26 February 2024
By Roger Kennedy
roger@TheCork.ie
There are over 20,000 active cryptocurrencies, with new ones emerging daily. The total value of cryptocurrency peaked at $2.9 trillion by the end of 2021 but dropped to $970 million by June 2022 due to a market downturn starting in April 2022. Cybercriminals exploit cryptocurrency trading to launder illegally obtained funds, avoiding government oversight and converting them into cash. According to Chainalysis’s “2022 Crypto Crime Report,” the total amount of money laundered through exchanges is $33 billion since 2017.
To combat money laundering on crypto exchanges, they integrate crypto address AML check. What is it, and why is it crucial for exchanges to comply with the AML rules? Let’s figure it out in this article.
Regulations for Crypto Currencies
Money laundering, financing of terrorists, and other illegal activities with crypto assets created the need for enhanced cryptocurrency security for crypto exchanges, coin issuers, and any companies that deal with digital assets. FATF (Financial Action Task Force) is an international organization that combats money laundering worldwide. It released its recommendations about crypto regulations, including AML standards. It is mandatory for every crypto-related business, service provider, and issuer to comply with AML regulations to prevent involvement in illegal financial activities.
How Crypto Exchanges Comply with AML Regulations
To ensure AML compliance, crypto exchanges should implement several practices:
- KYC (know-your-customer) procedures. Exchanges should have a robust KYC process in place to accurately identify and verify their customers’ identities.
- Risk-based approach. It involves identifying potential risk factors associated with customers, countries, and types of transactions and applying enhanced due diligence procedures for higher-risk scenarios.
- Monitoring and screening systems. Continuous transaction monitoring systems can help identify suspicious activities in real time, allowing for timely intervention.
- Reporting. Exchanges report any suspicious activity to relevant authorities for further investigation.
- AI and ML. To handle massive databases, crypto companies integrate technological solutions based on artificial intelligence and machine learning. Crypto companies have two options: building an in-house solution or outsourcing the task.
Neglecting AML compliance exposes crypto exchanges to severe consequences, including hefty fines, operational disruptions, and reputational damage. Non-compliance can lead to legal actions and the loss of banking and business partnerships, critically impacting an exchange’s operating ability. Furthermore, it undermines the integrity of the financial system, making exchanges complicit in money laundering and terrorist financing.
Wrapping up, AML compliance is not only a legal obligation but a fundamental necessity to ensure the sustainability, financial transparency, and trustworthiness of crypto exchanges.