European Union’s 5th Anti-Money Laundering Directive (AMLD5) kicks in January 2020. The key development in the AMLD5 is that EU legislation steps into the cryptocurrency world by making providers of exchange services between cryptocurrencies and fiat currencies, and custodial wallet providers, obliged entities, whereby they will need to apply adequate AML know your customer (KYC) due diligence and reporting of suspicious transactions.
With this step, EU legislators aim to tackle the anonymity of cryptocurrencies that helps shady characters to “spin” illegal funds cycle easier. However EU legislators understand well the challenge of addressing anonymous transactions in cryptocurrency world, because anonymity would still exist when transacting via unregulated exchanges, e.g. crypto to crypto and non-custodial wallets providers, and therefore anonymity and transparency in cryptocurrency world would still raise few concerns.
How transactions between regulated and unre gulated exchanges will be monitored? As it’s stated in AMLD5, the objective of regulatory scrutiny is to combat anonymity related to cryptocurrencies, and therefore some exchanges and wallet providers will have to perform KYC and KYT procedures. But there is no indication how everything should work and what additional measures should be applied if a user of unregulated exchange/ wallet provider transfers crypto to a user of regulated exchange /wallet provider. Its aimed that national laws provide more clarity and specify the rules to address this grey area.
One can expect that the ideal solution applicable in such a situation would be to follow a risk based approach and apply rigorous KYC and KYT process to make sure you understand not only who your customers are, but also where their funds originate from and flow to, who’s their possible business partner, review customer’s profile every year at least based on level of risk, design and apply an effective transaction monitoring with scenario-based rules and thresholds that is correlated with confirmed customer’s occupation/ business profile.But when it comes to transaction monitoring in cryptocurrencies, reality is not as simple as it looks!
Cryptocurrency transaction monitoring means not only looking at transactional patterns and behavior, but also the history of cryptocurrency used in transaction. Unwrapping and disclosing the history might not be as easy as it looks, because some of the crypto market players help users avoid detection of their previous transactions by automatically generating a new address for every transaction. Such actions are justified by crypto market players as helping to protect their customers privacy even though it weakens in-house AML specialist abilities to assess client correctly and partly cripples transaction monitoring.
The key take-aways are to understand and evaluate risk when dealing with unregulated exchange/wallet provider, determine your risk appetite, apply measures to reduce the risk, whereby elimination might be needed in situations where it becomes hard to manage the risk. Clearly privacy is a much-desired feature in the virtual world and the mission here will remain to preclude criminal use. Anonymity and transparency in the cryptocurrency world
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