The introduction of cryptocurrency is widely regarded as one of the most important changes of the twenty-first century. Its global reach and decentralized structure make it a new financial system with the potential to disrupt banking practices and give people more control over their money. However, there is a need to address a number of issues and challenges, and one method is to use cryptocurrency compliance.
Cryptocurrency was developed to address the shortcomings of the existing financial system. Cryptocurrency is not without its flaws, however, and there have been numerous reports of fraudulent transactions, crypto-cyber crime, and illegal use of digital assets. In response, governments and authorities have created cryptocurrency compliance to prevent these crimes.
Cryptocurrency compliance ensures that crypto investors and companies adhere to certain standards and regulations to keep financial fraudsters and cybercriminals at bay. These regulations and criteria vary depending on the crypto niche. However, all compliance standards aim to reduce fraud in the crypto space.
Anti-money laundering (AML), know your business (KYB), know your customer (KYC), know your transactions (KYT), taxes and customer due diligence (CDD) are all parts of cryptocurrency compliance.
Here is an overview of the three most important aspects of cryptocurrency compliance.
- Anti-Money Laundering Regulations (AML)
AML regulations prohibit the use of custodial services and cryptocurrency exchanges for money laundering in the cryptocurrency industry. These regulations, laws, and guidelines make it difficult for cybercriminals to convert illegally acquired cryptocurrencies and assets into cash. The Financial Action Task Force (FATF) sets global standards for anti-money laundering (AML) legislation. The FATF published its Updated Cryptocurrency AML Guidance [PDF] in 2014. Most of the FATF's AML laws have subsequently been adopted by other regulatory bodies, including the European Commission and the US Financial Crimes Enforcement Network (FinCEN).
These AML laws are enforced by cryptocurrency exchanges, decentralized finance (DeFi) protocols, stablecoin issuers, and major NFT markets. They investigate, monitor and attempt to prevent any questionable transactions that may be associated with terrorist financing or money laundering.
Following are some AML regulations:
- All cryptocurrencies must use risk-based crypto KYC compliance. Individuals with a high risk profile must follow stricter crypto KYC compliance protocols, while those with a low risk profile may follow less stringent KYC protocols.
- Crypto exchanges need to keep track of their clients on a regular basis.
- Clients must not be politically exposed persons.
- Customers must be screened regularly to ensure they are not subject to international sanctions.
- Know Your Client.
KYC requirements require centralized cryptocurrency platforms to identify and verify newly registered consumers. This allows the bitcoin institution to analyze the customer's level of risk in terms of financial and cyber crime. An exchange that does not require KYC is one of the warning signs of a shady cryptocurrency platform. Cryptocurrency institutions acquire and store personally identifiable information (PII) from users throughout the verification process. They then evaluate these to rule out hazards. Finally, these platforms validate individuals' identities against official databases that contain information on sanctioned individuals and politically exposed individuals.
Customers can access the crypto platform once they have been declared risk-free. KYC in cryptocurrency helps prevent criminal activities such as money laundering, tax evasion and the financing of terrorism.
- Know your business (Know Your Business)
KYB is a crypto compliance structure similar to KYC. The only difference is that KYC is for individuals while KYB is for cryptocurrency companies. KYB allows crypto companies to lawfully access information about their customers and partners. During this process, information is collected about the ultimate beneficial owner (UBO) of the company, potential partners and clients are verified, and decision makers, directors, shareholders with more than 25% of the total shares and beneficiaries are all verified. Crypto companies must also check the source of income of their executives and owners, as well as whether they are politically exposed or on a sanctions list. Typically, these organizations are also required to provide a full overview of all their activities, as well as average annual and monthly sales, and other relevant legal information.