Cryptocurrency’s mainstream boom increases BSA/AML risks

Driven by the global pandemic and shifts in the financial services industry, cryptocurrencies and digital payments are becoming increasingly mainstream. Rising interest in cryptocurrencies and uncertainty related to the traditional financial markets have piqued the interest of institutional investors and retail consumers alike. Some investors also view cryptocurrency as an anti-inflationary growth asset that can outperform other assets in an era of low returns from government bonds.

Companies operating as money transmitters and Money Service Businesses (MSBs) will need to be agile as they work to mitigate the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) risks associated with virtual currency transactions. With the majority of digital money transmission and cryptocurrency businesses categorized as MSBs, these companies may face significant risks around non-compliance with BSA/AML laws and regulations.

Market growth and increased BSA/AML riskDuring the past year, virtual currencies have experienced significant growth. This growth, coupled with much lower barriers to entry, have led to widespread adoption by consumers seeking to gain access to and conduct transactions with virtual currencies. As evidence of this widespread adoption, leading cryptocurrency exchange Coinbase recently announced that its cryptocurrency-funded Visa debit card — the Coinbase Card — could be added to Google Wallet as a form of payment for consumers throughout Europe.

The ease and speed with which consumers can conduct mobile payments using their digital assets is an indicator that transaction monitoring programs will need to adjust to recognize potentially illicit activity occurring in a space not yet fully matured. The very ease-of-use considerations desired by consumers can be exploited for illicit purposes.

Global access to cryptocurrency markets and the decentralized nature of these blockchain-based operations can make tracing the source of funds extremely difficult. While market-leading entities may implement stringent BSA/AML controls and oversight on their customers, significant risks still remain vis à vis the counterparties to its customers, who may be the customers of crypto exchanges with less stringent controls and/or less concern for regulatory compliance.

Large tech companies are also adopting products and services to increase virtual currency adoption among their customer base. In November 2020, PayPal announced it would open its network to bitcoin and other cryptocurrencies. PayPal’s announcement stated that “all eligible PayPal accountholders in the U.S. can now buy, hold and sell cryptocurrency directly with PayPal.”

Large tech companies must be sure to implement BSA/AML controls to manage the attendant risks of cryptocurrency adoption. For example, to reduce the Know Your Customer (KYC) risk associated with cryptocurrency transactions, PayPal places certain restrictions on its customers (via the PayPal Cryptocurrency Terms and Conditions), clarifying that its customers “…will not be able to transfer Crypto Assets from your Cryptocurrencies Hub to another cryptocurrency wallet.”

Cryptocurrency’s impact on financial servicesIn recent years, technology has played an increased role in the financial services sector. The shift to digital forms of currency has been inevitable, due to the clear advantages and efficiencies these new payment forms bring to financial services. These efficiencies include greater access to customers, efficiency in processing, and speed of transactions — all non-trivial improvements to traditional payments systems. In addition, the growth of fintech firms, eager to deliver services or products traditionally viewed as banking, have increased the velocity of change and adoption with their drive to innovate through technology.

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