Crypto Anti-Money Laundering Regulations


Cryptocurrencies have surged in value and popularity, with people from all walks of life investing in digital currency. However, while cryptocurrency has many benefits, there are also some drawbacks. One major drawback of the crypto industry is the lack of regulations as a whole, including Anti-Money Laundering.

Throughout this article, we will look at what AML is, why cryptocurrency firms use AML providers, the risk of non-compliance, and if a decentralized financial system such as crypto should try to move away from some of these regulations or embrace them.

What is AML?

AML is a set of regulations designed to prevent money laundering and the financing of terrorism. The primary goal of AML is to deter criminals from exchanging any illegitimately gained digital currency for cash.

The process involves several measures, such as verifying the identity of customers and monitoring transactions for suspicious activity.

crypto anti money laundering regulations
crypto anti money laundering regulations

Why Does the Crypto Sector Need Anti-Money Laundering Regulations?

The laundering issue affects the entire financial industry — whether in fiat currency or crypto. In response to the increasing financial crime, regulators urge the government to adopt strict anti-money laundering legislation and work on a plan to combat this issue. However, AML frameworks are enacted across jurisdictions with quantifiable differences. In addition, AML legislation is inherently global, so crypto-techs fear they might face complexity and customer friction.

The cryptocurrency sector is no stranger to money laundering. In fact, due to their anonymous nature, crypto-assets have often been used for criminal activities such as buying things from the darknet markets and laundering money. That has led to concerns from governments and financial regulators about the potential for money laundering and other financial crimes in the crypto space.

In response to these concerns, many countries have introduced anti-money laundering (AML) regulations for cryptocurrencies. These regulations typically require crypto exchanges and other businesses handling crypto-assets to implement know-your-customer (KYC) measures and report suspicious activity.

AML regulations aim to make it more difficult for criminals to use cryptocurrencies for money laundering and other illegal activities. In addition, by requiring businesses to verify the identities of their customers and report suspicious activity, AML regulations help to make the crypto space more transparent and safe for legitimate users.

While some people in the crypto community have criticized AML regulations as being too intrusive or burdensome, they are generally seen as necessary to protect the sector from criminal activity. Without AML regulations, it would be elementary for criminals to use cryptocurrencies for money laundering and other illegal activities. This would ultimately damage the reputation of crypto and make it less attractive to legitimate users.

So far, AML regulations have successfully curbed money laundering in the crypto space. However, there is always room for improvement and further refinement of these regulations. The goal should be to strike a balance between protecting the crypto space from criminal activity and respecting the privacy of legitimate users.

Why is Crypto Anti-Money Laundering Compliance Essential?

To operate in the crypto space, businesses must comply with relevant AML regulations, which is essential to protect the company from criminal activity and customers from fraud and scams.

AML compliance is not only necessary for businesses operating in the crypto space; it is also required by financial regulators. In most jurisdictions, crypto-assets companies must implement KYC measures and report suspicious activity. Failure to comply with these requirements can lead to significant fines or even a business shutdown.

AML compliance is a complex and ever-changing area. Therefore, businesses need to keep up to date with AML regulations changes and ensure they have appropriate policies and procedures.

Several service providers can help businesses with AML compliance. These service providers can help companies with KYC verification, suspicious activity reporting, and other compliance-related tasks.

Ultimately, it is up to each business to ensure they comply with relevant AML regulations. Non-compliance can lead to severe consequences, so companies must take AML compliance seriously.

What Crypto Assets Should Enforce AML Regulations?

There is a lot of debate about which assets should be covered by the AML regulations. For example, do NFT purchases require AML checks, or is it just tokens and coins?

The EU’s AML Directive 2018/843 mentions tokens and coins, but not NFTs directly.

However, Article 2 has recently included point (j) to show AML is required to purchase or sell art for 10,000 Euros or more – which NFTs can fall under this category.

So, as a quick recap, the following require AML:

  • All coin sales and purchases.
  • All token sales and purchases.
  • All NFT sales and purchases exceeding 10,000 Euros.

So, what about NFT Purchases and Sales for Less than 10,000 Euros?

There is no current legal requirement in place for AML checks. However, regulations are getting tighter, and the reality is; that if criminals illegally get their hands on NFTs, they can sell them and launder the money.

Therefore, AML checks are at the provider’s discretion, but it is certainly not a negative to include the checks for all cryptocurrency assets, as it is likely to be enforced soon.

Risk of Financial Institutions Non-Compliance With Crypto Anti-Money Laundering

A breach of these rules can cause significant financial losses for crypto firms. The exact nature of such violations will differ depending on the breach in question and the company business model; some of those risk factors may include:

  • Ultimately, a crypto firm can lose its operating license and have to move its operations.
  • Additionally, if a company is found to have violated Anti Money Laundering regulations, it will likely face significant fines from financial regulators.- These fines can range from a few thousand dollars to millions of dollars, depending on the severity of the breach.
  • The company may also be required to disgorge any profits from the illegal activity.
  • The company’s officers and directors may be subject to personal liability if they knew about or were involved in the illegal activity.
  • The company may be subject to criminal charges, resulting in jail time for its officers and directors.

