In the paper, the Australian Treasury explains that everyone who invests in cryptocurrency must include their assets in their tax returns. It also sets out the basis of a “token mapping framework” to help explain how various cryptoassets might fit into existing regulatory frameworks. 

The consultation period for this paper is open until March 3, 2023. The full list of consultation questions can be found in Annexure 4 on pages 52 and 53. 

Token mapping framework

In August’s joint statement, token mapping was highlighted as the “first step in a reform agenda,” as it would help the government identify how crypto assets and related services should be regulated. In the paper, “tokens,” “token system,” and “functions” are defined as follows:

• Tokens are physical or digital units of information that have a role in a token system
• A token system is a collection of steps involved in performing a function 
• A function can be any benefit ensured or facilitated by the token system to the token holder

This token mapping framework will be used to define the development of a custody and licensing framework, which the government is due to propose for public comment by mid-2023. 

According to our 2023 global compliance survey, these regulatory reforms are coming at an important time for Australian firms. When asked what crypto-based services they would offer in the future, 70 percent told us a trading or exchange service, 54 percent said crypto as a payment method or rail, and 51 percent a custodian or wallet service. 

Australia’s functional approach

The paper also discusses the concept of a “functional perimeter,” which would set Australia apart from other jurisdictions by adopting a broad “functional” definition of a financial product. This approach follows the policy adopted after the Wallis Inquiry recommended that the law adopt a broad definition of “financial product” so that “functionally-equivalent” products can be treated equivalently.

According to the paper, other jurisdictions have created an exhaustive list of regulated products and are often guided by risk-based approaches when updating the list to include novel financial products. The Hong Kong Securities and Futures Commission (SFC), for example, announced in January that it will propose a subset of tokens permitted for retail investors’ trading. According to the CEO of the SFC Julia Leung, only “highly liquid” assets will be on the list. 

Crypto scam concerns

These regulatory reforms come in light of rising concern regarding the increasing number of scams involving crypto. According to the Australian Securities and Investments Commission (ASIC), Australians caught up in cryptocurrency scams lost $701 million in 2021, representing a 135 percent increase from 2020. ASIC Deputy Chair Sarah Court said the main driver of this increase was crypto investment scams, where losses increased by 270 percent. The Australian Competition & Consumer Commission (ACCC) has also advised that crypto scam losses increased further in 2022.

In April 2022, AUSTRAC and the Australian Prudential Regulation Authority (APRA) released reports warning about the scale and risk management related to crypto assets. In particular, AUSTRAC included a list of financial and behavioral indicators linked to specific types of crime involving cryptocurrencies, such as illicit activity via darknet marketplaces, terrorism financing, scams, and tax evasion. Key red flags for compliance staff to note include:

• The customer’s wallet addresses show exposure to high-risk conversion services or darknet marketplaces
• An account receives multiple small deposits, which are immediately transferred to private wallets
• Public information or blockchain analysis tools indicate a customer has transacted with websites or wallet addresses considered to be high risk for terrorism activities or proliferation financing
• The use of services that do not make commercial or economic sense. For example, a business moving earnings through mixers or an individual converting a digital currency multiple times before cashing out, incurring additional conversion fees

Key takeaways

With new regulations coming in 2023, firms of all sizes need to devise a strategy for staying ahead of the latest developments. Three key steps to take include:

• Horizon scanning – firms should stay ahead of the curve by ensuring their compliance teams have adequate budgeting approved by senior management to address changes and that the right level of resourcing has been allocated to address regulatory changes

• Understand new requirements and impact – take the time to fully understand new requirements and the possible impact on operations, as new regulations may require adding a technology layer or developing a strategy to exit a pool of clients who are suddenly deemed to be breaking the law

• Contribute to regulatory consultations – this will help to ensure that laws are being developed that do not stifle innovation or lead to the development of regulations that could have a serious negative impact on the industry

The post Australian Government Begins Crypto Regulation Reform appeared first on ComplyAdvantage.

