The emergence of cryptocurrencies has lowered barriers to financial inclusion and revolutionized the financial ecosystem. However, with the upsides of crypto comes the same set of challenges that traditional banking systems face, one of which is safety. Digital assets are extremely popular for illicit activities, as payments can be made anonymously, cheaply, and without borders. In response to these potential pitfalls, governments and crypto companies have worked to create solutions. These exist under the same name as they do in traditional finance: Anti-Money Laundering (AML) regulations.
The term AML is the umbrella of regulations, laws, and protocols that aim to protect customers and institutions from illegal behavior. This can range from anything from terrorist funding to financial fraud, or profits from criminal activity such as human or drug trafficking, tax evasion, or corruption. Anti-money laundering aims to ensure that illegal money, disguised as legitimate income, can be found and sourced.
To create a regulated, safe cryptocurrency industry, AML measures are essential to building a trustworthy reputation in crypto. This blog will look at what exactly anti-money laundering regulations are, how they are implemented globally, and how they are relevant to cryptocurrency’s success.
Anti-money laundering regulations
What comes under this umbrella of ‘anti-money laundering’? AML regulations can cover a number of different things, including…
…Know Your Customer. KYC does what it says on the tin: regulates the means of legitimizing a customer's identity and protecting against fraud.
…Customer Due Diligence. CDD uses available data to determine if a customer might expose a business to risk.
…Enhanced due diligence. This is to check and assess customers already identified as high-risk.
Traditional AML regulations have changed over time as new technologies are created. In the US, the first anti-money laundering act came into force in 1970, dubbed ‘The Bank Secrecy Act’ (BSA) to make sure that banks had recordkeeping and reporting, and to properly identify who was carrying out transactions. The efforts were primarily focused on stopping organized crime syndicates from depositing large quantities of cash without reporting it to the government. Two years after its inception, the BSA was invoked in the famous Watergate scandal. In the 1980s, it was used as a weapon in the ‘war on drugs’ that gripped the nation at the time.
Just as in the US, governments have been creating new regulations and changing existing ones to keep up to date with the rapid developments in finance. Some of these regulatory bodies cross borders and have had a worldwide impact.
The Financial Action Task Force (FATF), for instance, is an inter-governmental body that sets international standards to combat money laundering and terrorism finance through any financial means. Since 2019 that also includes blockchain, crypto assets, and virtual currencies. FATF is one of the many agencies that have focused efforts on developing AML regulations for the crypto industry, and they are especially concerned with the traceability of crypto assets. For example, the ‘travel rule’ requires virtual asset service providers to share the personal information of both the sender and the recipient of a transaction after a certain threshold.
The FATF Travel Rule is, however, just a guidance. It is up to legislators around the world to take this guidance and then create their own legal framework. For instance, the European Union has developed the Traceability of Transfer of Funds (TFR) regulation, which ensures the traceability of crypto-asset transfers and authentication of users, using FATF standards. This will apply to EU law as of December 2024. In 2024, the Authority for Anti-Money Laundering and Countering the Financing of Terrorism (AMLA) was created to monitor regulations such as these.
Other examples of FATF-style regional bodies include the Asia/Pacific Group on Money Laundering, the Financial Action Task Force of Latin America, and the Inter-Governmental Action Group against Money Laundering in West Africa. All of these use FATF frameworks to enact anti-money laundering laws in their regions.
What has the impact been?
Implementation of AML regulations in the crypto space has wide-reaching implications for the industry. The industry needs regulations and safety protocols to legitimize its reputation with a wider audience and to become more mainstream. On the other hand, AML regulations can be limiting. The decentralized nature of cryptocurrency and other blockchain platforms means that it is difficult for regulators to enforce AML rules effectively. It also can turn customers off cryptocurrency if that anonymity and decentralization is mitigated by regulation.
With more and more AML procedures being enacted in the industry, it runs the risk of having innovation stifled. Compliance with AML can be costly, especially for smaller startups, and makes the barrier to entry much harder for newcomers in the space. It is also the regulated, safer cryptocurrency players that can end up feeling punished for the more volatile elements in the industry. Changing to adapt to new regulations hurts existing companies who want to stay within the parameters of the law, but costs nothing to those happy to ignore them.
The future of AML and crypto
The cryptocurrency industry, however, is consistently maturing. AML and similar regulations have played an increasingly central role in crypto narratives in the last couple of years, especially with regulatory frameworks such as Markets in Crypto Assets in the European Union coming into practice this year. Regulation is now much more central to the day to day workings of crypto. And with these more robust frameworks already in place, adapting to any new rules or guidances from regulatory bodies such as FATF will be a smoother process for both customers and companies.
In the future, as technological innovation continues to flourish in blockchain, there will be increasingly easy and cost-effective solutions for crypto to abide by AML regulations. Blockchain can help substantially with seamless, efficient solutions for AML efforts, instead of much more manual, costly systems.
Anti-money laundering regulations remain vital to making cryptocurrency as safe a space as possible, but will certainly look different as the years go by. It will be vital for the crypto industry to remain open to a two-way dialogue with regulators. Without actors in the crypto space providing feedback and context of the challenges and needs of businesses, regulations such as AML might begin to work against the industry rather than with it.
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