The popularity of cryptocurrencies has risen significantly in recent years, with more individuals and businesses using them for a variety of purposes, including international money transfers and online purchases. In order to protect the integrity of the global financial system and minimize illegal uses of cryptocurrency, it is necessary to apply anti-money laundering (AML) regulations to the industry.

The 2014 Financial Action Task Force (FATF) report on the potential risks of money laundering and terrorist financing in the cryptocurrency world highlighted the openness to anonymity in cryptocurrency transactions, the global and segmented reach of virtual currencies, and the lack of central supervision of decentralized cryptocurrency trading. After the report was published, regulatory bodies began to adopt AML recommendations for virtual currencies and cryptocurrency exchanges.

The FATF updated its Standards in October 2021 to provide guidance on how to apply the Standards to virtual asset (VA) activities and Virtual Asset Service Providers (VASPs) to reduce the risk of money laundering and terrorist financing associated with VA activities and to protect the integrity of the global financial system.

Cryptocurrency, by its very nature, is a decentralized form of money that can be easily transferred across borders. While it is true that cryptocurrencies can be used for anonymous exchange, this anonymity is not absolute. One of the main ways that cryptocurrency transactions are traced is using public ledgers, which are maintained on a blockchain.
Every time a cryptocurrency transaction is made, it is recorded on the blockchain, along with information about the sender and the recipient. This means that it is possible to trace the flow of cryptocurrency from one person or entity to another by analysing the blockchain.
The use of cryptocurrencies for illegal purposes is a small fraction of overall cryptocurrency activity. Most individuals and businesses that use cryptocurrencies do so for legitimate purposes, such as transferring money internationally or making online purchases.

While the risk is quite low compared to traditional payment methods, such as cash and wire transfers, the AML regulations in the crypto space ensure that cryptocurrency exchanges require users to undergo know-your-customer (KYC) and anti-money laundering (AML) checks, which helps to identify the parties involved in a transaction and aim to minimize the number of illegal uses of cryptocurrency.


Here are just a few examples of the many cases of money laundering through cryptocurrencies that have been reported in recent years :
  • 1

    In 2018, the US Department of Justice charged a Russian national named Alexander Vinnik with operating a money laundering scheme that involved the use of bitcoin. Vinnik was accused of operating BTC-e, an unlicensed bitcoin exchange, which was used to launder the proceeds of various criminal activities, including the sale of fake identification documents and stolen credit card information. The DOJ alleged that Vinnik laundered approximately $4 billion through BTC-e.

  • 2

    Another case in 2018, the U.S. Securities and Exchange Commission (SEC) charged the company Arise Bank and its founders with conducting a fraudulent initial coin offering (ICO) and using the proceeds to conduct a Ponzi scheme. The SEC alleged that the defendants raised $600 million from investors by falsely claiming that they had acquired an FDIC-insured bank and were using the funds to develop a platform for cryptocurrency banking. The defendants allegedly used investor funds to pay for personal expenses and to cover the losses from failed investments. The defendants settled with the SEC, agreeing to pay fines and return funds to investors.

  • 3

    In 2020, the US Department of Justice charged a Ukrainian national named Andrii Kolpakov with money laundering for his role in a cybercrime scheme that involved the use of cryptocurrency. Kolpakov was accused of using bitcoin to launder the proceeds of a business email compromise (BEC) scheme that targeted US-based companies. The attacks resulted in over $1 billion in losses to various financial institutions, merchant processors, insurance companies, retail companies and individual cardholders. The BEC scheme involved sending fake emails to companies, purporting to be from a legitimate vendor, and requesting payment for invoices.

AML regulations in the crypto space concern VASPs, or all entities that deal in cryptocurrency, including crypto exchanges, wallet providers, and other financial institutions. VASPs are required to comply with AML regulations in the countries where they operate, and failure to do so can result in significant fines, reputational damages, the removal of the license, and other penalties.

Compliance with AML regulations can be challenging and costly for crypto businesses as AML regulations can be complex and subject to change, which can make it difficult for businesses to stay up-to-date and compliant. Businesses may need to invest in training and professional development for their staff to ensure that they are aware of the latest regulations to maintain the integrity of the financial system and protect against the use of cryptocurrency for illegal activities.