Pursuant to President Biden’s Executive Order (EO) 14067 on Digital Assets, the Treasury’s report took the form of a roadmap detailing how the government will bring greater transparency to the digital asset sector. Along with eight other reports from federal agencies, the Treasury’s action plan informed a new framework, published by the White House in September 2022, for the responsible development of digital assets.  

The comment period for the Treasury’s Action Plan ended on November 3. 

Regulatory Clarity and Public-Private Engagement

Speaking at the Crypto Council for Innovation, Rosenberg highlighted two specific issues repeatedly appearing in the report’s comment letters. Regarding the desire for further regulatory clarity, industry commenters asked questions about decentralized finance (DeFi) and being subject to sanctions obligations and regulatory anti-money laundering and combatting the financing of terrorism (AML/CFT) frameworks.

To ensure the DeFi industry has a clear understanding of its AML/CFT and sanctions obligations, the Treasury will review the specific issues the sector identified in the comments and explore how current questions and uncertainty should be addressed. Rosenberg noted that thought would be given to whether additional regulatory guidance will take the form of advice, outreach, or regulation. 

Second, Rosenberg commented on the industry commenters’ requests for more public-private engagement between the government and the virtual assets industry. Recognizing the industry has unique insight into illicit finance threats, Rosenberg said, “Stronger two-way dialogue can […] strengthen the US government’s understanding of technological innovations and changes, as well as create greater opportunities for industry to identify areas where these innovations may result in regulatory uncertainty.” 

Questions Around Privacy for Virtual Asset Transfers

Rosenberg also commented on some policy questions from industry commenters surrounding the Treasury’s approach to mixers following the designations of Blender.io and Tornado Cash. 

In May 2022, cryptocurrency mixer service Blender.io was sanctioned by the US after it was used in a heist backed by the Democratic People’s Republic of Korea (DPRK) to fund the country’s nuclear weapons and missile programs. Following this designation, in August 2022, another mixing service, Tornado Cash, was sanctioned for enabling cybercriminals to launder USD 7 billion in crypto since 2019. 

Rosenberg noted that while virtual assets can provide helpful insight into financial activities through public blockchains, which can be used to support AML/CFT compliance, some virtual asset users may desire privacy when conducting transactions. 

“Our goal and intention is not to deter the development of technologies that provide privacy for virtual asset transfers,” said Rosenberg. “We welcome opportunities to further engage with [the] industry on how these technologies can both promote privacy while also mitigating illicit finance risks and complying with regulatory and sanctions obligations.”

Further information on illicit financing risks associated with anonymity-enhancing technologies in the virtual asset ecosystem can be found in the 2022 National Money Laundering Risk Assessment. 

Key Takeaways

While the Treasury’s report is likely to play a significant role in shaping the future development of digital assets in the US, regulations will continue to be an ongoing and iterative process. Firms should stay up-to-date with the additional regulatory guidance and expanded engagement efforts the Treasury has committed to providing. 

For further reading, compliance staff should also familiarize themselves with the additional reports from federal agencies that highlight “a clear framework for responsible digital asset development and pave the way for further action at home and abroad.” The two other reports published by the Treasury in September 2022, include:

• The Future of Money and Payments
• Crypto-Assets: Implications for Consumers, Investors, and Businesses

The post US Treasury Follows Up On Action Plan to Mitigate the Illicit Finance Risks of Digital Assets appeared first on ComplyAdvantage.

Founded in 2021, DolarApp is a dollar USDc account for Mexico and Argentina. We met with co-founder and COO Álvaro Correa Gallardo to find out more.

Introducing DolarApp

Backed by investors such as Y Combinator and Kaszek, DolarApp was created to help solve the problem Latin American citizens face when trying to access banking in US dollars.

“After living and working across Latin America, from Panama to Mexico to Colombia, my co-founders and I realized the big existing problems people faced when trying to dollarize their finances, with some people ultimately traveling to the USA frequently just to be banked in dollars. People’s motives for wanting to dollarize their finances vary; some want to protect their savings in a more stable currency, some travel often to the US and need to pay in dollars frequently, while others work for companies in the US and receive a salary in USD. Until now, the only solutions for these problems were credit cards that might charge up to 3% foreign transaction fees, or remittance providers who charge around 5% transaction fees when making or receiving USD transfers. Ultimately this leads to a poor financial experience for people in LatAm just because of where they happen to be born”, said Correa.

