AML detection in cryptocurrencies: What you need to know

Cryptocurrencies are no longer an innovation. Today, as the industry evolves, institutional investors and companies from the traditional sector are actively joining the crypto space.

They launch their own crypto products, integrate existing digital assets into their payment systems, etc. Given the anonymous nature of cryptocurrencies, they can be vulnerable to misuse for money laundering purposes. And when it comes to institutional use, the problem becomes severe. 

Is there any lawmaker in crypto? Are there any measures to protect against illegal activities and financial schemes? This article will explain who is behind crypto regulations and the importance of digital currency AML checks.

How FATF is establishing the rules

The Financial Action Task Force (FATF) is an international organization that aims to create strategies to prevent money laundering and financing of terrorism (CFT). They keep a blacklist of countries that do not take action against these problems. The FATF provides guidelines for AML and CFT, which are mandatory to follow to avoid being added to the blacklist.

FATF released global AML rules and, over time, included crypto guidance. Other regulatory bodies (FinCEN, the European Commission, and others) joined the FATF’s rules. They apply to crypto assets issuers, exchanges, some DeFi protocols, etc. – all defined as virtual asset services providers (VASPs).

Institutional-grade exchanges must comply with AML policies. For example, you may receive crypto from your counterparty and want to make sure that the money is not linked to illegal schemes. Using the crypto AML check on WhiteBIT or another regulated exchange, you can quickly determine whether the money is linked to any financial crime.

Anti-money laundering in crypto

AML rules for VASPs include:

  • Know-your-customer (KYC): KYC and AML for crypto are typically coupled together. KYC means conducting customer identity verification and due diligence checks to ensure legitimacy. 
  • Customer due diligence (CDD) and enhanced due diligence (EDD): Performing risk assessments to understand the money laundering risks associated with each customer. 
  • Crypto AML monitoring: This involves continuously monitoring transactions for suspicious patterns that might indicate money laundering. Large, rapid, or irregular transactions, especially those involving high-risk jurisdictions, are monitored closely.
  • Record-keeping: Detailed records of customer identification information, account files, and transactions.
  • Reporting: Reporting suspicious activity to the relevant financial authority without tipping off the customers involved. 
  • Crypto risk assessment: Assessing the risks associated with VASP’s services, including types of customers, products, and countries they transact with.
  • Reviewing and auditing: Regularly reviewing and auditing the AML program to ensure its effectiveness and make necessary adjustments in response to regulation changes.

AML rules help increase transparency in financial transactions, reduce the risk of financial crimes, and build a more secure and stable financial environment.