Crypto Anti-Money Laundering Measures in 2023: What Experts Say

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Crypto experts are hoping that increased regulation, especially anti-money laundering and know-your-customer (KYC) measures, will help businesses and customers in the long run, especially as part of surveillance regulations affecting the industry.

Last month, Bulgarian crypto lender Nexo, for example, found itself in the spotlight as the Bulgarian prosecutor’s office and state security service launched an investigation against the company for charges including the money laundering, organized criminal group, tax crimes, provision of banking services without the necessary license, computer fraud and violations of international sanctions against Russia.

According to Nexo however, the Bulgarian prosecutor’s office misinterpreted the facts regarding the financing of terrorist activities. The company also claims that all money laundering allegations against them are baseless. The prosecution also initially said the investigation was part of an international investigation, which so far has not been supported by any foreign partners.

Last year, the industry saw the collapse of crypto giants such as FTX, LUNA, and Celsius, among others. Such developments threaten to become a continuation of the industry’s downfall, especially when it comes to consumer confidence.

What crypto businesses need to do now is change that perception by complying and adhering to existing regulations, experts are adamant.

According to Bosnian entrepreneur and crypto expert Vedad Mesanovic, for crypto companies to operate legally, they should follow certain rules. In the European context, there is currently the MiCA Markets in Crypto-Assets Regulation, which is one of the first attempts at comprehensive regulation of crypto markets and extends to money laundering, consumer protection, liability of crypto companies and environmental impact. .

“Crypto companies must comply with a complex web of regulations that vary from country to country. Regardless of their operating model or intentions, without proper licensing and AML compliance, they risk being shut down by regulators or face significant fines. The blockchain market is so new and uncertain that it is natural for crypto businesses to face these challenges. However, it is also important to note that this process of maturation and change was meant to happen in this space,” Mesanovic told The Recursive.

Change in industry perception

Considering all the significant developments that have occurred in 2022, there is also a change in the way regulators and law enforcement agencies approach the industry.

“There are growing preemptive reactions, as the nature of virtual currencies allows for instantaneous global transactions, and in particular the relationship to existing anti-money laundering and anti-terrorist financing provisions” , crypto expert and vice-president of the Serbian Bitcoin Association, tells Arvin Kamberi at Le Récursif.

The blockchain’s transparent design also enables transaction tracking so law enforcement can use it to police online exchanges and trading platforms.

“Some cryptocurrencies put privacy and anonymity at the center of their design (like Monero), but virtual currencies are “internet currency” and online tracking is effective, especially if/when they are used for buy goods offline or convert them into national currencies,” Kamberi adds.

Although the Nexo investigation has yet to produce relevant findings, such cases could benefit the industry in the long run, some experts say.

“Situations like Nexo are good for the industry because, whether they have committed wrongdoing or not, they bring a certain level of regulatory reach and attention that is necessary for an emerging asset class like blockchain continues to drive the asset class forward,” Semir Gabeljic, director of digital asset hedge fund Pythagoras Investments tells The Recursive.

So, such an unregulated landscape was always a looming disaster, claims Mesanovic.

“Recent developments with companies like Nexo, FTX and Celsius have been waiting to happen in an unregulated industry that is still maturing and evolving. Visions and business ideas aside, many entrepreneurs have rushed into the business. cryptocurrency space with one intention: get rich quick. Such endeavors almost never end well. And then you have VCs recklessly throwing money at up-and-coming “visionary crypto geeks” while media companies are promoting their success, hoping to accelerate crypto adoption.The combination of all these events can only create a disastrous outcome,” says Mesanovic.

Complex and evolving problem that can benefit the industry

Although the regulation of the crypto industry is a complex and evolving issue, after all that happened in 2022, it is likely to bring the much needed positive effects in the sector.

On the one hand, regulation can increase trust and adoption of crypto by providing better consumer and investor protection, reducing the risk of fraud, and increasing transparency and accountability in the industry.

Therefore, crypto anti-money laundering measures – AML and “know your customer” – KYC should be a must for all crypto platforms looking to do business globally. However, while in some countries there are strong KYC measures, in others, like Seychelles for example, there are more lax regulations, which could be attractive to some industry entities looking to exploit this.

“Contrary to common opinion, cryptocurrencies are not so evidently used for money laundering and terrorist financing. As Europol’s report ‘Tracing the Evolution of Criminal Finances’ suggests, cryptocurrencies are mainly used for trading in illicit goods and services and fraud.Almost every country in the world has adopted regulations to require virtual currency traders to follow global AML and KYC procedures.This field is getting more orderly “, explains Kamberi.

On the negative side however, excessive regulation could stifle innovation and limit the potential for crypto to disrupt traditional financial systems. It could also lead to increased compliance costs and bureaucracy, which could make it harder for small projects and startups to survive.

“In order to improve public trust, fintech companies must monitor transactions, know the identity and understand the intentions of their customers. But they must also ensure that this data is not shared with third parties and that the people are not discriminated against in the process based on certain contributions,” adds Mesanovic.

Overall, the long-term effects of crypto regulation will depend on the specific regulations put in place and how they are enforced. A balanced approach that leaves room for innovation while providing the necessary oversight and protection would benefit the crypto industry in the long run, experts say.

“Best practices in the fight against crypto money laundering include verifying each investor, whether onshore or offshore, specific regulatory requirements for investing based on their jurisdiction, which includes forms such as the W-8 and proper documentation to ensure that the investor is not on sanctions list or sanctioned country. Essentially, strong internal control processes around AML/KYC and documentation. Crypto investors should avoid integrating with any platform considered a ‘grey’ area regarding AML and KYC integration and look for alternatives,” says Gabelljic.

What crypto businesses and projects could do on their own at this point would be to introduce and implement robust security measures to protect customer data and assets, and complying with any future regulatory requirements. .

“Cryptocurrency landing pads are the business models created during the peak of cryptocurrency value. These are not the landing pads as seen in regulated financial markets. They often use decentralized blockchains and FinTech solutions to move user funds into farming, staking, pre-mine, etc. schemes. Many of them were based on the principle of an “endless bull market” for bitcoin, and faced disastrous consequences when the value of the cryptocurrency market fell (look at the 3Arrows, Luna, Celsius ) and billions lost in days, leaving a market in shambles,” concludes Kamberi.

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