Anti-Money Laundering Regulation of Cryptocurrency: U.S. and Global Approaches
The absence of in-built geographic limitations makes it difficult to resolve which jurisdiction, or jurisdictions, may In recent years, cryptocurrencies 1 have emerged as a prominent potentially regulate each underlying activity.
3 moves by regulators in the United States and other jurisdictions to assert authority over cryptocurrency markets underscore this Due to this growth, cryptocurrencies and ICOs have become backdrop of legal and regulatory uncertainty.
Section 4 identifies and counter-terrorist financing (together, "AML") regimes.
From cryptocurrency risk considerations for FIs, focusing on risks the regulatory standpoint, many of the risks associated with posed by customers who hold, produce, or otherwise interact with cryptocurrencies echo those presented by new financial products cryptocurrencies to a significant degree and by services provided to and technologies of the past: the risk of untested business models, cryptocurrency markets.
The online ecosystem surrounding Cryptocurrency is a form of virtual currency.
FATF has defined cryptocurrency opens new cyber and insider threat vulnerabilities, "virtual currency" as "a digital representation of value" that "does while the iterative nature of the DLT underlying cryptocurrencies not have legal tender status .
Allen & Overy, LLP Anti-Money Laundering Regulation of Cryptocurrency
Rather than residing in a currency, and "e-money," which is a digital representation of cfieatntralised authoritative system, the blockchain is stored jointly by currency.
While Bitcoin, not "private", since all transactions on the ledger are a matter of which launched in early 2009, is the oldest and most well-knopuwbnlic record and every coin is associated with a unique transaction cryptocurrency, many variations have since been created with various history.
The most recent boom has seen cryptocurrency increasingly adopted as a means Cryptocurrency Businesses of raising capital, often portrayed as a variant of "crowdsourcing" startup costs.
On registration requirements imposed by the Financial ■ AVirtual Currency Exchange ("VCE") is a trading platform Crimes Enforcement Network ("FinCEN") (with respect to that, for a fee, supports the exchange of virtual currency for "money services businesses 2"6 t)h, e Securities and Exchange fiat currency, other forms of virtual currency or other storCesommission ("SEC") (with respect to issuers, brokers, and dealers of value (for example, precious metals).
21 Adding to the risks, many wallet exchanging, or using virtual currencies qualify as money and VCE providers may, correctly or incorrectly, consider t sheerirvices businesses ("MSB") 31 regulated under the Bank Secrecy businesses to fall outside the scope of existing AML regulations.
32 In doing so, FinCEN distinguished those who merely use Going forward, how to apply existing AML regimes to this complex"virtual currency to purchase goods or servi3c3e(sa""user") from and rapidly changing ecosystem will be a critical question for exchangers and administrators of virtual currency, 34concluding that financial crime regulators.
Such a business qualifies as a covered MSB if it "(1) accepts and transmits a convertible virtual currency or (2) buys or State of Global AML Regulation sells convertible virtual currency for any reason".
offering make an "investment of money" in a "common enterprise" with a "reasonable expectation of profits" to be "derived from the U.S.
69These amendments would require EU Member States In 2014, the CFTC observed that cryptocurrencies may consttitoutseubject those service providers to the same obligations as banks "commodities" under the Commodity Exchange ACcEtA(""), such and other financial institutions under MLD4 - including CIP and that the CFTC has broad jurisdiction over derivatives that rbeefenreefinccieal ownership identification, KYC, transaction monitoring, cryptocurrencies (e.g., futures, options, and swaps) and market and suspicious activity reporting - and will subject those providers participants that transact in such contracts.
53 Persons MLD5 anticipated to occur in mid-2018, national implementation that act as futures commission merchantsF("CM") 54or introducing of these requirements may be expected by late 2019 or early 2020. brokers 55 for cryptocurrency derivatives under the CEA are also While MLD5 is pending, some EU jurisdictions have acted to extend covered by BSA AML requiremen56ts.
