Crypto Conversion Services Reinforce KYC and AML

While cryptocurrencies continue trending among consumers, global regulators are keeping a close eye on crypto in an effort to bend the industry with old school control models.

In recent years, legislation strengthening crypto services liability for clients’ misconduct has been implemented by the world’s largest economies. In parallel, cryptocurrency exchanges, wallets, and crypto-exchangers requirements get a tougher edge worldwide. The fact that cryptocurrency can be potentially utilized for money laundering, tax evasion and terrorist financing shapes the primary concern for legislators from various jurisdictions, as has been repeatedly referenced by the same.

Who started the ball rolling?

The latest push to reinforce the ‘Know Your Client’ (KYC), Anti-Money Laundering (AML), and Combatting the Financing of Terrorism (CFT) provisions was triggered by several high-profile corruption scandals and increased terrorist attacks in the EU. Panama papers leak case was one of the milestones. Panamanian law firm and corporate service provider Mossack Fonseca’s database was leaked in April 2016. Paradise Papers were exposed online the following year, throwing light on the top end of offshore finance. Revealing large-scale corruption mechanisms involving former and current politicians, sportspeople, businessmen, and local elites were made possible by virtue of these postings.

EU pushback

‘Panamagate’ resulted in increased transaction control within certain regions and jurisdictions. Thus, in July 2018 the European Union adopted the Fifth Anti-Money Laundering Directive (5AMLD). The respective amendments were tabled back in summer 2016, however, it took another three years to negotiate and finalize the language. Another major corruption scandal involving Danske Bank spurred the EU legislators into action. The Scandinavian bank was allegedly carrying out a suspicious transaction in the amount of 200 billion euros between 2007 and 2015.

Under the most recent EU-enacted Fifth Anti-Money Laundering Directive, the cryptocurrency services (i.e. wallet, exchanger and cryptocurrency exchange operators) must ensure adequate identity verification of their customers by checking their full name as well as contact information. Moreover, cryptocurrency service providers have to disclose the names of the beneficiary owners, unveiling the chain of proxy holders and offshore legal entities. Finally, cryptocurrency platforms are now obliged to apply enhanced customer due diligence (CDD) measures and submit suspicious activity reports (SAR). Thus, crypto-service operators have to register, and in certain cases get specific licenses. It goes without saying that the latter must ensure no effort is spared to avoid scammers utilize their services for money laundering purposes. The European MPs hope the new directive “ends the anonymity associated with virtual currencies and exchanges.”

According to Vitaly Medvedev, the co-founder of the Baltic crypto-exchanger Itez, implementation of the Fifth Directive in its current form shouldn’t be negatively affecting crypto industry development thus far. ‘The Directive’s tougher stance mostly concerns large-scale players converting over 1K euros at a time’, – says Medvedev. ‘Those will be required to provide more personal info in order to perform both fiat and crypto transactions. Small-scale customers exchanging 100-200 euros will not be hugely affected.’ Mr. Medvedev also notes that obtaining a European cryptocurrency exchange license and wallet provider license is not a major showstopper for bona fide companies. He managed to obtain both cryptocurrency exchange and virtual wallet operating licenses in Estonia for his Itez project that runs a crypto-exchange platform of the same name.

World ‘Crusade’

On a parallel track, Financial Action Task Force on Money Laundering (FATF) has been working on strengthening the requirements for anti-money laundering and combatting terrorism financing. The organization has a long-standing history of fighting offshore companies. Recently it literally called a crusade against massive scale tax avoidance schemes and criminal money ‘whitewashing’ amid Panama Papers and 2017 Paradise Papers leaks. In 2018 FATF had amended Recommendation 15 (R15) to cover cryptocurrencies. In less than a year’s time, FATF released an updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (June 2019). 

The Recommendations mirror the provisions of the aforementioned Fifth Anti-Money Laundering Directive to a great extent. The FATF Recommendations require virtual asset service providers to collect client data and pass it to other services providers should customers perform fiat or cryptocurrency exchange transactions to a third-party service address. According to the FATF’s Recommendations, countries should ensure that virtual asset service providers are duly licensed when operating within FATF Member-States. Apart from legal entities, the same applies to individuals performing cryptocurrency deals on a regular basis. Noteworthy, the G20 leaders supported the FATF Recommendations. Implementation of the new requirements is monitored by FATF, with a review set for June 2020.

Crypto Industry response

In response to the requirements of global regulators and financial authorities in a number of countries, crypto exchanges, wallets, and other virtual services were forced to strengthen the user identity verification procedures, as well as to closely watch customer operations to avoid criminal money laundering. Poloniex, ShapeShift and other crypto exchanges have updated their user identification and verification policies accordingly. ‘ShapeShift is a legal entity, and we have to comply’, said CEO Erik Voorhees. This announcement came up in Autumn 2018 when the exchange platform first integrated a customer identity verification procedure. 

The legendary bitcoin trading P2P-platform and crypto industry veteran LocalBitcoins announced the new client identification requirements in 2019. The EU-registered company had to comply with the new provisions of the Fifth Anti-Money Laundering Directive, passed by the European Parliament in July 2018. The LocalBitcoins clients need to complete the KYC procedure by 1 October 2019 or else be banned from further trading. LocalBitcoins developed a new verification process for four different account tiers based on the annual trading volume. Should the latter be under 1K euros, the clients will have to provide their full name, country of residence, email and phone number. The top tier with unlimited trading volume requires providing residential address and proof of the same, along with submitting a passport (or other photo ID) copy.

‘Each country has its own laws covering KYC and AML. Exchanging large amounts gets tougher scrutiny, sparing traders performing minor conversions from overburdening. For instance, currency trading under 40,000 roubles (approx. $650USD) for individuals in Russia is passport-free’, notes Medvedev of Itez. ‘As it relates to the EU, the Fifth Directive sets the monthly transaction limit of 150 euros on prepaid cards. Therefore, purchasing a small amount of crypto doesn’t require submitting a pile of docs and a passport copy on top.’ Trading bitcoins through Itez via VISA and MasterCard credit cards simply call for the customer’s full name and email address.

The key objective for strengthening the KYC, AML and CFT regulations is to avoid money laundering and terrorism financing through cryptocurrencies. At least, that’s how the implementation of the latest recommendations and directives is justified by global regulators, government authorities and world major economies.

Disclaimer: The information presented here does not constitute investment advice or an offer to invest. The statements, views, and opinions expressed in this article are solely those of the author/company and do not represent those of Bitcoinist. We strongly advise our readers to DYOR before investing in any cryptocurrency, blockchain project, or ICO, particularly those that guarantee profits. Furthermore, Bitcoinist does not guarantee or imply that the cryptocurrencies or projects published are legal in any specific reader’s location. It is the reader’s responsibility to know the laws regarding cryptocurrencies and ICOs in his or her country.


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