While working at Revolut, Correa and his co-founders, Fernando Terrés and Zach Garman, began thinking about how to provide people in LatAm the ability to manage their everyday finances in USDc, achieving financial stability while avoiding these high fees.

From Peso to USDc and Back Again

“With DolarApp, users can get account details in Mexico and USA, allowing them to go from peso to USDc and back in a matter of seconds,” explained Correa. “Users can also invest in digital dollars, earning 3% annually, and pay with an international Mastercard with up to 4% cashback.”

Additionally, users can send and receive payments in the US for a flat fee of $3 versus the $3 fee plus a 2% charge that other money transfer companies charge. DolarApp supports this by offering both USA and México account details in the same app, which removes the need for remittances across the US-LatAm corridor.

DolarApp’s Social Impact

“The thing I love most about building DolarApp is that we’re solving a massive problem that drastically improves the lives of millions of people. Since we first launched our beta in June, we’ve seen massive interest in the product, which reinforces the demand is there and people love the initial offerings. I also haven’t seen other products available in the region that offer the kind of rewards and cashback that DolarApp does!”

What’s next for DolarApp?

DolarApp is currently working on improving their account details in the US for people in Latam by offering direct debit payments, expanding their product to more countries such as Argentina and enabling Apple Pay and Google Pay.

Are you an early stage FinTech and need a KYC and AML solution?

Ready your start-up for scale with free access to our transaction monitoring and customer screening tools through ComplyLaunch.

Register for ComplyLaunch today

Follow DolarApp:

Website
LinkedIn
Twitter
Facebook
Connect with Álvaro Correa Gallardo
Connect with Fernando Terrés
Connect with Zach Garman

The post ComplyLaunch Customer Spotlight: DolarApp appeared first on ComplyAdvantage.

While MiCA broadly applies to cryptoasset service providers (CASPs) providing crypto services to EU residents, some areas fall outside of MiCA’s scope. These include crypto-assets that:

• Are unique and not fungible with other crypto-assets, such as digital art and collectibles
• Qualify as financial instruments as defined under Directive 2014/65/EU, such as security tokens
• Represent services or physical assets that are unique and not fungible, including real estate or product guarantees
• Are offered for free, or are automatically created

Classification of crypto-assets

The MiCA bill introduces three sub-categories of crypto-assets based on whether an asset seeks to stabilize its value in relation to other assets. These include asset-reference tokens, e-money tokens, and other crypto-assets.

Asset-reference tokens are assets that maintain a stable value by referencing several currencies, one or several crypto-assets, one or more commodities, or a combination of such assets. Contrastingly, e-money tokens are assets that aim to stabilize their value by referencing only one official currency, such as stablecoins. All other crypto-assets that do not fall into either of the aforementioned groups make up MiCA’s third sub-category. 

CASP requirements

Under MiCA, potential retail holders of crypto-assets must be informed about the characteristics, functions, and risks of the crypto-assets they intend to purchase. Therefore, CASPs will be required to compile a whitepaper containing general information on the

• Issuer and offerer
• Rights and obligations attached to the crypto-assets
• Underlying technology used for such assets
• Related risks

Prior approval for marketing communications will also be required for asset-reference and e-money tokens. All advertising messages and marketing materials should be fair, clear, not misleading, and aligned with the information provided in the crypto-asset whitepaper. 

Further requirements for asset-reference tokens and e-money tokens include regulatory approval before launching new services and vetting key management personnel. Regarding management, the bill notes that issuers of asset-referenced tokens should have robust governance arrangements, including a clear organizational structure and effective processes to identify, manage, monitor, and report the risks to which they are or might be exposed.

More information on the key takeaways for CASPs can be found here.

Next steps

The MiCA bill points to a more comprehensive, strategic view of crypto assets being adopted by the EU and a greater understanding of how they integrate into the broader financial services ecosystem. 

