AML in Crypto: How is it Enforced? And in What Ways Can it Impact Everyday Investors?

Question

Crypto investors often view regulation in a negative light, but it’s proven to be extremely effective in preventing criminal activities on the blockchain and in the markets.

Unfortunately, money laundering isn’t restricted to traditional financial markets; crypto has also become a target for malicious individuals looking to generate cash illegally

AML is put in place to prevent this, but how reliable is it really? And how does it impact the everyday investor? Keep reading as we take a deep dive into the wider implications of AML and how it works in practice

What Does AML Mean?
How Prevalent is Money Laundering in Crypto?
- When Did it Become a Problem?
How Criminals Launder Money in Crypto
How AML Works in Practice
- KYC (Know Your Customer)
- Crypto Wallet Screening
- Monitoring Transactions
The Role of Regulators
How Does This Impact Investors?
- Signup Requirements
- Transaction Restrictions
- Less Privacy
- Potential for Higher Liquidity
- Regulatory Uncertainty
- On the Flipside
- Why This Matters
- People Also Ask:

What Does AML Mean?

AML stands for anti-money laundering and refers to the rules, policies, and laws established to prevent criminals from turning unlawfully obtained crypto into real-world fiat currency

Because cryptocurrency is decentralized, allowing users’ personal information to remain anonymous when executing transactions, crypto has become an enticing arena for criminals

This, therefore, feeds into the main goal of AML protocols: to establish a clean and responsible cryptocurrency landscape that isn’t filled with bad actors exploiting the system for their selfish greed

How Prevalent is Money Laundering in Crypto?

Crypto’s low cost and direct transactions, along with its ability to hide a digital footprint, have sadly drawn many criminals to it for the purpose of laundering money

In 2021, Chainlink reported that almost $9 billion worth of crypto had been lost to money laundering activities. However, this number skyrocketed to $23.8 billion just a year later, according to Chainalysis, indicating that this is still one of the biggest issues in crypto

When Did it Become a Problem?

Money laundering in crypto isn’t exactly a new phenomenon, though. It can actually be traced back to the government’s crackdown on the dark web website known as the Silk Road in 2013

When it was discovered that the illegal site was involved in money laundering solely using Bitcoin (BTC) as its form of payment, this sparked concern among government agencies about how much crypto was being used for such acts, kicking off the wave of regulations that exist today

How Criminals Launder Money in Crypto

By exploiting blockchain and crypto technology, criminals can acquire money illegally through a multitude of devious tactics, with these being the most prominent

Smurfing: Separating large sums of cash into smaller amounts which are then sent to a wallet through multiple transactions to obscure the identity of the perpetrator.
Mixing: Services that blend the crypto of multiple users to hide the transaction history
Privacy Coins: Privacy-based crypto tokens are designed to provide a greater level of anonymity to the person using them, making it difficult to track their origin
Offshore Accounts: Having an offshore account makes it so criminals can obscure the initial origin of their funds
Exchange Swapping: Criminals may decide to transfer their funds across multiple exchange platforms, making it hard for a third party to trace their actions

How AML Works in Practice

As a digital currency investor, you are almost guaranteed to have encountered at least one of the several AML practices deployed in recent years

Though they might seem a little unnecessary or longwinded in some cases, it’s always worth keeping in mind that these measures are put in place to establish fair play within the crypto system, so they mean well, even if they can seem like they’re being difficult for the sake of it

KYC (Know Your Customer)

If you’ve ever signed up for a centralized crypto exchange or wallet, there’s a good chance you may have encountered a KYC check. Simply put, this process involves collecting personal customer information from a user when onboarding them to verify their authenticity

Most of the time, KYC will require a person’s passport, driver’s license, or birth certificate to ensure they are who they say they are and not someone purposefully trying to avoid identity verification. However, sometimes, it will also ask for a picture of the person in question or even a fingerprint

If someone intended to launder money and didn’t need to follow KYC, they could easily create a dud account with random unverifiable information that would make it virtually impossible to identify them. Therefore, KYC has become mandatory for centralized exchanges to help rectify this issue

Crypto Wallet Screening

Wallet screening is a tool that allows someone to immediately identify the owner of a wallet and, more importantly, the source and destination of their funds.

