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The Money Laundering & Terrorist Financing Risks Associated with ICOs


Initial Coin Offering (ICO) also known as a ‘token sale’ or ‘coin sale’ is a method of fundraising in the cryptocurrency industry. Funds are raised by the sale of coins at a discounted price which bares similar resemblance to IPO’s. The ICOs are usually accompanied with a white paper which is an official document informing the investors on the product in a hope to lead them into investing.


As the cryptoasset markets are not currently regulated, ICOs have presented a money laundering and terrorist financing risks; examples include the case of Fantasy Market who were charged by the SEC for running a fraudulent ICO scheme.


In an attempt to raise $25 million by selling 125 million FMT tokens, Jonathan C. Lucas the founder of fantasy market had made a white paper with fake claims to lure investors. The white paper had claimed the value of the tokens provided would increase as the demand for the Fantasy Market platform rose and that a working-beta version of the site existed which was later found to be false.


The lack of formality involved in ICOs gives the opportunity for individuals to launder money through swapping cryptocurrency that originated from illicit financing for tokens that can be sold for fiat currency. This makes it an attractive market for money launderers and terrorist financing as the lack of regulation and government intervention has made it difficult for criminals to be identified.


Although ICOs share similar features to IPOs they do not have to go through the strict regulation set by regulators such as the UK FCA. Currently not all ICOs fall within FCA’s regulatory boundaries which is why it is decided on a case by case basis. It is usually the case that ICOs involving regulated investments and firms, Tokens that constitute transferable securities, placement of securities and crowdfunding all fall under the boundaries of the FCA regulation.


Things are, however, set to change; from the 10th January 2020 the FCA will be the regulator for cryptoasset markets in the UK to help combat money laundering and terrorist financing when the EU 5th Money Laundering Directive is set to be transposed into UK Law. ICOs fall under the MLRs set out by the directive which will require them to register by 10th January 2021 or cease trading. However, in an attempt to reduce the risks from the cryptoasset market the FCA will supervise businesses whether or not they have registered.


One of the risks posed by ICOs is the potential risk of fraud as some issuers may not have the intention to use the funds raised in the way the project was marketed. This will be tackled by the assessment approach outlined by the FCA which will require businesses to demonstrate that is has policies, controls and procedures in place to effectively manage money laundering and terrorist financing risks.


In order to comply with the new regulations cryptoassets business need to:


  • Develop and embed an effective and proportionate AML governance framework;

  • Develop policies and procedures which are aligned to the firm’s risk appetite statement;

  • Embed systems and controls which are proportionate to the firm’s business;

  • Ensure an effective three lines of defence model is in place to protect against financial crime;

  • Ensure all personnel undertake effective training to instil a positive culture in relation to combating financial crime.


If you would like to know how Lysis can support your business to comply to the new regulations, please email info@lysisfinancial.com.


By Abdullah Ashur, Consultant at Lysis Group

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