Cryptocurrencies are a prime example of digital disruption. Even for those that do not use or understand them, they have changed the way we look at money. And blockchain, the distributed-ledger technology used by cryptocurrencies, has enormous positive implications for the security of information sharing, as its decentralised nature has allowed fintech innovators to come up with new ways to store and transfer value.
While the popularity of cryptocurrency among cybercriminals has fueled misconceptions around these transactions being anonymous, the reality is that the inherent transparency of blockchains makes cryptocurrency investigations easier in many ways, for law enforcement, than financial investigations involving fiat currency.
Blockchains act as permanent, publicly viewable ledgers of nearly all cryptocurrency transactions, making it possible for investigators to track funds’ movements between cryptocurrency addresses, something that simply isn’t possible with fiat currency.
The UAE, a digital pioneer in its own right, has seen the good and the bad in crypto technologies. In Q4 of 2020, the government announced new cryptocurrency regulations that compelled the providers of crypto-assets and services to be incorporated onshore or in a financial freezone, and be licensed by the Securities and Commodities Authority (SCA).
The move was directly linked to the UAE’s anti-money laundering (AML) and know-your-customer (KYC) efforts and a range of other compliance standards. And yet the UAE has been a strong adopter of blockchain, for its versatile set of use cases.
The Dubai government launched its Blockchain Strategy in 2018 because it saw broad potential in the technology to solve a number of issues, including the potential to deliver approximately $1.5 billion in annual savings on document processing across government departments.
AML and crypto
Anti-money laundering is a critical requirement of cryptocurrency if it is to gain acceptance. The Financial Action Task Force (FATF) is a global watchdog that establishes and promotes AML standards. Saudi Arabia joined FATF in 2019, and while the other five members of the Gulf Cooperation Council are not formal members, the GCC itself is a full member.
The UAE has already implemented several AML rules recommended by FATF, which will help stop nefarious actors from converting questionably obtained cryptocurrencies into real-world fiat money.
In pursuit of AML, so-called “virtual asset service providers” (VASPs), such as cryptocurrency exchanges and stablecoin issuers, and some NFT (non-fungible token) marketplaces deploy compliance officers that monitor transactions for suspect activity and also act as KYC auditors.
VASP compliance officers report out-of-step activities to regulators and other agencies, which can leverage the blockchain to trace funds and transactions to individuals in the real world.
The AML and KYC processes that have served traditional finance for so long must now be extended to the crypto world.
While it’s true that the pseudonymity of cryptocurrency transactions makes them attractive to criminals, the transparency of blockchains makes the successful investigation of crypto-related crime more easily possible than with traditional fiat currency. And though it allows for instant cross-border transfers, the public and permanent nature of the blockchain means those funds are traceable, and owners of addresses engaged in criminal activity can be identified.
Still, there is no denying that cryptocurrencies are gaining popularity among criminals who around the world laundered an estimated $8.6 billion of cryptocurrency in 2021, an increase of a staggering 30% on the previous year.
When governments and global cooperatives like FATF come together on effective AML regulations, laundering schemes become more risky and less profitable, while opportunities for investigators become more numerous.
Crypto businesses can help with their own continuous transaction monitoring and the empowerment of compliance officers. KYC is a huge part of this, because crypto-investigators can use records to map pseudonyms to real-word identities.
Standards required
Banks ask customers for photo ID and proof of residence and may use a range of biometrics for future verification. KYC for cryptocurrency businesses is similar, but varies by jurisdiction.
Most exchanges ask for name, official ID, and current address. In October, FATF said certain NFT marketplaces, DeFi protocols, and stablecoin providers could also be subject to KYC regulation.
There is no denying that cryptocurrencies are gaining popularity among criminals who around the world laundered an estimated US$8.6 billion of cryptocurrency in 2021
KYC customer identification programs (CIP) allow service providers to ensure customers are who they say they are. Legal names, dates of birth, addresses, and documents such as driver’s licenses and passports are required for individuals, and business licenses and articles of incorporation for corporate clients.
Through customer due diligence (CDD), KYC best practices call for a risk assessment of each customer, through standard background checks, customer surveys, and transaction audits.
The amount of attention AML officers devote to an account will reflect the CDD result, and when suspicious activity is detected, VASPs submit Suspicious Activities Reports (SARs) to AML authorities such as FinCEN in the US or the Financial Intelligence Unit (FIU) in the UAE.
Advanced technologies are now available that help with KYC best practices by automating monitoring based on CIP and CDD inputs. Such technologies are adept at the detection of suspicious activity, and capable of sending instant alerts for the purposes of timely investigations.
Prosperity in the wings
Cryptocurrency’s growing acceptance cannot be ignored. Nor can its popularity among criminals and scammers. The AML and KYC processes that have served traditional finance for so long must now be extended to the crypto world. CIP, CDD and ongoing vigilance are the building blocks of regulation and of trust, and have little to no effect on profitability.
When global cryptocurrency exchange Binance introduced KYC, it reported that more than 96% of its customers complied. Hundreds of regulated markets and millions of customers are now opened to Binance, at the expense of very few losses in customers.
AML and KYC minimise business risks and protect individuals, organisations, and societies from fraud and crime, while building much-needed trust in cryptocurrency. The UAE has taken important steps down this road with its recent regulations that call for transparency. New prosperity is waiting in the wings.
This article was originally published in our sister site ArabianBusiness.com.
