This article briefly:
69% of companies in the crypto industry are concerned about violating anti-money laundering regulations, a new study shows.
Many respondents expressed serious concerns about the robustness of their compliance programs and their ability to avoid trouble.
Policymakers around the world have been tightening anti-money laundering rules, including recent steps by the European Union to mandate the collection of data on all crypto transactions.
Companies in the crypto industry are feeling the burden of compliance. A new SmartSearch study shows that 69% of respondents are concerned about the possibility of violating anti-money laundering (AML) regulations and causing more financial and reputational damage to the troubled industry.
Concerns are widespread. In addition, nearly one in five respondents (17%) said they were “very concerned” about the robustness of their compliance programs.
Anti-money laundering compliance raises concerns in crypto industry
The new survey of 500 compliance decision-makers at banks, challenger banks, crypto platforms, real estate developers and gaming institutions revealed significant anxiety about complying with anti-money laundering procedures.
In most jurisdictions, governments require companies dealing in cryptocurrencies to verify the identity of individuals with whom they transact. It 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 renowned origins as a privacy-based financial system.
Many cryptocurrency companies also admitted to relying on flawed manual processes for customer verification. The survey found that 25% of cryptocurrency exchanges and 42% of over-the-counter traders mistakenly believed that an unverified upload of official documents, such as a passport or driver’s license, provided sufficient evidence of a customer’s authenticity.
In fact, these documents can be easily forged, exposing companies to the very violations they fear.
Policymakers have gradually tightened anti-money laundering rules around the world in recent years. Last month, the European Union strengthened its anti-money laundering measures to include crypto asset transfers.
The new rules require crypto asset service providers to collect and share sender and beneficiary information. The rules apply to all transactions, regardless of the amount. Swedish Finance Minister Elisabeth Svantesson called the move bad news for cryptocurrency criminals.
NUVO CEO and co-founder Caria Wei acknowledged that anti-money laundering requirements can pose challenges to growing a company, but argued that the process does not have to be onerous.
Wei told reporters, “Advances in new technologies, such as zero-knowledge proofs (ZKP), are beginning to ease this burden by verifying information without revealing it, thereby satisfying KYC requirements without compromising user privacy.”
Using zero-knowledge proofs to protect privacy
Wei believes that it is not unreasonable to expect AML/KYC standards to be consistent with those in TradFi.
She added, “But it must 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.”
Christopher Grilhault des Fontaines, co-founder and COO of Dfns, told reporters that compliance professionals should take advantage of the unique suite of technology available to them and get input from blockchain analytics firms.
He said, “By leveraging experts who examine on-chain interactions, companies can better understand all transactions associated with any digital asset project they are working with, doing real-time diagnostics, if you will.”
des Fontaines added, “After all, the essence of blockchain is maximum transparency. Therefore, overcoming AML-related issues may actually be easier in the digital world. What is most needed is a broader regulatory regime that fosters innovation while promoting tools and activities that prevent illegal activities.”