Crypto to become one of the most secure environments ever

[ad_1]

Cryptocurrency experts discuss regulatory fragmentation, rapid adoption of travel rules, and good compliance practices for VASPs.

In January, blockchain analytics firm Chainalysis released a report revealing that only 0.34% ($ 10 billion) of all cryptocurrency transactions in 2020 represented illicit activity, down from around 2.1%. ($ 21.4 billion) a year earlier.

But if you listen to the sensationalism of individual adverse events by the media or politicians, you might have a more negative perception of the crypto industry, according to panelists in a recent webinar hosted by Refinitiv.

Yet one of the biggest shifts in how the industry is viewed in recent years has been among law enforcement and regulators who are actively working with blockchain technology and using its traceability benefits to combat the crime, according to Pelle Braendgaard, CEO of Notabene, which helps companies manage regulatory and counterparty risk in crypto transactions.

All the data is there, they can trace everything, which is why they are able to solve problems like ransomware. In almost all major [ransomware] cases, they were able to trace and isolate the funds fairly easily and fairly quickly, Braendgaard said. The reality is, if you are a money launderer, Bitcoin and crypto really are one of the worst tools for that.

Irregular patchwork of regulations

Despite the rapid development of tools to address concerns about illicit activity in the crypto space, the FATF (Financial Action Task Force) said in its second 12-month review of the implementation of its revised standards on cryptocurrencies. virtual assets and VASPs (Virtual Asset Service Providers) that the industry does not move fast enough and countries do not enforce regulations fast enough.

According to Malcolm Wright, chief compliance officer at 100x Group, which owns and operates the popular crypto exchange BitMEX, some countries are more advanced than others, creating an irregular patchwork of regulations that results in regulatory arbitrage on the part of some VASPs moving to jurisdictions where doing business is easier.

The FATF would like to see regulators level the playing field and put in place fairly similar regulations so that there is no opportunity for companies to bend the rules, Wright said.

The fragmented and rapidly changing regulatory landscape also makes compliance with AML rules more difficult, especially for large VASPs operating globally, said Grace Chong, Of Counsel at Simmons & Simmons JWS, where she manages regulatory activities. and digital and represents crypto exchanges, brokers and custodians.

She noted that countries implement travel rules and AML requirements differently, with variations in thresholds, while rules for reporting suspicious transactions also differ by jurisdiction. All of this can be extremely difficult for companies operating in multiple jurisdictions, Chong said.

End of regulatory arbitrations

According to Braendgaard, who helps companies implement the travel rule, the issue of regulatory arbitrage is likely to end within one to two years, even if some countries fail to keep pace with the implementation. national regulatory frameworks for VASPs.

What’s really interesting is that we are now seeing a lot of exchanges registering with us, not because it’s still a requirement, but because their counterparts are in jurisdictions where it’s a requirement, they must therefore now implement it. [the travel rule], he said. This precedes local regulations.

Braendgaard added that initially there were concerns that the adoption of the travel rule would be weak. However, industry adoption is now happening much faster, mostly for business reasons rather than just to meet local regulatory requirements, he said. I think that’s really what’s going to help bring it out next year.

Indeed, it appears that industry players widely recognize the way forward, and many crypto exchanges have decided to get ahead and have started to put in place best practices, including systems for adopting the rule. travel, Wright said.

Travel rules implementation

It describes the implementation of travel rules as having three parts, the first involving the messages that must be transmitted between VASPs. Last year, industry bodies including GDF (Global Digital Finance), where Wright chairs the AML working group, developed an email standard called IVMS101. This provided a standard data model that VASPs can use to transmit originator and payee information as required by the travel rule.

The second part is the transfer protocol to ensure that the IVMS101 message is transmitted securely. While a number of companies provide transfer protocols, the industry still strives to ensure that different protocols can communicate with each other seamlessly, Wright said.

The third part is being able to ensure that the data is stored securely in the VASPs. In February, BitMEX released guidelines for VASPs on good data storage practices when transmitting travel rules data. The principles cover access management, travel rules data security, information protection, logging and monitoring, incident management and privacy.

Meanwhile, the FATF consulted in March on updated guidelines for virtual assets and VASPs and is working on releasing a final version by November of this year. The guidelines further clarify the travel rule and the need for VASPs to use information obtained from KYC processes, or the home institution, to perform sanction screening.

Immediacy of screening results

Panelists highlighted the challenges for VASPs to comply with sanctions filtering obligations, especially if they do not collect information such as date of birth and nationality, as this will lead to a high number of false positives and will slow down customer onboarding. In addition to standardizing KYC processes, VASPs will need to deploy reliable screening systems such as World-Check, which allow for automation, immediacy of results, and the flexibility to adjust thresholds to manage false positive rates.

The World-Check database is already widely used in the wider financial sector. It covers 100% of sanctioned entities globally, contains millions of additional records that are not on official lists, including data on PEPs (Politically Exposed Persons), and offers negative media filtering functionality for identify other potential regulatory, legal and reputational risks.

The crypto first-time travel rule allows institutions to collaborate better before the transaction, Braendgaard said. He noted that the latest FATF guidelines stipulate that the transmission of travel rules data must take place immediately, in order to allow any freeze action to take place before the underlying transaction is settled.

I think blockchains and cryptocurrencies, with the right tools and the right trained staff, will truly be one of the most secure environments ever, he said.

Good conformity marks

Looking ahead, Wright said that good compliance for a crypto exchange could potentially involve integrating other exchanges almost like a correspondent bank with a due diligence questionnaire at the Wolfsberg Group. This would allow for easy two-way integration that will include questions on areas such as transfer protocols, screening practices, and data storage.

What we are currently building is a very robust ecosystem between exchanges that will allow the transfer of this information, but will also help raise the game because if you are not at that level then you will end up having a lot of trouble. to deal with those exchanges that are, Wright said.

For Jason Yu, director of compliance and anti-money laundering at HashKey Group, the characteristics of good compliance would be the tone of the top, the responsibility of the top management, clear roles and responsibilities, the establishment policies and procedures on controls, having the right tools and the right technology to enable the compliance function, well-defined escalation procedures, good record keeping and a training program in place .

–

For more practical advice on crypto compliance, watch this on-demand webinar.

100x Group, AML, Automation, Bitcoin, BitMEX, Blockchain, Chainalysis, Correspondent Bank, Crypto, Crypto Exchanges, Cryptocurrency, Customer Onboarding, Data Storage, Due Diligence, False Positives, GAFI, Featured, GDF, Grace Chong , HashKey Group, IVMS101, Jason Yu, KYC, Malcolm Wright, Notabene, Pelle Braendgaard, PEP, ransomware, Refinitiv, Regulatory Arbitration, Sanctions Screening, Simmons & Simmons, booth, suspicious transaction reporting, travel rule, VASP, assets virtual, Wolfsberg Group, World-Check

[ad_2]