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Cryptocurrencies and AML

European Payment Summit presentation delivered by Nadja van der Veer of PaymentCounsel and Michael Burtscher of Minerva on 15 March 2018.

The presentation explored current issues around the regulation of cryptocurrencies, focusing on the following topics:

Cryptocleansing: how does it work?
Market concerns & regulatory responses
The road to crytpo licensing: learning from New York
Cryptoplatforms: success through compliance

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Cryptocurrencies and AML

  1. 1. Cryptocurrencies & AML: Regulating a New Mainstream Nadja van der Veer PaymentCounsel Michael Burtscher Minerva European Payment Summit, 15 March 2018, The Hague To receive a copy of this presentation by email please get in touch:
  2. 2. Agenda ● Introduction ● Crypto-cleansing: how does it work? ● Market concerns & regulatory responses ● The road to crypto licensing: learning from New York ● Crypto platforms: success through compliance
  3. 3. Introduction
  4. 4. The value of crypto 22 May 2010 The first Bitcoin transaction is made by Lazlo Hanyecz in Jacksonville, Florida He spent BTC 10,000 and bought…
  5. 5. The value of crypto
  6. 6. The value of crypto 8 March 2018 BTC 10,000 = USD 99.6 million That’s a lot of pizzas…
  7. 7. From niche to mainstream ● January 2009: Satoshi Nakamoto releases v.1.0 of the Bitcoin software ● 22 May 2010: First transaction is made buying two Papa John’s pizzas ● 2 October 2013: The FBI arrests Ross Ulbricht in San Francisco and takes the Silk Road website offline. It has an estimated turnover of USD 1.2bn ● Bitcoin becomes known as the means to pay online for illegal products and activities: from drugs to child pornography and assassinations …and yet it is clearly much more than that
  8. 8. The value of Bitcoin went beyond just Silk Road
  9. 9. The year was 2013
  10. 10. Bitcoin price history 2010-2018
  11. 11. And there’s not just Bitcoin… 3 January 2018 Market capitalisation of all cryptocurrencies passed…
  12. 12. $700 billion
  13. 13. Crypto-cleansing: How does it work?
  14. 14. What is crypto-cleansing? 1 The act of laundering money by purchasing cryptocurrency 2 The act of laundering cryptocurrency in order to make it untraceable
  15. 15. The process of money laundering 1. Placement: introducing the money into the system 2. Layering: carrying out a multitude of complex transactions to camouflage the origin of the money 3. Integration: acquiring wealth in some shape from these transactions
  16. 16. Placement: purchasing cryptocurrency
  17. 17. Layering: how a crypto-mixer works
  18. 18. Integration: real estate
  19. 19. NOTE: the UK’s Money Laundering Regula;ons 2017 also apply to estate agents Integration: real estate
  20. 20. Cryptocurrencies: doom or redemption?
  21. 21. Market Concerns & Regulatory Responses
  22. 22. Cryptocurrency: so what is it? ● Commodity (US CFTC, Finland, Taiwan) ● Virtual commodity (Hong Kong) ● No legal tender (Argentina, Belgium, Hong Kong, Indonesia, Italy, Jordan, Malaysia, Mexico, Poland) ● No currency (Colombia, Norway, Singapore, South Korea, Sweden, Taiwan, ESAs) ● No money (Norway, Singapore, ESAs) ● No legal status (South Africa) ● Financial instruments (Germany) ● Electronic currency (Iceland, Lebanon) ● (Speculative) Assets (France, Norway, Sweden) ● Securities (Philippines) ● Digital representation of value (ESAs) Countries issuing own VC: Ecuador, Estonia (pushed back by ECB), Russia, Venezuela
  23. 23. Market concerns
  24. 24. Market concerns
  25. 25. Market concerns
  26. 26. Warnings ● Bangladesh ● Belgium ● Bolivia (ban) ● Brazil ● China (ban) ● Cyprus ● Denmark ● Ecuador (ban) ● European Banking Authority ● Finland (ICO-specific) ● France ● India ● Israel ● Jordan ● Lebanon ● Mexico ● Morocco (illegal) ● Netherlands, the ● New Zealand ● Portugal ● South Korea (ban) ● United Kingdom Disclaimer: non-exhaustive
  27. 27. Risk of undermining the State ́s monopoly on currency??? Warnings
  28. 28. But also: ● “Virtual currency has the potential to improve payment efficiency and reduce transaction costs for payments and fund transfers” (FATF) ● “Transactions in virtual currencies can be cheaper, faster, more secure and more transparent” (European Parliament) ● “Cryptocurrencies are the “future of money” (Bank of England - Mark Carney) ● “It would not be wise to dismiss crypto-assets; we must welcome their potential but also recognise their risks” (IMF) ● Financial inclusion: addressing needs of unbanked ● A payment system with no single point of failure ● Absence of a central authority acting as transaction intermediary creates new opportunities, but also potential risks ● Irreversible and secure
  29. 29. The Road to Crypto Licensing: Learning from New York
