Study: Two-Thirds of Crypto Firms Concerned About AML Violations

This article briefly:

A new study shows that 69% of companies in the crypto industry are concerned about violating anti-money laundering regulations.

· Many respondents expressed serious concerns about the robustness of their compliance programs and ability to avoid trouble.

Global policymakers have been strengthening anti-money laundering rules, including the European Union's recent move to mandate the collection of data on all encrypted transactions.

Companies in the crypto industry are feeling the burden of compliance. A new SmartSearch study reveals that 69% of respondents are concerned about the possibility of breaching anti-money laundering (AML) regulations and causing more financial and reputational damage to the troubled industry.

People's concerns are widespread. Additionally, nearly one in five respondents (17%) said they were "very concerned" about the robustness of compliance procedures.

Anti-Money Laundering Compliance Causes Encryption Industry Anxiety

The new survey of 500 compliance decision-makers from banks, challenger banks, crypto platforms, real estate developers and gaming agencies reveals that they feel severe anxiety about complying with anti-money laundering procedures.

In most jurisdictions, governments require companies dealing in cryptocurrencies to verify the identities of the individuals they transact with, which also includes conducting due diligence on customers using their services.

These regulations have been standard practice around the world for decades. However, their implementation in cryptocurrencies conflicts with their well-known origins as privacy-based financial systems.

Many cryptocurrency companies have also admitted to relying on flawed manual processes for customer verification. The survey found that 25 percent of cryptocurrency exchanges and 42 percent of over-the-counter traders wrongly believed that unverified uploads of official documents, such as passports or driver’s licenses, provided sufficient evidence of a customer’s authenticity.

In fact, the documents are easily forged, exposing companies to what they fear is a breach.

In recent years, policymakers have gradually tightened anti-money laundering rules around the world. Last month, the European Union stepped up anti-money laundering measures, which include the transfer of crypto assets.

The new rules require crypto asset service providers to collect and share sender and beneficiary information. This rule applies to all transactions, regardless of the amount. Swedish Finance Minister Elisabeth Svantesson called the move bad news for cryptocurrency criminals.

Caria Wei, CEO and co-founder of NUVO, acknowledged that anti-money laundering requirements can pose challenges for companies to grow, but believes the process doesn't have to be onerous.

Wei told reporters that “advancements in new technologies, such as zero-knowledge proofs (ZKP), are beginning to alleviate this burden by verifying information without revealing it, thereby meeting KYC requirements without compromising user privacy.”

Protect privacy using zero-knowledge proof

According to Wei, it is not unreasonable to expect AML/KYC standards to align with those in TradFi.

She added, "But it has to take into account the unique nature of the cryptocurrency space - its decentralization, pseudonymity and cross-border operation. In response, some solutions are using the concept of 'self-sovereign identity' to help users control their digital identity while sharing necessary data with authorities, maintaining a balance between privacy and compliance.”

Dfns co-founder and chief operating officer Christopher Grilhault des Fontaines told reporters that compliance professionals should take advantage of the unique technology suite available to them and seek input from blockchain analysis firms.

“By leveraging experts who examine on-chain interactions, companies can better understand all the transactions related to any digital asset project they’re working with, with real-time diagnostics, if you will,” he said.

Des Fontaines added, “After all, the very essence of blockchain is maximum transparency. Therefore, in a digital world, it may actually be easier to overcome AML-related issues. What is most needed is a broader regulatory regime to foster innovation, while promoting tools and campaigns to prevent illegal activity."

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