This is a more modern method that some exchanges have deployed to gain better insight into individuals whose actions may seem suspicious

If the intermediary finds that the cryptocurrency transactions exceed a certain risk assessment threshold, it could block them if it suspects they’ve been moving money illegally

Monitoring Transactions

As the name implies, transaction monitoring involves institutions scanning an exchange to identify any suspicious fund movement

The aim here is to seek out any anomalies, that is, the passing of funds that are out of the ordinary and unlike anything seen by the rest of the community

The Role of Regulators

As mentioned previously, as crypto investors, the idea of regulators constantly breathing over our shoulders and dictating the rules from behind the scenes isn’t exactly appealing

However, regulators have played a crucial role in laying down ground rules to follow in an attempt to stamp out money laundering from the crypto industry

The exact rules and regulations for AML compliance can differ between jurisdictions, but all laws and policies are designed for the same purpose. Here are the main AML policies to know about, alongside the area of the world they apply to:

The Financial Action Task Force (FATF): Provided a global AML framework for virtual asset providers to follow, including customer due diligence (CDC) and suspicious transaction reporting (STR)
Markets in Crypto-Assets Regulation (MICA): A set of EU laws that establishes key provisions for issuing and trading. It encourages transparency and accountability by regulating crypto assets that would not be currently regulated under existing financial legislation
Fifth Anti Money Laundering Directive (5MLD): This European protocol extended AML procedures into cryptocurrency and introduced compulsory background due diligence checks for individuals in ‘high-risk’ countries. These checks involve finding out the source of funds and conducting background checks.
Office of Foreign Assets Control (OFAC): An arm of the U.S national treasury, OFAC enforces exchanges to comply with US sanctions laws while possessing a list of banned individuals suspected of conducting financial crimes
Monetary Authority of Singapore (MAS): A policy that has intensified compliance and monitoring mechanisms within Singapore as a way to tackle criminal activity through the use of digital assets
Australian Transaction Report and Analysis Centre (AUSTRAC): All Australian financial services, including those in crypto, must abide by AUSTRAC’s regulations or sanctions will be imposed

How Does This Impact Investors?

So, let’s return to an investor’s perspective and consider how an abundance of crypto AML regulations and protocols will impact a person’s day-to-day trading

Signup Requirements

Since KYC is mandatory, not optional, the majority of crypto investors will need to undergo it, even though it can make signing up for a wallet or exchange much more time-consuming

Not everyone is a fan of giving away personal information, especially in the world of crypto, where privacy means so much, and may, therefore, jump to a decentralized exchange instead. However, it’s worth keeping in mind that KYC does have good intentions at heart, and it can be worth the hassle if it helps wipe criminals out of a network

Transaction Restrictions

AML programs have the potential to limit the amount that a person can send or receive if it is deemed to be too far ahead of the risk threshold. This can be annoying for experienced investors who are lawfully moving a large sum at once, but the exact amount will usually be absurdly high to catch any suspicious activity that seems illegitimate

Less Privacy

Simply put, AML measures grant a fair amount of control to the regulators or people behind an exchange. Giving them tools that allow for wallet screening, for example, automatically limits a user’s privacy, though the benefit is that it will be much easier to identify bad actors on the network

Potential for Higher Liquidity

By having AML in place, exchanges signal that they aim to be criminal-free and verifiable platforms. This can attract more investors to partake in the crypto market, increasing the speed at which assets can be bought and sold without token prices needing to be adjusted

In this way, AML measures help to protect market integrity, showcasing it as legitimate rather than a playground for criminals

Regulatory Uncertainty

Regulation laws are always changing, especially in a young sector like crypto. This means new law enforcement can be added unexpectedly, which can cost existing users, who may have certain services or features locked away as part of the update.

Additionally, there can be periods when the regulatory landscape for a network or cryptocurrency exchange seems uncertain, causing people to leave to be on the safe side, decreasing market participation and liquidity in turn

On the Flipside

Despite existing for good reason, many crypto investors consider measures like KYC as being an invasion of privacy.
Many people take particular issue with biometric KYC, which involves registering for an exchange with a fingerprint and facial recognition, which can seem dystopian.

Why This Matters

Money laundering has become such a prevalent issue in crypto that it has completely transformed the regulatory landscape for crypto investors. These rules and laws can ultimately impact how a person conducts their trading and how safe the crypto industry is