Before the act can be signed into the Official Journal, it must be voted on at a European Parliament plenary session, possibly in November. If no amendments are made, the bill will move on and be signed into law during December’s plenary session. From then, crypto firms will have up to 18 months to prepare themselves for the changes, with the bill likely coming into effect in 2024.  

The post EU Lawmakers Approve MiCA Bill to Regulate Crypto appeared first on ComplyAdvantage.

The reports urge agencies to promote innovation by kickstarting private-sector research and helping cutting-edge US firms establish themselves in global markets. They also call for measures to mitigate risks, including fraud, theft, and crypto-asset mismanagement. 

The fact sheet is structured around seven recommendations for federal agencies:

• Protecting consumers, investors, and businesses 
• Fostering financial stability
• Countering illicit finance
• Reinforcing US financial leadership and economic competitiveness
• Promoting financial inclusion
• Advancing responsible innovation
• Exploring a US central bank digital currency (CBDC)

New framework and policy recommendations

The reports encourage federal agencies to issue guidance to address current and emergent risks in the digital asset ecosystem to protect consumers, investors, and businesses. Similarly, the US Treasury will work with other agencies to foster financial stability to identify, track, and analyze emerging strategic risks related to digital asset markets. 

Identifying and understanding these risks is also key to effectively fighting the illicit use of digital assets. As part of this effort, the Treasury will complete an illicit finance risk assessment on decentralized finance by February 2023 and an evaluation of non-fungible tokens (NFTs) by July 2023.

To reinforce the US’ global financial leadership and competitiveness, federal agencies recommend the expansion of leadership roles in digital assets work at international organizations and standard-setting bodies, including the G7, G20, and the Financial Action Task Force (FATF).

To promote financial inclusion, federal agencies recommend building a federal framework for nonbank payment providers and encouraging the adoption of instant, 24/7 payment systems such as FedNow. The Federal Reserve plans to launch this system in 2023. The development of new financial technologies such as this is a priority of the new framework, with the agency reports recommending the instigation of a Digital Assets Research and Development Agenda. The Treasury has also been encouraged to provide innovative US firms with regulatory guidance, best practice sharing, and technical assistance.

The final section of the fact sheet notes that the Biden Administration has already developed policy objectives for a US CBDC System. To support the Federal Reserve’s efforts and to advance other work on a potential US CBDC, the Treasury will lead an interagency working group to leverage cross-government technical expertise.

Key takeaways

The framework and reports outlined in this fact sheet are likely to play a significant role in shaping the future development of digital assets in the US. However, the development of regulations for digital assets will be an ongoing and iterative process shaped by input from federal agencies and the public. 

Compliance staff should pay particular attention to plans of action highlighted in the fact sheet and, more specifically, ensure they are familiar with the US Treasury report on addressing the illicit financing risks of digital assets. The priority actions recommended by the Treasury include:

• Improving global anti-money laundering and combatting the financing of terrorism (AML/CFT) regulation and enforcement
• Updating Bank Secrecy Act regulations
• Strengthening US AML/CFT supervision of virtual asset activities
• Engaging with the private sector
• Supporting US leadership in financial and payments technology

Further reading

The reports submitted to President Biden to date, according to each federal agency, are as follows:

• US Department of Justice
  • How To Strengthen International Law Enforcement Cooperation For Detecting, Investigating, And Prosecuting Criminal Activity Related To Digital Assets
  • The Role of Law Enforcement in Detecting, Investigating, And Prosecuting Criminal Activity Related to Digital Assets
• US Treasury
  • The Future of Money and Payments
  • Crypto-Assets: Implications for Consumers, Investors, and Businesses
  • Action Plan to Address Illicit Financing Risks of Digital Assets
• The White House, Office of Science and Technology Policy (OSTP)
  • Climate and Energy Implications of Crypto-Assets in the United States
  • Technical Evaluation for a US Central Bank Digital Currency System
  • Technical Design Choices for a US Central Bank Digital Currency System
• US Department of Commerce
  • Responsible Advancement of US Competitiveness in Digital Assets

The post White House Issues First-Ever Digital Asset Development Framework appeared first on ComplyAdvantage.

