This paper reminds readers of the financial crime risks that can be encountered in the cryptocurrency ecosystem and provides suggestions for addressing these systematically. To implement effective risk-management controls, firms must understand the risks involved and be aware of the complexities specific to cryptocurrencies. Those financial institutions that take active measures to adapt their programs to the risks of cryptocurrencies will be well positioned to avoid the pitfalls that are bound to emerge as risks becomes more concrete and regulators become more active in this space.
The characteristics of cryptocurrencies, including anonymity and limited participant identification and verification, coupled with their global reach and the lack of a central oversight body, present many new Anti-Money Laundering (AML), Sanctions and Know Your Customer (KYC) risks. For traditional financial institutions, the existing industry most likely to be impacted by the emergence of cryptocurrencies, the associated AML/Sanctions/KYC risks are particularly pertinent.
Regulators are rapidly considering the implications of cryptocurrencies on the existing regulatory systems, as demonstrated by the United States Securities and Exchange Commission’s request that online trading platforms must register as a national securities exchange and the announcement by the Treasury’s Financial Crimes Enforcement Network (FinCEN) that coin developers and exchanges should be considered ‘money transmitters’ and treated as money services businesses for regulatory purposes. It is, therefore, important that banks immediately begin to consider how they may be exposed directly or indirectly to cryptocurrencies and evolve their AML/Sanctions/KYC programs to address these risks. While there is always much work to do on the Anti-Financial Crime front, banks will also need a well-organized cryptocurrency initiative. The purpose of this publication is to explore the financial crime risks related to cryptocurrencies and provide concrete suggestions on how institutions can approach these from an AML/Sanctions/KYC perspective. For a more general explanation of cryptocurrencies, see Oliver Wyman’s recent paper on Cryptocurrencies and Public Policy – Key Questions and Answers.