Virtual Asset AML Risk Mitigation and More: A Regulatory Understanding of Cryptocurrencies


In early 2019, FATF released their guidance for a risk-based approach to Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs). While the guidance, provided general information on virtual asset AML risk mitigation and trade financing risks, it did not provide specific information about how to address specific risks associated with the various types of virtual assets.


As a follow-up to his popular webinar on “What FIs need to know about Cryptos“, Greg Pinn, AML Consultant and Virtual Asset Expert, will detail each type of virtual asset in the market, their relative traffic volume, and regulatory issues related to each one.


Participants will also learn key features of different virtual asset types and understand how to properly risk profile each virtual asset type for their institution.


Q&A on Virtual Asset AML Risk Mitigation


Q: Do you think Financial Institutions (FIs) are more likely to integrate with stablecoin cryptocurrency like Tether, instead of conventional cryptos like Bitcoin so they can better control the risks?


A: I would say no. While stablecoins have a great value, I think they provide significant amount of risks because they are pegged to an asset. You could be stuck with something that is completely without value. Until you can get reliable audits of these firms’ assets, I would not encourage FIs to work with stablecoins


Q: What are some realistic use cases on how FIs can incorporate cryptos into their portfolio?


A: There are certain FIs that do not even allow people to transact into and out of an exchange. Especially for lower amounts of money, you may decide that you will freely allow a transaction under $10,000 into a crypto exchange but maybe not over, so setting a limit.


Where it could be profitable for FIs is offering banking services to crypto vendors. We have seen in a lot of jurisdictions and outright refusal to do any banking for any business related to crypto. I think that that is too severe of an approach.


There are many businesses that are desperate for banking services and there’s a lot of money providing custodial services so there’s a lot of great opportunity there for financial institutions.


Q: Do you see cryptos being used to pay taxes and bills?


A: I think it was Arizona that ran a pilot project for paying the state income tax. I do not think we are going to see widespread adoption from a government perspective for things like taxes mainly because there is the fluctuation of value. The state could end up with far less money than they may have in the time it takes them to exchange it back to fiat.


Q: What are some good and easy ways to stay on top of cryptocurrencies and their markets?


A: is a great place to start – it is a great resource for what are the top cryptocurrencies by market share. You can see which ones are doing the volume and it provides the links to the cryptocurrencies. The other thing is to monitor crypto news. Coindesk is one of those that is very helpful.


Q: From a legal or law enforcement standpoint are private coins responsive to legal process like grand jury subpoenas, search and seizure warrants and so on?


A: If you are talking about ones in the U.S. and Canada — the main larger exchanges, then yes they are quite receptive because if they are not, they will be shut down. The challenge is because so many of these businesses are out of country; it becomes a more difficult challenge for law enforcement.


Q: How would an FI contact Bitcoin to determine if suspicious activity is occurring? Would this be a standard 34b collaboration?


A: There is no such thing as contacting Bitcoin unfortunately. There is no Bitcoin official organization. There is no Bitcoin group. Bitcoin is completely decentralized and so that is one of the challenges.


Anytime someone is sending cryptocurrency into their traditional FI account, that will need to be done through an exchange. What you need to do is cooperate directly with the exchange. There is no way to connect with Bitcoin or Ethereum directly.


Q: I would like to ask about skills and capabilities to be able to decipher these technological nuances. Do you have some recommendations on what kind of people FIs should have on board to be able to understand these differences?


A: It is hard these days because obviously no one has a degree in cryptocurrency. I think there are a couple of schools that have just started degree programs globally, but I do not think there is anyone yet who has a degree in cryptocurrency.


There are many courses that people can take about what cryptocurrency is. Knowledge is based on your experience, so you either want to look for people that are crypto enthusiasts that have experience working crypto businesses or are just passionate.


Q: Which technique can we use to do to the due diligence on these types of transactions if most of them are encrypted or placed by anonymous customers?


A: Anonymous customer transactions are really a problem for privacy coins. I am not here to provide legal advice, but privacy coins are very problematic in AML/KYC.


There are a number of cryptos that provide both managed services as well as tools that allow you to interrogate the blockchain directly. These can be great for doing investigations and for monitoring the cryptocurrency wallet over time. I would reach out to one of those organizations and start an engagement with them.


Compliance Solutions

Alessa provides an industry-leading crypto AML compliance software solution to ensure that your financial institution is in full compliance with changing regulations and growing compliance risks.


Contact us today for more information, or check out our blog for additional resources, such as our analysis of KYC for crypto and the crypto travel rule.

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