The government believes no other country has conducted a token mapping exercise. It will focus on better understanding how Australians use crypto-assets and the gaps in current regulatory frameworks. A core theme of the government’s statement is consumer protection and the need to “provide additional consumer safeguards.”

Token mapping was a core recommendation of an October 2021 review by a parliamentary select committee into Australia as a technology and financial centre. The committee’s reasoning focused heavily on the rise of Decentralized Finance (DeFi) and, in particular, the growth of DeFi protocols and blockchain projects using Decentralized Autonomous Organization (DAO) models. DAOs feature governance models that enable stakeholders to vote, making decisions collectively rather than through a centralized entity or designated person. For example, some DAOs are used to launch crypto-backed stablecoins. 

A “serious approach” to crypto regulation

The Morrison government, which left office in May 2022, had announced a consultation on a proposed Digital Services Act. Built around four pillars that included technology neutrality, flexible principles, direct ministerial oversight, and cooperation, the plan included a framework for DAOs. However, the Albanese government will pause these plans while it conducts the token mapping work: “The previous government dabbled in crypto-asset regulation but prematurely jumped straight to options without first understanding what was being regulated.” 

Nonetheless, Australia’s policymakers recognize the potential upsides of acting fast. Noting that examples of DAO legal structures globally are “limited,” the parliamentary committee highlighted that the US state of Wyoming legislated in this area and has attracted “significant business activity” as a result of its “proactive stance.” 

The race to establish frameworks and manage arbitrage

Regulators in other major regional economies are still grappling with regulatory arbitrage related to the crypto-asset space. In July 2022, South Korean regulators intervened to tackle so-called “kimchi premium dealers.” These dealers buy tokens, including bitcoin, overseas before selling them for a profit through domestic crypto exchanges. In August, the country’s Financial Intelligence Unit (FIU) took action against 16 foreign-based firms it believes have been conducting business without the appropriate authorizations under the Financial Transactions Report Act. 

Meanwhile, Hong Kong is preparing to launch its virtual asset service provider (VASP) licensing regime, which its government believes will be one of the most comprehensive in the world. License applications for covered firms must be submitted by December 1st, 2023. 

Next steps

The announcement from the Australian government represents the first step in a likely years-long process toward legislating to deliver a comprehensive regulatory framework. In the meantime, firms should keep abreast of the latest announcements and in particular, look out for the public consultation paper on token mapping. The government has pledged to issue this “soon.” 

The post Albanese Government Launches Crypto Token Mapping Exercise appeared first on ComplyAdvantage.

In response to a question during a parliamentary session on August 1, Shanmugaratnam noted some of the areas MAS will be “actively assessing,” including regulating reserve requirements and the stability of stablecoins’ peg against the value of a fiat currency.  

Singapore’s consideration of its overarching regulatory approach towards stablecoins follows the country’s Financial Services and Markets (FSM) Bill, which enhanced the powers of MAS and addressed regulatory weaknesses in the cryptoasset space. The move also aligns with the global effort by regulators to build and extend their anti-money laundering and combatting the financing of terrorism (AML/CFT) regulations to better reflect the shifting crypto and stablecoin landscape. 

Stablecoin reserve requirements 

MAS Managing Director, Ravi Menon, discussed the agency’s approach to the crypto ecosystem at the Financial Times’ Crypto & Digital Assets Summit in April this year. Regarding stablecoin regulation, Menon said there needs to be a level of surety regarding the extent to which stablecoin backing is liquid and available when required. 

While Shanmugaratnam confirmed that the impact of Terra’s collapse on Singapore’s economy was minimal, MAS will continue to work on stablecoin regulation and utilize feedback from the public to inform its direction. 

“From a developmental perspective, MAS’ aim has been and remains to enable the growth of an innovative and responsible digital asset ecosystem,” said Shanmugaratnam. 

