters exploit the privacy-enhancing properties of a blockchain platform, such as the user staying pseudonymous during transactions, to launder money. According to Federal Trade Commission (FTC) data, in the 14 months to Q1 2022, scamsters had stolen more than $1 billion from 46,000 people in crypto scams. 

Cybercriminals in the crypto world often exploit platforms for ransom. According to Chainanalysis data, ransomware payments amounted to more than $692 million in extorted money during 2020. There are also records of surging incidents pertaining to money laundering through DeFi protocols. The Chainanalysis report mentioned a nearly 2,000% increase in cryptocurrency laundered through such protocols. 

The current state of crypto regulations

In most countries worldwide, including the United States, Canada, Singapore, South Korea, China, India, the United Kingdom, etc., cryptocurrencies are not considered legal tender.

Although there are some countries that consider cryptocurrency legal and treat it as property, such as Australia, Japan, Switzerland, etc., only El Salvador has recognized a cryptocurrency, Bitcoin specifically, as a legal tender.

Most countries consider cryptocurrencies an unregulated financial instrument, with their respective Central Banks red-flagging their growing usage for a variety of reasons. For instance, India's Central Bank chief called crypto "poor gambling" and said CBDC is the "currency of the future." 

Surprisingly, even Singapore, a country earlier touted as one of the world's leading crypto hubs, now seems to have double thoughts about its plans. Recently, Singapore MAS Chief said he isn't keen to regulate cryptocurrencies, as, according to him, that would legitimize them. 

In the world's biggest economy, the United States, industry proponents believe that the government and the relevant authorities are upping the ante against crypto companies and projects, leaving them with no option but to shut down their shops and move abroad.

Overall, 2023 is dubbed the "Great Reset" by crypto industry leaders, as we will see major regulatory changes, leaving the VASPs with no options but to accept the regulated reality. 

Amid the upcoming regulatory onslaught, Shyft Network is working with all stakeholders to smoothen the transition for the crypto users, with user experience and privacy intact, as the crypto users and the ecosystem at large are our priority.

What is know-your-customer (KYC) for crypto?

As discussed already in the context of how crypto AML works, KYC, a component of a provider's AML compliance efforts, aims to check customer identities to ensure that the transaction is legitimate and legal. It is a procedure of identification/verification, background checks, transaction scrutiny, and transaction monitoring continuously. 

Why is Crypto KYC Important?

At their core, crypto exchanges are the same as traditional financial institutions in the sense that these firms and service providers face the same financial risk as all money service businesses. KYC measures and compliance helps these exchanges safeguard their services from money laundering risks and other financial crime risks, including identity theft, fraud, and much more. Click here for more details on Crypto KYC. 

AML Compliance Tools for Crypto

There are several types of crypto compliance software available in the market. These software solutions provide diverse solutions to exchanges and crypto service providers of other kinds. 

For instance, these solutions ensure continuous smart contract verification as developers keep changing their codes. They also scrutinize smart contract business logic to ascertain potential risk vectors. 

Some solutions help create verifiable human identities on-chain to safeguard privacy, screen crypto wallets for AML/CFT and sanctions risk, help market participants meet FATF travel rule guidelines (Shyft Veriscope), and investigate crypto or digital assets and crypto transactions. 

Risk of Non-Compliance With Crypto Anti-Money Laundering Regulations

Such risks could be many. Non-compliance may lead to crypto assets being used to evade sanctions. Even more concerning is the potential use case for terrorist financing. 

Many countries have already flagged this risk as their primary reason behind being suspicious of crypto assets. After all, many fraudulent actors turn illicit fiat currency into crypto to disguise the origin of their funds. 

At a more functional level, non-compliance for crypto businesses may result in being denied a license to operate, forcing a firm to even shut down its operations or go through significant remediation work to get back on its feet. 

AML Crypto Regulations in Europe

In June 2022, pertinent EU authorities struck a provisional agreement on anti-money laundering rules for cryptocurrencies. It was designed to motivate crypto firms to check their customers' identities. The crypto firms were also asked to report suspicious transactions to crack down on illicit funds. 

According to one of the lawmakers in the Union, the new rules would help law enforcement officials in linking certain transfers to criminal activities and identify the real person behind criminally fraudulent transactions. The rule makers also proposed overseeing unhosted crypto wallets held by individuals exceeding 1,000 Euros. 

Final Note

The crypto industry has many advantages. It widens the scope of our existing financial service delivery mechanisms by making them intermediary-free, inclusive, accessible, and more equitable. Yet, fraudulent actors exploit these emerging-tech protocols to launder money. 

While such cyber breaches, attacks, and intrusions in the system result in losses worth billions of dollars, they reduce the trust of the user and investor community toward the entire crypto ecosystem. 

Anti-Money Laundering laws and regulations help resist these exploits by incorporating a robust check and balance system into the process. It helps keep a consistent track of transactions to preempt fraudulent attacks and mitigate potential losses by acting on them beforehand.


VASPs need a Travel Rule Solution to begin complying with the FATF Travel Rule. So, have you zeroed in on it yet? Check out Veriscope, the only frictionless crypto Travel Rule compliance solution. 

Visit our website to read more: https://www.shyft.network/veriscope, and contact our team for a discussion: https://www.shyft.network/contact.

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