Anti-money laundering laws for cryptocurrency vary from country to country. In general, however, regulations for crypto are integrated into AML processes that require exchanges and other financial institutions to implement certain measures to identify and verify the identities of their customers, and to monitor and report suspicious activity.
These measures include customer due diligence procedures, such as obtaining and verifying identification documents and information on the purpose and intended nature of the business relationship. They also include transaction monitoring systems to detect and flag unusual or potentially illicit activity, and the reporting of suspicious activity to relevant authorities.

Cryptocurrency regulations are a major focus for regulators worldwide, with approximately 95% of regulators currently working on developing regulations for the industry. The crypto industry itself is supportive of regulatory efforts, seeing them to legitimize and grow the industry. The Financial Action Task Force (FATF) has recently defined virtual asset service providers (VASP) to include cryptocurrency exchanges, stablecoin issuers, decentralized finance (DeFi) protocols, and non-fungible token (NFT) marketplaces, setting the stage for regulatory efforts in various countries.

US In the United States, the Bank Secrecy Act and its implementing regulations impose AML obligations on financial institutions, including crypto exchanges. The Act requires these institutions to implement a written AML program, establish and maintain internal controls, and report suspicious activity. The Act also requires financial institutions to file Currency Transaction Reports (CTRs) for transactions involving cash or other monetary instruments in excess of $10,000, and to file Suspicious Activity Reports (SARs) for transactions that may involve money laundering or terrorist financing.

UE In the European Union, the Fifth Anti-Money Laundering Directive (5AMLD) imposes AML obligations on virtual currency exchanges and custodian wallet providers. The Directive requires these entities to identify and verify the identities of their customers, and to report suspicious activity to relevant authorities. The Directive also requires member states to establish national registers of beneficial ownership information for companies and trusts, and to establish centralized bank account registers or equivalent systems. The European Parliament has recently voted to impose a €1,000 limit on crypto transactions where the customer cannot be identified, requiring entities such as banks and crypto asset managers to verify customers' identity, ownership, and control of the company, and subjecting NFTs to anti-money laundering rules.

CA In Canada, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations impose AML obligations on financial institutions, including virtual currency exchanges and certain other businesses that deal in virtual currencies. These entities are required to implement a compliance program, keep certain records, and report suspicious transactions and large cash transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

AU In Australia, the Anti-Money Laundering and Counter-Terrorism Financing Act and its regulations impose AML obligations on financial institutions, including digital currency exchange providers. These entities are required to implement a compliance program, keep certain records, and report suspicious transactions to the Australian Transaction Reports and Analysis Centre (AUSTRAC).

AU In Africa, the Namibia Virtual Assets Act 2023 became law in July 2023 and is designed to safeguard consumer protection, stop market exploitation, stop money laundering, and set up a regulatory body to control and oversee providers of virtual asset services and related activities.

The use of technology, such as blockchain analysis tools, artificial intelligence, and machine learning algorithms, will play an increasingly important role in the future of AML regulations for cryptocurrency. These technologies can help to automate and streamline AML processes, making compliance more efficient and effective.

However, there are also limitations to the use of technology in this context, such as the potential for false positives and the need for human oversight and interpretation. Additionally, the use of such technologies raises privacy and security concerns that must be carefully considered and addressed.

AML regulations for cryptocurrency will continue to evolve and be refined over time, as the industry and the regulatory landscape change. For example, new technologies and business models may emerge that present new risks and challenges for AML compliance. It will be important for regulatory bodies to stay up to date with these developments and adapt their regulations accordingly. It is likely that international cooperation and coordination will continue to be a key factor in the development of AML regulations for cryptocurrency, as the nature of the industry is global and cross-border in scope.

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Click to watch the associated videos

AML & Virtual Assets Episode I - The Importance of AML Regulations in the Crypto Space

AML & Virtual Assets Episode II - Examples of Money Laundering Through Cryptocurrencies

AML & Virtual Assets Episode III - Current AML Laws for Cryptocurrencies

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