A focus on standard setting

Standard setting within crypto markets remains a global concern for regulators and governments alike. Alongside MAS’s upcoming guidance on stablecoin usage, the Financial Stability Board (FSB) will propose the first global crypto rules in October this year. 

In June 2022, the Financial Action Task Force (FATF) released its “Targeted Update on Implementation of FATF’s Standards on Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs).” In the report, the FATF cited its commitment to facilitate discussion between jurisdictions and other standard-setting bodies on stablecoin implementation issues. 

Key takeaways

As stablecoin regulation, and crypto in general, remains subject to scrutiny across the globe, compliance staff should stay abreast of any new or updated guidance. Even guidance issued in jurisdictions outside of a firm’s operational scope should be assessed, as regulators are likely to review existing regulatory guidance to help inform their direction of travel. 

Firms based in Singapore should also be attentive to any upcoming calls from MAS inviting feedback from the public regarding future stablecoin regulation. 

The post MAS Announces Plan to Consult Public on Stablecoin Regulation appeared first on ComplyAdvantage.

Coming from the digital payments industry, with experience at companies including Mastercard and PwC, Emanuele Brion started working with the digital asset industry in 2017, including as a founding member of Crypto.com. In 2021, he decided to enter the digital asset industry full-time by taking on the role of Business Developer of the digital asset fintech Eidoo. In February this year, he also took on the role of Chief Operating Officer at Moneyfold.

Introducing Moneyfold

Launched in May 2017, Moneyfold was founded to create a regulated stablecoin. In 2018, the company graduated from the Financial Conduct Authority’s (FCA) regulatory sandbox program issuing tokens on the Ethereum blockchain to the value of national currencies including the Euro and the British Pound. Over time, Moneyfold has evolved, through its small e-money institution license, in “offering banking services to businesses and individuals working in the digital asset industry, both in the UK and throughout the European economic area”. 

Digital asset natives

“Before Moneyfold, the entities that were offering e-money services to companies in the digital asset industry did not have the relevant background or understanding to provide an optimized service. 

“The founders of Moneyfold, however, are all digital asset natives, meaning we understand the intricacies of the crypto industry and can provide the right services that meet a specific need.”

Providing direct control

“The thing I love most about building Moneyfold is the unification we are creating between the world of traditional banking and the crypto world.

“But our proudest achievement so far has to be when we launched the first DeFi Visa payment card where the funds are directly under the control of the final user, not a third-party. While other crypto cards exist in the market, in each case the assets are held by the exchange, not the final user. 

“However, we built a complex on-chain mechanism on the blockchain that allows crypto to be kept directly by the user and redeemed against underlying funds at any time.”

What’s next for Moneyfold?

“Our biggest goal for the future is to go mainstream and expand our client portfolio by offering e-money services to more crypto companies throughout the UK and European economic area.”

Are you an early stage FinTech and need a KYC and AML solution?

Ready your start-up for scale with free access to our transaction monitoring and customer screening tools through ComplyLaunch.

Register for ComplyLaunch today

Follow:

Website
Twitter
LinkedIn
Connect with Emanuele Brion

The post ComplyLaunch Customer Spotlight: Moneyfold appeared first on ComplyAdvantage.

What are NFTs?

NFTs are digital representations of real-world objects bought by collectors and usually sold online. They are supported by blockchain technology – often the Ethereum blockchain – and contain built-in authentication, which is proof of ownership. 

NFTs have existed since 2014 but are increasingly likely to come to firms’ attention through client transactions. Like physical artwork or collectibles, NFTs are unique or have a limited run, which means the amount NFTs are worth is subjective. 

What is NFT Money Laundering?

The regulation of NFTs is still in its infancy, as regulators and international bodies explore how they are used and how widespread adoption has become.

With increasing amounts of money – often cryptocurrency – being used to pay for NFTs, there are concerns that they may be used to circumvent expanding anti-money laundering (AML) rules for traditional art.

For example, under the EU’s Fifth AML Directive, anyone involved in purchasing or selling a work of art for more than €10,000 has AML obligations to carry out Customer Due Diligence (CDD) and report any suspicious activity.