What is the Financial Action Task Force?

The Financial Assistance Task Force (FATF) is an international organization that defines global standards in AML. The FATF published guidance in 2018 to tackle crypto-based unauthorized activities. In recent months, FinCEN implemented most of the recommendations from the FATF. From here, the baton is passed onto virtual asset providers (VASPs), defined by FATF as crypto exchanges and stablecoin issuers.

VASPs are now responsible for Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance, just like traditional financial institutions. The main difference is that instead of looking at bank account balances and transactions, VASPs must monitor blockchain addresses and transactions. This requires advanced analytics to identify risk patterns and suspicious activity.

FATF’s Recommendations for Virtual Assets Service Providers (VASPs)

  1. Establish and maintain risk-based policies, procedures, and controls to prevent, detect, and report money laundering or terrorist financing;
  2. Implement customer due diligence measures, including enhanced due diligence for higher-risk customers;
  3. Take steps to prevent anonymous use, including identifying and verifying the identity of their customers;
  4. Obtain and keep information on the sender and recipient of virtual assets;
  5. Cooperate with other VASPs to prevent money laundering and terrorist financing;
  6. Report suspicious transactions to the relevant financial intelligence unit; and
  7. Comply with applicable sanctions regimes.

VASPs that do not comply with FATF’s recommendations may be cut off from the global financial system. This would effectively spell the death of the VASP, as it would no longer be able to send or receive fiat currency.

The FATF’s recommendations are not mandatory, but they are influential. Many countries have already begun implementing them, and more will likely follow suit. The United States has been a leader in this regard, with FinCEN issuing several guidance documents on how VASPs should comply with AML laws.

How does AML Work in the Crypto Industry?

The vast majority of crypto businesses that use an AML program make the AML and KYC procedures relatively simple to complete. While there is no one-size-fits-all answer to fighting financial crime with the existing rules, the process is usually straightforward.

If you want to see how the BHero launchpad AML and KYC process looks, click here.

The BHero launchpad currently has five steps:

  1. Connect your wallet to the dApp (for blockchain connection to your personal details)
  2. Provide basic information such as name, source of funds (for participating in a launchpad), etc.
  3. Complete a liveness check to prove you are a real person, not using a photo of someone else.
  4. Prove your identity with documents.
  5. Prove your address with utility bills, a bank statement, etc.

After you have completed your sections, the KYC and AML regulatory bodies will complete blockchain analysis, customer identification, and verifying documentation.

All the providers will carry out checks to help fight crypto crime by ensuring the applicant is not on government watchlists, has not received illicit funds, and provides suspicious activity reports about client transaction history.

Should the Cryptocurrency Industry Align with AML Requirements?

The question of crypto and decentralized finance adopting and conforming to AML regulatory authorities provides a massive split in the crypto community. Some believe DeFi should stay that way without the centralization of authorities. On the other hand, some say that we need regulations for higher adoption and safety.

There is no “one size fits all” answer here. However, compliance with regulations to keep your money safe can never be a bad thing, can it?

Cryptocurrency AML Frequently Asked Questions

Here are some of the most frequently asked questions surrounding Anti-Money Laundering regulations in cryptocurrency.

Cryptocurrency Money Laundering Statistics

2021 saw the following statistics:

  • $14 Billion in crypto was received by illicit addresses.
  • Total illegal transactions are $15.8 trillion (a 567% increase on 2020).
  • Only 0.15% of all transaction volume was illicit in 2021.
  • Scams and theft are the two highest ways criminals gain dirty money.

Always learn how to keep your funds safe, and we can reduce these rates.

How to do AML Checks?

Completing AML checks will vary depending on the provider and business you are buying into. However, most will require the following:

  • Name
  • Address
  • Date of birth
  • Proof of the above.

Some will want the following:

  • Liveness checks
  • Your intention
  • Details of fund source
  • Relationship to the business.

All AML providers will walk you through the process that they use.

Is Cryptocurrency Money Laundering?

As a whole, no, cryptocurrency is not money laundering.

Is Cryptocurrency Used for Money Laundering?

Yes, it is. However, tighter regulations and better public knowledge can stop it.

What Is AML in Cryptocurrency?

AML in cryptocurrency is the same as in the fiat markets; to stop people from having the ability to launder money.

When Does AML Apply?

Different countries have different regulations. However, the most prominent times that AML applies are:

  • Buying cryptocurrency
  • Selling cryptocurrency
  • Buying and selling NFTs over a specific value.

It is always best to check your area of residence, though.

When Will Crypto Become Regulated?

There are already some regulations in some countries and complete bans in others. Decentralization makes cryptocurrency challenging to regulate, so while there is no immediate regulation in sight, we can expect further regulations soon.

Where is Cryptocurrency Legal Tender?
  • El Salvador – September 7, 2021
  • The Central African Republic – April 27, 2022
Who Does Anti-Money Laundering Apply to?

All financial service providers.

Eddie Munteanu

Eddie Munteanu

COO - Head of Marketing

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