Cryptocurrency is a digital medium of exchange that was first introduced by bitcoin in 2009. There are currently more than 2200 cryptocurrencies being traded publicly totalling a value of $246 Billion. Unlike fiat currency that is regulated by a central bank and can be printed, cryptocurrency can only be generated through a process referred to as ‘mining’. The process is extremely complex, which is why the bitcoin value currently sits at $8,03327 for 1 bitcoin (down from a high of $19,783.06 in December 2017), alongside the fact only 21 million can be mined. The question then leads to why are cryptocurrencies in demand, who uses cryptocurrencies, and are they regulated?
Cryptocurrency is becoming extremely popular due to its lack of government intervention, no inflation, price and the perceived security it has. It can also be noted that not only do people view cryptocurrency as a medium of exchange, but also an investment. As a rising market with a lack of government intervention this could seem like the perfect place for criminal and terrorist activity. A global study by Confirm, a London-based regulatory tech firm, found that 69 percent of the crypto exchanges do not have “complete and transparent” KYC procedures. The study also found that only 26 percent of exchanges had a “high” level of AML procedures. Although these numbers are extremely high and show cryptocurrency to be a risk, the United Kingdom currently do not have any laws in place on cryptocurrencies as they are not considered legal tenders and the number of Brits using cryptocurrencies is a mere 3%.
Apace with not being regulated there is no government or regulatory intervention in the cryptocurrency market and as a result, terrorist financing has increased through these channels. Reuters have reported that the terrorist organisation known as Hamas have been raising funds through complex methods such as bitcoin. Each transaction creates a new digital wallet making it more complicated to flag the transactions which consequently make it more difficult to identify the source of funding.
The Fifth Anti Money Laundering Directive (5AMLD) will become mandatory EU law that will require all countries within the EU, including the UK, to abide by the regulations in place from 10th January 2020. The 5AMLD is an EU law that will require all EU members to follow and abide by the regulations set. Under 5AMLD cryptocurrencies will be ‘obliged entities’ which would have previously been defined as banks and other financial and credit institutions under 4AMLD. This ultimately changes the approach taken on cryptocurrencies and exchanges for more thorough background checks such as requiring to obtain the address and identity of cryptocurrency owners as well as monitoring transactions, and reporting any suspicious activity to the local Financial Intelligence Unit.
The regulation will also be introduced making it mandatory for cryptocurrencies to register with the authorities in the country they are domiciled in, for instance - FCA in the UK and BaFin in Germany. The Financial Action Task Force (FATF) has also raised standards to ensure that regulation of crypto assets goes further than the 5AMLD.
As the Brexit deadline currently projected for the 31st October 2019, and continues to loom, there is still no lucidity regarding the manner in which the UK will depart and whether a deal will be struck or not. The outcome of this will determine the laws the UK adopts or if new regulation is needed.
Moreover, the National Risk Association of Money Laundering and terrorism reported in 2017 that the risks associated with cryptocurrency relating to money laundering and terrorist financing were relatively low, however, thus is likely to increase. One reason could be that currently crypto assets are not easily accessible, which is why we are likely to see an increase the more accessible they become.
The European Banking Authority warned in 2014 that virtual currencies are vulnerable to criminal abuse, as transactions are made anonymous between parties and are not confined to jurisdictional borders. As cryptocurrencies are a worldwide currency and KYC varies depending on country and institution it will be difficult to impose regulation that will tackle it on a global scale.
The UK is currently attempting to introduce statutory instruments relating to Brexit to help translate EU law into UK law. Although the joint HM Treasury-Financial Conduct Authority-Bank of England Crypto Assets Taskforce has identified benefits of using crypto assets and its technology, it has also identified the risks associated with its effect on consumers and market. Recently the Guardian released an article stating that the FCA proposed a ban on cryptocurrency products as they are extremely volatile and not suited to small investors as they don’t understand the risks associated with them. However, some countries have decided to ban cryptocurrencies entirely such as China, Russia, Vietnam, Bolivia Columbia and Ecuador. Therefore, the future of cryptocurrency remains unclear and indications are it will remain that way.
Lysis Financial provides services across Governance, Risk and Compliance, enterprise-wide risk management frameworks, design of client on-boarding and AML target operating models, compliance policies and procedures. We can work with Cryptocurrency firms and exchanges to help make them compliant to the new money laundering regulations by January 2020.
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By Abdullah Ashur, Junior Consultant at Lysis Group