Digital currencies: How to protect yourself in an uncertain landscape

Steps to mitigate money laundering and terrorist financing risk

As blockchain, digital currencies, and initial coin offerings (ICOs) continue to surge in popularity, governing bodies across the globe are scrambling to establish standardized regulations—an arduous task, to say the least. Not only is today’s digital currency landscape completely uncharted terrain, but new variables are being introduced at a breathtaking pace, continually changing the digital currency landscape and, in turn, the most obvious regulatory path forward.

Despite this uncertainty, one constant is slowly emerging: the notion that digital currencies be regulated and that certain players in the ecosystem be subject to anti-money laundering (AML) and counter-terrorist financing (CTF) requirements.

For banks hoping to get ahead of the inevitable regulatory changes, revisiting internal AML and CTF guidelines in the context of digital currencies would be a good place to start. At the most preliminary level, this means exploring whether it makes sense to allow digital currency exchanges to become banking customers. Similarly, banks should consider whether they will allow existing customers to transact with digital currency exchanges, and how to deal with customers that engage in token sales.

“Will banks choose to avoid banking virtual currency exchanges? Will they allow their customers to transfer money to and from exchanges? Which products (e.g. credit cards) will be used to transfer money to and from exchanges? These are all questions they must answer, as they move forward in this new virtual environment,” says Sandeep Chopra, Senior Manager, Risk Advisory Deloitte.

In light of these shifts, it makes sense to review existing policies and to update them as necessary. For instance, if a financial institution already has a preliminary policy governing the different players in the digital currency ecosystem, now may be the time to outline specific onboarding requirements for these players, such as mandating a higher level of due diligence.

“Regardless of how you choose to amend your policies, one thing is clear: to monitor digital currency transactions for AML, banks need a better understanding of their customers’ cryptocurrency related transactions and who they are dealing with” says Caroline Costello, Senior Manager, Financial Advisory Deloitte.

To do this, banks may want to consider how to efficiently identify customers that interact with digital currency exchanges, customers acting as digital exchanges, and transaction types that may pose digital currency-related risk exposure. Banks may also benefit from establishing processes that allow them to monitor these customers and transactions for AML red flags. For instance, advanced data analysis techniques can help analyze relevant data and network activity to identify unusual trends and activity patterns, such as:

  • High-velocity transactions
  • Unusual transaction amounts
  • Unbalanced in-and-out activity
  • Accounts that predominantly include cryptocurrencies
  • High-frequency transactions with different exchanges

With this information in hand, financial institutions will be better placed to develop rules and scenarios for more efficient digital currency monitoring—an invaluable advantage in today’s uncertain regulatory environment. Not only can such a proactive move help banks safeguard themselves against the heightened risk of AML presented by digital currencies, but also it positions them well on the path to inevitable regulatory compliance.

Given the rapid pace at which the sector is evolving, this kind of head start can become a true advantage.

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