Why Do Cryptocurrency Exchanges Need AML/CTF?

Cryptocurrency exchanges engage in crypto-fiat exchanges or virtual currency custodian wallet services. This is deemed the most high-risk sector as it offers a less regulated channel where virtual currencies are digitally transferred, stored or traded.
As a Cryptocurrency or virtual exchange business, you are a “regulated entity”, if you:

RISK EXPOSURE

Cryptocurrency businesses involve transactions, both, between crypto and fiat currency as well as between various cryptocurrencies issued privately. The anonymity of virtual currency conceals the source of funds and the ownership, allowing the proceeds of crime to be laundered through cryptocurrencies and custodian wallets. The virtual currency remittance system is exposed to risks of terrorism financing (TF) or funding of illicit activities.

COMPLIANCE REQUIREMENTS

Compliance of crypto exchanges and wallet providers begins with registering your businesses with your national regulators. KYC and verifying beneficial ownership information is mandated at the onboarding stage, as well as screening for Sanctions and PEP checks. Ongoing scrutiny of high-value transactions, high-risk clients, high-risk countries, fiat to crypto transactions, transaction monitoring for unusual behavior, monitoring high-value wallets, and reporting suspicious transactions are ways that crypto businesses can remain compliant.

GAPS IN COMPLIANCE

The ability to convert cash to virtual currencies and trade between multiple virtual currencies for profits, allows illicit funds to be integrated into the legitimate economy. Other factors like the ease of remitting money for illegal activities or to fund terrorism through the virtual exchanges, make crypto businesses vulnerable to AML/CTF compliance. The lack of transparency in transactions and ownership structures of the virtual currencies are other limiting factors. As virtual currency transactions remain outside of a formal monetary system, it is difficult for crypto businesses to be regulated.