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Crypto Firms Must Embrace KYC & AML Requirements to Survive




By: Raymond Hsu, Co-founder and Chief Executive Officer for Cabital.

I have no doubt that as regulators continue to scrutinize the growing cryptocurrency industry, companies that interact with digital assets must now comply with new legislation from their national government agencies. Know Your Customer (KYC) and Anti-money laundering (AML) requirements are now compulsory in most major jurisidctions and must be strictly adhered to protect users from nefarious activities.

FATF calls for more oversight of crypto

Last week, the Financial Action Task Force (FATF) released its finalized crypto guidance to the public, calling on more regulatory oversight of crypto firms. This includes forcing them to report suspicious transactions to their regulator and to make sure every single customer goes through a complete KYC journey. 

The FAFT’s guidelines are advice, guidance you can say, as they don’t have the force of the law on their side. The FAFT’s guidelines would require national regulators to implement their suggestions through their own legal systems or political frameworks. But the global AML watchdog is influential in setting international standards for governments on policies concerning AML and terrorist financing, and with its stature, it could become a global leader in shaping regulations around the digital assets space in the future. In fact, already more than 36 countries are FAFT members, including much of Europe, China and the U.S. 

Representatives of the crypto industry have voiced concerns that the FAFT’s guidelines could stifle innovation and undermine user privacy. Peter Van Valkenburgh, research director at crypto advocacy group Coin Center, wrote in a blog post last Thursday that “It would be inappropriate for anything like these non-specific and confusing standards to replace the current law and regulations we have on the books here in the U.S.”

I see where Valkenburgh is coming from, but I believe we are at the point of no return now. Governments across the world are now demanding that cryptocurrency centralized exchanges that serve their citizens figure out who they are to ensure that nobody is involved in illegal activities. A great example can be seen with U.S. regulators. 2021 has seen U.S. authorities take unprecedented action in regulating its growing crypto industry by reviewing everything from stable coins to lending in crypto. 

This is only the beginning

I foresee regulators across the globe becoming even more stringent in the KYC and AML requirements for cryptocurrency exchanges. And that isn’t only for centralized exchanges, the FATF has also issued guidelines for DeFi also. 

DeFi is an umbrella term for various projects in the decentralized world, which includes activities including exchanges, lending, borrowing, trading, staking – all without a central intermediary that oversees transactions. 

The DeFi space will continue to attract the eyes of FATF and national regulators as the industry continues to rapidly grow, with over $100 billion of assets posted as collateral in various projects, according to data provider DeBank.  

Crypto firms must embrace KYC and AML

As regulator’s across the globe continue to strengthen their KYC and AML requirements, cryptocurrency companies will have to work with leading RegTech companies and improve their internal compliance policies and procedures to ensure that they are able to meet their regulatory requirements. 

In fact, in the future, cryptocurrency companies are going to have to create a compliance programme that are modelled after leading global financial service providers or they won’t last long. 

This would include:

  1. Setting up sound internal policies and procedures, in other words, creating and following through with strong corporate governance practices.
  2. Hiring and retaining highly professional compliance officers to manage daily operations.
  3. Retaining a law firm that consists of experts in cryptocurrency regulation for advice.
  4. Installing software that detects patterns of high risk activity, from OFAC sanctioned addresses and darknet markets, to scams and anomalous transactions. 
  5. Deploying technology that would enable them to connect cryptocurrency transactions to real-world activity and review a service’s top counterparties and risk exposure.

Following the law is the only way

Crypto firms that follow rules and regulations will be treated better than ones that break the law. Digital asset companies that adhere to the law will reap many benefits including being granted licenses to work in new markets, allowed to provide user-friendly fiat on-and-off ramp services along with simply having the peace of mind to operate in a clear regulatory environment. I am confident that crypto companies that are being rogue and operating outside the law will always have to look over their shoulder, wondering when the regulator will knock on their door. 

And once they do, which surely they will do, it will only be troublesome. We saw this recently when the U.S. Securities and Exchange Commission started examining Uniswap Labs, the main developer of the world’s largest decentralized exchange, called Uniswap. U.S. regulators came knocking on Uniswap’s door seeking information about how investors use their platform and how it is marketed. Uniswap quickly got the message and said in a public statement that the company is “committed to complying with the laws and regulations governing our industry and to providing information to regulators that will assist them with any inquiry.”

Crypto firms that deploy cutting-edge RegTech and embed strong internal compliance procedures that allow them to do proper due diligence of their customers will survive and thrive in the growing industry. It is clever that digital asset firms that do not conduct proper KYC of their customers will have an extremely difficult time and will have an uphill battle with regulators that are keen on ensuring that the industry follows standards and rules like all other industries. The time to become compliant is now. 

Raymond Hsu is the Co-founder and Chief Executive Officer
for Cabital.

Cabital is a leading cryptocurrency institution in the
digital finance industry. Since 2020, Cabital has strived
to bring professional financial services to the world of
cryptocurrencies. Leveraging the teams extensive experience
in traditional finance along with the power of blockchain
technology, Cabital empowers people from all walks of life to
generate high income from their digital assets safety, creating
a more sustainable financial industry.