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The use of cryptocurrencies as an integral part of criminal schemes is growing immensely. However, the overall number of crypto transactions related to illicit activities still represents only a limited share of the criminal economy when compared to fiat currency transactions. A range of constraints are related to the usage of digital currencies, including high volatility likely a major factor for money launderers and terrorist financiers to use them as long-term investments.
Criminals are also becoming sophisticated to use digital currencies. In recent years cryptocurrencies have been mostly used to obfuscate money flows as a part of complex money laundering schemes, they are also been used by criminals to carry out investment frauds. However, governments, as well as regulatory authorities, are coming up with new regulations to govern digital currency use and making the existing AML framework top-notch to curb illicit acts.
The Cryptocurrency Landscape
In 2009, Bitcoin emerged as the first decentralised currency and gained instant popularity because of the absence of third parties involved in transactions. While existing digital currencies had centralised entities as intermediaries. Cryptocurrencies are developed from blockchain technology and backed by cryptography, resulting in a completely new payment system where secure transactions could be made directly without banks’ or intermediaries’ authorization. However, since the birth of cryptocurrencies, it is used as a significant means of payment, investment and transferring of funds.
The emergence of an innovative and flexible payment option that enables irreversible, anonymous and end-to-end transactions in real-time from any part of the world has raised regulatory concerns. However, the rapid transformation of virtual currencies did not require an immediate regulatory or enforcement response. Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance was not particularly developed to cater for this payment option.
This is the reason why, fraudsters, particularly cybercriminals began to take advantage of the favourable environment and started using digital currencies for trading on the dark web, money laundering, terrorist financing and extortion schemes. In addition to this, Bitcoins have always been trackable and are not completely anonymous. To make use of their profits, money launderers tend to use exchange services to cash out or government them into fiat currencies. Improved regulations of cryptocurrencies now require the virtual asset service providers to gather more in-depth information regarding the customers and their transactions.
New EU Regulation for Crypto
Recently, EU officials have signed an agreement on what will be the first proper regulatory regime for the cryptocurrency sector. The European Commission along with EU lawmakers from member states have made a deal in Brussels after several hours of negotiations. The decision was made a day after the three main institutions agreed upon the measures to clamp down on money laundering in the crypto sector. The new regulations are to be introduced at a time when cryptocurrencies, especially Bitcoin, are facing the worst phase in over 10 years.
The Markets in Crypto-Assets (MiCA), is formulated to impose stricter rules on the entities involved in the crypto market, such as crypto exchanges and issuers of stablecoins, which are tokens that can be pegged to existing assets like the US dollar. After the new rules are imposed, stablecoins like Tether and Circle’s USDC will have to maintain sufficient reserves to meet redemption requests in the case of large-scale withdrawals. Stablecoins that gain prominence will also have to be limited to 200 million euros in transactions per day. The European Securities and Markets Authority, or ESMA, will have the authority to intervene or impose bans on crypto platforms if they fail to sufficiently secure the interests of investors or threaten the market’s stability.
“Today, we put an order in the Wild West of crypto assets and set clear rules for a harmonised market that will provide legal certainty for crypto-asset issuers, guarantee equal rights for service providers and ensure high standards for consumers and investors,” said Stefan Berger, the EU lawmaker who led negotiations on behalf of the European Parliament.
Markets in Crypto Assets (MiCA) Regulation
MiCA will also shed light on environmental concerns linked to cryptocurrencies, with exchanges and online platforms forced to disclose their energy consumption along with the impact of virtual assets on the environment. The regulatory authorities also proposed to restrict the crypto mining activities, the energy-consuming process of minting new units of bitcoins and other crypto tokens.
However, it didn’t manage to get approval from lawmakers. The new rules and standards will not affect tokens without issuers, like Bitcoin, but exchanges and trading platforms will need to take significant steps to warn customers about the potential risk associated with cryptocurrency trading. While Non-Fungible Tokens (NTFs) which represent ownership of digital properties like art, were not part of the proposals. However, the EU Commission needs to determine whether NFTs require a separate set of rules or not within the upcoming 18 months.
That being said, regulators have also reached an agreement on measures to be taken for reducing anonymity in crypto transactions. Financial regulators are facing concerns about the misuse of crypto-assets in financial crimes like money laundering as well as sanctions evasions, especially during Russia’s ongoing invasion of Ukraine. Additionally, cryptocurrency transfers between the exchanges and un-hosted digital wallets owned by individual entities will need to be reported to the regulatory authorities if the transaction or value exceeds the 1,000-euro threshold.
However, MiCA is the first and foremost attempt to develop a rigid set of regulations for the EU’s crypto industry. While some other policies have daunted cryptocurrency exchanges and online platforms, several industry leaders see the move as a positive step, believing the EU could become the trendsetter and lead the world on crypto regulations. The policies and laws are expected to hit the market in 2024, a critical move that would help the US and UK to develop laws particularly customised to the crypto industry.
What Shufti Pro Offers
Combating financial crimes like money laundering and terrorist financing requires cryptocurrency exchanges to incorporate robust AML checks and KYC procedures. These practices have not only been encouraged by global regulatory authorities but have shown encouraging results in the real world as well. As cryptocurrency adoption is showing no signs of slowing down, firms must invest in the right AML solutions to streamline compliance and fraud detection processes.
Shufti Pro’s Anti-Money Laundering (AML) screening allows cryptocurrency firms to stay compliant with regulatory standards as well as prevent money laundering. Powered by thousands of AI algorithms, Shufti Pro’s AML screening solution runs background checks on customers against 1700+ global watchlists in less than a second with 98.67% accuracy.
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