Potential Money Laundering Risks For Crypto Exchanges

Crypto, GameStop, and AMC have been all the rage lately, attracting big institutions in addition to a swarm of retail investors. This overwhelming increase in investors has translated to big profits for exchanges by way of commissions, thereby leading to an explosion of FinTech companies. One of the most notable companies born of this environment is Robinhood and Robinhood Crypto.

State of Affairs

In the US, cryptocurrency exchanges are legal and subject to the Bank Secrecy Act (BSA). Therefore, companies that offer bitcoin exchange services must register with FinCEN, set up an AML/CFT programme, maintain the required records, and submit reports to the appropriate authorities.

While this is happening, the US Securities and Exchange Commission (SEC) has stated that it views cryptocurrencies as securities and that digital wallets and exchanges must adhere to all applicable securities laws. While referring to Bitcoin as a commodity and allowing bitcoin futures to trade publicly, the Commodities Futures Trading Commission (CFTC) has adopted a more tolerant perspective.

Evolving Regulations

We see fintech companies like Robinhood and others, increasingly fined or denounced in news cycles. However, the issue is not just non-compliance to existing regulations. It is also that many aspects of crypto-trading are highly unregulated and lack proper protocols to identify or disclose potential money-laundering activities, leaving these applications vulnerable in an ever-evolving environment.

The US Treasury has underlined the urgent need for crypto legislation to combat domestic and international illegal activity. To impose data collection obligations on cryptocurrency exchanges and wallets, FinCEN proposed a new law in December 2020. The rule would compel wallet owners to provide identification when transmitting more than $3,000 in a single transaction and mandate that exchange companies file suspicious activity reports (SAR) for transactions over $10,000 by the fall of 2022.

The Justice Department continues to engage with the SEC and CFTC on upcoming cryptocurrency laws to promote efficient consumer protection and more streamlined regulatory oversight. The new regulations classify bitcoin exchanges as brokers and require them to abide by the necessary AML/CFT reporting and record-keeping requirements.

Privacy as a Service

Crypto platforms don’t just offer their users a novel commodity to trade in. They are also in the business of enabling privacy which is fine as long as there are no bad actors. However, the world is less than ideal and these platforms have become hubs for fraud, phishing, money laundering and tax evasion.

Consider a crypto trading network as a black box. Money goes in one end, and comes out the other. But when service providers can’t trace what happens inside the blockchain thanks to the anonymity of it all, that makes it impossible to catch bad actors.

Additionally, the biggest advantage of crypto-trading is also becoming its biggest downside. Anonymity makes it easy to deploy phishing attacks, leading to increasing occurrences of fraud.

Impact of Regulations on Cryptocurrencies for Mainstream Investment

Long-term cryptocurrency investors might benefit from more regulation.

As far as regular investors are concerned, regulating cryptocurrencies may be a positive step for the sector. If properly targeted, more regulatory advice could reduce crypto asset speculation. Increased investor confidence brought on by less speculative activity may entice additional long-term investors who have previously shunned the extraordinarily volatile and speculative crypto sector.

Since no legal structure guarantees financial protection, crypto investors now have little to no protection in the market. The market needs to be regulated to make it safer. Like individual stocks, investing in cryptocurrencies is risky, but investor safeguards may lessen the market’s susceptibility to outside manipulation. Greater investor confidence can result from safer markets, which frequently equals higher value over time.

Final Word

“Evolution of the Crypto sector coupled with trends in financial technologies comes with the risk of certain vulnerabilities in scalability, security and lack of governance, which in turn, makes the sector highly volatile and exposed to cyber-attacks. All we need is the ability to predict and reduce viable losses by establishing a proper risk management structure.” – Sejal Palresha, AML enthusiast.

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