As the Directive doesn’t define what a ‘work of art’ is, or mention NFTs, it is unclear whether NFTs could be considered works of art and be subject to AML/CFT and Know Your Customer (KYC) practices under this ruling.

However, in 2020, the EU proposed a regulation that may apply to NFTs. The Markets in Crypto-assets Regulation (MiCA) defines NFTs as “a digital representation of value and rights which may be transferred electronically, using distributed ledger technology or similar technology”. 

NFTs may fall under the ‘other crypto-assets’ category of the regulation – meaning issuers do not have specific licensing obligations, but are required to be a legal entity (even when being established outside the EU) and comply with specific business and governance conduct requirements.

In the US, while there is no direct regulatory guidance on NFTs, some states have created laws that could hold NFTs under their purview.

How does Money Laundering Through NFTs Work?

While the ways that criminals can launder money are diverse, the basic principles of money laundering – placement, layering, and integration – apply to NFT money laundering. 

As Financial Action Task Force (FATF) guidance states, much of the risk and regulation relating to NFTs and money laundering will depend on how they are being used and the nature of the asset that is traded.

In 2022, the US Treasury warned of the risk of NFT money laundering in the art sector. “The ability to transfer some NFTs via the internet without concern for geographic distance and across borders nearly instantaneously makes digital art susceptible to exploitation by those seeking to launder illicit proceeds of crime because the movement of value can be accomplished without incurring potential financial, regulatory, or investigative costs of physical shipmen,“ the report said. 

The Treasury Department also flagged that criminals could self-launder money by purchasing an NFT, then passing it to themselves through different digital accounts, creating a sales record before selling to an unsuspecting buyer, and coming out clean on the other end.

Comply With Cryptocurrency AML Regulations

Learn how your business can identify crypto AML red flags with our fast and flexible AML compliance solutions.

Explore our AI Driven Solutions

Why are NFTs Attractive for Money Laundering? 

While there is no evidence that money launderers are flocking to NFTs, facets of the trade of NFTs will seem appealing to potential criminals. 

For example, a simple way to detect potential trade-based money laundering is whether the price of a transaction is in line with the fair market value of an item. But with the volatility of the NFT market, discerning a reasonable price for an item can be tricky – making it much easier for potential NFT money laundering. 

And although NFT transactions have unique codes that are recorded on a public ledger, purchasers can remain anonymous, a big plus for anyone looking to wash assets discreetly. 

There is also no mechanism to prevent launderers from creating multiple accounts and transferring assets to cover their trails further.

Some industry commentators believe the NFT money laundering risks are high, arguing that NFTs could be used to facilitate ML and tax evasion for the wealthy, as they face less scrutiny from regulators and lawmakers. 

NFT money laundering scenarios could involve phishing and virus attacks, identity fraud, or forgeries. 

What is NFT Wash Trading?

Wash trading – a transaction in which the seller is on both sides of the trade to paint a misleading picture of an item’s value and liquidity – is an ongoing concern with cryptocurrency exchanges, some of which have attempted to inflate trading volumes.

For NFTs, wash trading takes advantage of the fact that many trading platforms allow users to trade by simply connecting their wallets to the platform, without needing to identify themselves. 

US comedian and crypto investor Isaiah McCall, who created a 2021 blog titled ‘How to Launder Money with NFTs,’ warned that you could spend $1m of illegal money on your own NFT, resell it for nothing, and bank the profits.

A 2022 report by Chainalysis reveals that some sellers have conducted hundreds of NFT wash trades. The report shows that while most NFT wash traders were unprofitable, the top 110 profitable wash traders made a collective $8.9m in profit. Many purchases at NFT marketplaces were also shown to come from illicit addresses, used stolen funds, or came from addresses with sanctions risk.

NFT Money Laundering Risks

What are the risks?

The risks around NFT money laundering are still emerging. The FATF is beginning to sketch out its approach to NFTs distinct from decentralized finance (DeFi), and this will likely shape how many major financial markets approach the issue. 

