Crypto Asset’s Pathway to the Mainstream through AML and KYC Compliance

The crypto industry has acquired a bad reputation as a conduit for money laundering and fraudulent activity and lack of regulatory oversight.

According to some of its proponents, one of the main reasons that Bitcoin exists in the first place is to circumvent government laws regarding client due diligence, as stated in the now famous Satoshi Nakamoto paper “payments to be sent directly from one party to another without going through a financial institution”.

Cryptocurrencies are a proof of concept for the use of blockchain technology, the benefit of which is that you get a secure immutable archive, which should be a good platform for asset management. However, for mass adoption by the asset management industry, cryptocurrency providers and cryptocurrency exchanges first have to ensure that their investors are not criminals or people with terrorist links. Know Your Customer (“KYC”) and Anti-Money Laundering (“AML”) due diligence represents a key route to giving that assurance, and ensuring compliance with any future regulation.

If you are considering setting up operations in the regulated crypto activity e.g. running a fiat-to-crypto exchange or raising capital as part of a securitised initial coin offering, choosing the right KYC and AML check solution should be a priority.

The joint HM Treasury-Financial Conduct Authority and Bank of England Crypto assets Taskforce Final Report represents a welcome addition to the space, setting out as it does, the UK’s planned approach to regulating crypto assets and distributed ledger technology in financial services.

Crypto assets Taskforce: Final Report

The Crypto asset Taskforce’s report states that it will take strong action to address the use of crypto assets for illicit activity by consulting on which crypto asset activities should be regulated, and bringing all relevant firms within the scope of anti-money laundering and counter-terrorist financing (“CTF”) regulation.

To achieve the above aim, the UK government is developing a robust regulatory response which will address these risks by going significantly beyond the requirements set out in the EU Fifth Anti-Money Laundering Directive (“5MLD”), providing one of the most comprehensive responses globally to the use of crypto assets for illicit activity.

The fiat-to-crypto asset exchange firms and custodian wallet providers will be brought into the scope of AML/CTF regulation, as required by 5MLD. The Taskforce Report also promises to provide clarification as to whether certain crypto assets already fall within the existing regulatory perimeters and whether the regulatory perimeters need to be extended. Therefore if your company is conducting crypto business in the UK, you may want to get involved in the FCA’s consultation, in order to make sure that you have input to the legislation that will be put in place in 2019 as a result of the Taskforce’s recommendations.

NorthRow is a founding member of the Innovate Finance association which monitors changes in legislation. During regular meetings we provide feedback on proposed reports and upcoming changes to ensure that NorthRow and our client’s AML and KYC compliance checks  continuously meet regulatory requirements. Our clients include a number of crypto asset companies, including CoinSchedule, CoinGift and Token.

Finally, it is worth noting that HM Revenue and Customs is planning to issue guidance on the tax treatment of crypto assets early in 2019.

Final word

If you are looking to start a crypto asset business it is important to ensure that proper procedures are put in place from day one. Governments are keen to ensure that these businesses do not become channels for money laundering or the funding of terrorism. Ensuring that you remain compliant by putting in place a robust client onboarding process that can adapt to changes in legislation is of paramount importance.