  30. 30. Regulatory history ● US FinCEN guidance on application Bank Secrecy Act to Bitcoin companies ● Leading: after 2 years of research & industry consultation - NY 2015 ● Recent SEC warning: online trading platforms subject to registration Other countries followed in 2017 (and still now): ○ Austria: financial services involving VC are regulated ○ Australia: VC exchanges subject to registration/ regulation (as of mid-2018) ○ Canada: main focus on AML concerns ○ China: ban for FIs and PSPs to accept/use/sell VC. Exchanges to register ○ Japan: VC regulation (2016). Recent enforcement: cease orders & penalties ○ Malaysia: VC exchanges subject to AML obligations, Compliance Officer appointment (2018) ○ Singapore: VC business may be subject to AML laws ○ Switzerland: bitcoin kiosk operators subject to license & VC platforms subject to AML laws Disclaimer: non-exhaustive
  31. 31. ○ ○ ○ ○ ○ ○ ○ ○ LATEST NEWS: Regulatory history
  32. 32. BitLicense Limited to activities involving NY or NY resident Virtual currency business activity: ● receiving VC for transmission ○ except when TXN for non-financial purpose and ○ not involve transfer of more than a nominal amount of VC ● storing, holding, maintaining custody/ control on behalf of others ● buying/ selling VC as a business ● performing exchange services as a business ● controlling, administering, issuing VC
  33. 33. BitLicense: definitions Virtual currency: “any type of digital unit that is used as a medium of exchange or a form of digitally stored value. Virtual Currency shall be broadly construed to include digital units of exchange that (i) have a centralized repository or administrator; (ii) are decentralized and have no centralized repository or administrator; or (iii) may be created or obtained by computing or manufacturing effort” Excluding: ● in-game currency not convertible and redeemable ● affinity or rewards programs ● digital units on prepaid card
  34. 34. “The Great Bitcoin Exodus”
  35. 35. BitLicense: obligations Compliance Officer● Customer information collection● Compliance policies● anti○ -fraud, AML, cyber security, privacy & information security AML program● Report TXNs >10,000 USD and SAR● Cybersecurity program● BC/DR plan● Consumer protection: advertising & marketing requirements, disclosure● of material risks
  36. 36. 5th AML Directive Changes
  37. 37. 5AMLD: state of affairs ● Concerns: ○ VC exchange platforms no obligation to identify suspicious activity ○ anonymity allows potential misuse for criminal purposes ● Dec 2017 - political agreement ● Pending adoption EP & EC (no changes foreseen) ● Transposition 18 months after publication Virtual currency broad application: means of payment, exchange, investment purposes, store-of-value products or uses in online casinos.
  38. 38. 5AMLD: definitions Virtual currency: “a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency, and does not possess a legal status of currency or money, but is accepted by natural or legal persons, as a means of exchange, and which can be transferred, stored and traded electronically” Virtual currency exchange platforms: “providers engaged in exchange services between virtual currencies and fiat currencies”
  39. 39. 5AMLD: definitions Custodian wallet provider: “ an entity that provides services to safeguard private cryptographic keys on behalf of their customers, to hold, store and transfer virtual currencies.”
  40. 40. 5AMLD: licensing vs. registration ● Initial proposal: license ● Now: registration
  41. 41. 5AMLD: VC obligations VC exchange platforms & custodian wallet providers obliged entities, so: ● identification ● verification ● obtaining info on purpose and intended nature relationship ● ongoing monitoring ● suspicious activity reporting
  42. 42. Best approach: EU or US?
  43. 43. Crypto Platforms: Success through Compliance
  44. 44. Competence ● For crypto to continue to succeed and be the new MAINSTREAM: o Platforms that provide access to crypto need to act responsibly o This means acting like the established financial organisations when it comes to the prevention of ML/FT, including KYC and CDD/EDD o In Europe some firms are already FCA and CySEC licensed, while for the US they have FinCEN MSB licenses
  45. 45. Recruitment is key
  46. 46. Controls ● Implement the latest technologies to board millions of customer in a short space of time ● Capture and analyse a person’s digital fingerprint ● Transaction monitoring: EDD, Source of Funds verification ● Limit the sources where money can come from: only from a credit/debit card in the person’s name or their own bank account
  47. 47. Controls Some platforms only enable customers to buy and sell crypto● but do not allow customers to transfer crypto from external wallets Block or allow crypto● -mixers Block or allow Bitcoin ATMs● Some even file SARs●
  48. 48. Self-regulation vs forced-regulation
  49. 49. Thank you! Nadja van der Veer Co-Founder | PaymentCounsel Michael Burtscher Founder | Minerva