How FinTech can Leverage on FINMA Blockchain Initiative?

  • Richard Marley
  • August 30, 2019
  • 4 minutes read
  • 1543

Swiss Financial Markets Supervisory Authority (FINMA) has taken a revolutionary step in the history of Blockchain payment and cryptocurrency(FinTech). The regulatory authority has issued a “banking and securities dealers” certificate to two organizations purely dealing in virtual assets.

The license has been provided to two virtual currency banks SEBA Crypto AG and Sygnum AG. These banks deal in cryptocurrency trading, issuance, exchange, and management. Both these institutions deal purely in virtual assets.

The regulatory authority is very confident regarding its decision. Anti Money laundering protocols that apply on fiat currency transfers are applied to the cryptocurrency transfer, that will be legalized under the certificates issued. 

Cryptocurrencies are the hub of money laundering and terrorist financing. It is the reason why global banks are not dealing with cryptocurrencies and regulatory authorities have not shown complete interest in this niche of financial sector. 

Due to this risk attached to cryptocurrency and its trading, FATF issued its new set of rules for blockchain and virtual assets in June 2019. As per the regulations, the existing AML rules also apply to the virtual currency exchange, transfer and to the wallet providers of virtual assets. Unregulated bodies are exempted from these regulations. 

FINMA has moved one step ahead and legalized cryptocurrency trading and transfer. It took stringent measures to prevent exploitation of this advancement by money launderers and terrorists. 

Anti Money laundering regulations on blockchain payments

FINMA imposed rigorous regulations on blockchain and virtual assets trading, transfer, and exchange (fiat-to-virtual currency, virtual-to fiat currency, or virtual-to-virtual currency). Below is a brief insight into AML and KYC regulations for cryptocurrency institutions as per FINMA Guidance

AML compliance must be practiced on payments on Blockchain

The AML compliance regulations on fiat currency exchanges and traditional banks are also imposed on blockchain. The regulations include identity proofing of clients, in-depth screening of ultimate beneficiaries, risk-based approach in business relationships and timely reporting to Money Laundering Reporting Office Switzerland (MROS) in case of any suspicions regarding a client or a transaction request from a client. 

Complete Identity proofing of client at the time of fund transfer

Complete information of the sender and receiver must be communicated to the financial intermediary (bank, cryptocurrency exchange, wealth management companies, and stock exchanges, etc.) with the transfer request. This will help the receiving bank to run in-depth identity proofing on the people involved. In case of suspicion, the bank will cancel the fund transfer. 

This will add two-fold security to the whole fund transfer process.

Technical provisions

The information transfer among the financial intermediaries can be done through suitable means, other than blockchain, since  there is no developed system for information transfer like SWIFT – the one used in interbank fiat transfer. The banks can use a feasible and safe mode of information transfer. 

Fund transfer among onboard clients and third-parties

The institutions regulated by FINMA are allowed to send or receive funds to and from the external wallets of their own clients on whom complete identity verification process is performed. 

In case the fund transfer involves a third party (clients of some other institution) wallet,  complete information about the sender and ultimate beneficiaries must be shared among the financial intermediaries involved. The transfer will be verified after in-depth identity proofing of the third party involved. 

No exception for unregulated wallets

The unregulated institutions dealing in fiat are exempted from some AML and KYC regulations. FINMA has not given this exemption to cryptocurrency institutions to fortify this new venture against money laundering and terrorist financing. 

Complete AML and KYC regulations will be practiced on cryptocurrency transfer, exchange, and trade even when dealing with unregulated institutions. 

How Blockchain Payment Solutions can Leverage on these rigid Regulations

This new venture of FINMA in the cryptocurrency and blockchain has a lot of growth potential. It might become the cornerstone of the history of FinTech. Blockchain payment solutions, cryptocurrency facilitators and exchanges, and FinTech can leverage on these strict compliance protocols. 

AML compliance is practiced by most of the traditional financial intermediaries and it is their competitive advantage over FinTech solutions. FinTech and blockchain payment companies need to identify this huge opportunity to rise as a credible and compliant industry. It will not only improve their future growth but will also help them sustain their growth. Also, compliance will help them achieve market value and customer trust. 

The ideal solution for new FINMA AML Compliance

The registered cryptocurrency exchanges in Switzerland will have to run complete identity verification on their clients while onboarding them or before validating their fund transfer request. 

Real-time identity verification will help them exercise seamless compliance and customer onboarding. When embarking on such growth ventures compliance is the primary focus, as it ensures growth opportunities. To fully utilize this opportunity, real-time identity verification and AML compliance software are paramount for sustainable success.