Alan Paterson
Bob Wigley
Plenitude Insights
Sanctions
Digital Assets
Digital Assets/CryptoOur whitepaper makes sense of the spectrum of financial crime risk posed by cryptoassets, how to manage it effectively and what firms need to consider and prepare to safeguard the financial system by adopting a truly risk-based approach and enable the cryptoasset industry to flourish.
Economic crime threats are continually evolving, impacted by the emergence of new technologies, services and products, and the cryptoasset sector is no exception. Ten years ago, Bitcoin mining had become the token of choice for darknet markets with over a third of cryptoasset transactions estimated to be illicit. Today the direction of travel is very different. International standard-setters such as the Financial Action Task Force (FATF) have laid down the challenge for the crypto sector to become a regulated gatekeeper to the legitimate economy, with the UK and other countries legislating to bring cryptoasset firms within regulation for anti-money laundering and counter-terrorist financing.
This paper aims to support financial institutions as they navigate this transitional period. While the anti-money laundering regime is meant to support a risk-based approach this can be difficult to apply to the cryptoasset sector, given the semi-anonymous nature of cryptoassets and the fast pace of change across technology, business models and regulation. While many cryptoasset firms are developing and applying innovative technological approaches to financial crime controls, there are also new types of cryptoassets, exchanges and tools being used to enhance anonymity and defeat KYC and fraud prevention techniques. By summarising the range of cyptoasset business activity, associated financial crime risk and good practice, this paper aims to help financial institutions inform their risk appetite and take a more considered approach to risk management
Conclusion
Cryptoassets and their decentralised, quasi-anonymous nature pose a disruptive threat to traditional financial institutions. The same could have been said for MSBs, payment service providers and e-money providers over the last 20 years, which all stirred up significant debate regarding consumer protection and the integrity of the financial system. Eventually, traditional financial institutions have found ways to work with these other sectors and incorporate these new services into the wider financial ecosystem.
Achieving that elusive balance between innovation and regulation, with prominent voices weighing in – some touting cryptoassets as the future of finance and others raising concerns about the illicit finance implications of the cryptoasset ecosystem – make for a confused debate. While it is true that we don’t know what we don’t know about the cryptoasset market, the same remains true of illicit activity in the banking system and other sectors, as evidenced by multiple continuing scandals and enforcement actions.
Further application of KYC/AML regulations, long seen as effective by regulators, professional bodies, and multilateral institutions will help assuage financial institutions concerns about cryptoasset transactions. Equally a continued drive to identify illicit activity, prevent fraud, track and trace illicit funds and provide information to regulators and law enforcement will all stand the industry in good stead.