Whether qualifying as an national law or regulatory actions, and other Member States (such MSB or a broker or dealer in securities or commodities, the BSA as the UK and the Netherlands) having far left cryptocurrency requires an FI to maintain a risk-based AML compliance programme, trading largely outside the AML regulatory regime.
75 Such service providers are subject to obtain identification and retain records when handling transfers to Italian AML obligations, 76 including KYC7,7 record keeping of USD3,000 or more.
85 A 2015 Bank of Italy communication86on the prudential Many FIs are taking a conservative approach and nriostks of cryptocurrency further suggested that some cryptocurrency opening such accounts, while others have proceeded on a case-by- functions could violate criminal provisions of Italian banking law, case basis.
As the following sections illustrate, the potential for which reserve certain banking, payment, and investment services different standards and consequences to attach to cryptocurrency exclusively to authorised entities.
potential for collateral risk from serving unlicensed entities or, in the (d) UK extreme case, handling illicit proceeds as a consequence of serving In the UK, the prevailing view of regulators has been to treat non-compliant cryptocurrency businesses in Italy.
89 commercial dealings with cryptocurrencies can Order 2001.104 given the breadth of products that may trigger an authorisation requirement where the platform involvebse(ila)belled as cryptocurrencies, there is a risk that some coins or buying and selling cryptocurrency in order to carry out principal tokens (including those issued as part of an ICO) may constitute broking services, or (ii) operating as a multilateral trading facilityt.ransferable securities and fall within the prospectus regime Providers that act as "currency exchanges" offering to exchaunngdeer the Financial Services and Markets Act 2000 (FSMA), or legal tender for the purposes of proprietary trading, contract broking, alternatively, depending upon how they are structured, some ICOs or investment broking, are
Cryptocurrencies or the services for currency-like cryptocurrencies fall outside the scope proceeds of their sale that could be the subject of a restraint order or of the DFSA95and are in general not covered confiscation order to the extent that they constitute criminal property "institutions" for purposes of the Act for the Prevention of Moneuynder the Proceeds of Crime Act 2002 (P"OCA"), and concealing Laundering and Financing of Terrorism ("Wwft"). 96When MLD5 or handling such criminal property could trigger the money laundering offences under POCA1.08 where firms operate is implemented the Wwft will extend to these entities as discussed above. 97The Minister of Finance expects to complete the within the regulatory perimeter in breach of the FSMA general
offence, Although a lower court ruled in 2014 that Bitcoins do not themselvaensd thereby constitute a predicate crime for the primary money qualify as "common money99a"s, a practical matter many Dutch laundering offences under POCA. banks and other financial institutions have been reluctant to accept proceeds that derive from cryptocurrency exchange transactions if they cannot validate the origin of these funds.
At instruments" under the DFS 1A0,0 such that a provider of such a the extreme end, China currently prohibits commercial issuance and cryptocurrency or of investment services for such a cryptocurrency exchange cryptocurrency services.
limitations trading, and other services, and urge these institutions to strengthen will be lifted once a formal legal framework can be established. 119 their monitoring of money laundering. In 2016, a PRC-incorporatedBecause of the legal uncertainty regarding the future status of VCE platform was found partially liable for AML violations duecryptocurrencies, the Korean Financial Services Commission to its failure to perform KYC while offering cryptocurrenc (y"FSC") has begun to regulate cryptocurrencies through its authority registration and trading services. 109 to regulate banks pursuant to its existing statutory powers. These Subsequently, in September 2017, the PBOC issued a
jominetasures, announced in January 2018, require cryptocurrency announcement (the "Announcement"), affirming thattrading to occur through real-name bank accounts linked to cryptocurrencies do not have legal status or characteristics that cryptocurrency exchanges.
120 The FSC also introduced a mandatory make them equivalent to money, and should not be circulated and "guideline" with respect to cryptocurrency-linked accounts to 110 ensure bank compliance with AML.121 Among other things, the used as currencies.