Among the measures recommended to counter the risk of NFT money laundering are greater private sector information sharing to improve transparency in the art sector, and applying AML/CFT requirements, such as completing suspicious activity reports and KYC processes, to art market participants.

The Royal United Services Institute (RUSI), a security think tank, has highlighted that NFTs are most often purchased with cryptocurrency on online marketplaces – meaning that the AML risks associated with crypto should also apply to NFTs. RUSI also warns of the risk of an NFT ‘art heist’ – where a criminal actor could hack user accounts on NFT marketplaces and transfer NFTs to their accounts. 

Can NFT Money Laundering Risks be Mitigated? If so, How?

Firms that haven’t done so should integrate NFT management into their risk assessments and risk-based approach to AML. RUSI guidance on how NFT money laundering risks can be mitigated sets out a regulatory foundation firms can start to build out/plan. 

Ways to mitigate NFT money laundering include:

1. Setting a baseline for companies that want to focus on NFTs
2. Implementing KYC policies and ongoing monitoring, similar to those used in the traditional art market and compliant cryptocurrency exchanges
3. Ensuring there is an option for two-factor authentication for consumers
4. Confirming cyber security measures are in place to protect against hackers
5. Possible development of a register of stolen or fraudulently purchased NFTs, mimicking the global Art Loss Register

To learn more about money laundering risks – download our AML Guide for Crypto Firms.

The post NFT Money Laundering: What You Need to Know appeared first on ComplyAdvantage.

Rathi also reiterated the FCA’s position on cryptocurrency, citing its accessibility and cross-border capabilities as areas of particular concern. The FCA plans to “deepen ties on crypto regulation and market developments” with US regulators as part of its regulatory approach to crypto.   

Greater clarity needed for crypto firms

The viability of cryptocurrency platforms has been under much scrutiny by the FCA, having been investigated by the regulator since 2018. Earlier this year, the FCA held two Crypto Sprints, the results of which told the FCA that firms wanted existing rules and tools should be used where possible. Furthermore, some participants suggested establishing a self-regulatory organization to provide greater clarity for firms before formal regulation takes effect.

While Rathi noted introducing new regulations is “a matter that is not up to us to decide,” the FCA’s collaborative approach to market developments is likely to further affect rules for stablecoins and central bank digital currencies. At the US-UK Financial Innovation Partnership earlier this year, both countries agreed to continue exchanging views on these topics and share information on the underlying technology that could help firms remain compliant. 

However, compliance consultancy Bovill has called for further clarity on the FCA’s expectations for crypto firms in light of only 13% of firms being successful in their application for clearance under the fifth Anti-Money Laundering Directive (5AMLD). Introduced in January 2020, 5AMLD classified cryptocurrency exchanges as “obliged entities,” requiring crypto service providers to perform additional checks on customers and obligating them to submit suspicious activity reports (SARs).

Regulator reform

Rathi also noted changes the FCA made to its systems infrastructure to improve fraud detection. In moving some of the regulator’s core systems to the cloud, over 50,000 firms and tens of thousands of users were transferred to a new regulatory data platform. “Using our data lake, we aim to more swiftly identify, connect and react to firm and market issues,” said Rathi.

The FCA’s environmental, social, and governance (ESG) strategy was also highlighted by Rathi. The FCA aims to promote awareness of climate change, work with firms to manage sustainability risks, and support global efforts to transition to a low carbon economy in line with the UK’s net zero policy.

After receiving criticism concerning staffing shortages, the FCA has shared that 500 new positions have been filled this year, with a further 1000 roles expected to be filled by the end of 2022. Along with the latest IT systems, additional staff is set to increase the FCA’s analytical capacity, which is listed as one of the core elements of the government’s suspicious activity report (SAR) reform program.  

Compliance staff should remain informed of discussions between UK and US regulators, bearing in mind the FCA’s aim of creating a “global financial system that promotes innovation, competition and economic growth” through collaboration. 

The post FCA Chief Outlines Data-Led Strategy Highlighting Crypto Concerns and Regulator Reform appeared first on ComplyAdvantage.