Why Anti-Money Laundering Compliance Controls are Important in Fiat On-Ramps

Introduction

Government regulation in payments is in itself extremely critical, then if you add the extra layer of cryptocurrency you meet with even much harder resistance. There is a current misconception that cryptocurrency is the form of money used to perpetuate illicit transactions, i.e terrorism, fraud, drugs and other forms of transactions that contravene the standards of the law.

Regulatory Background

The regulatory background all over the world for AML is pretty stringent with the FATF (Financial Action Task Force) playing a key role acting as the global money laundering and terrorist financing watchdog. The inter-governmental body sets international standards that aim to prevent these illegal activities and the harm they cause to society. The body has 39 member nations including the USA, France, Germany, China and other leading countries globally.

In 2021, the FATF released a guidance of risk-based approach for virtual assets and virtual assets service providers that called for countries to assess and mitigate their risks associated with virtual asset financial activities and providers; license or register providers and subject them to supervision or monitoring by competent national authorities. VASPs (Virtual Assets Service Providers) are subject to the same relevant FATF measures that apply to financial institutions when it comes to AML/CFT related activities.

How AML really works

Money laundering refers to the process of taking illegally obtained money and making it appear to have come from a legitimate source. The whole concept around money laundering is trying to ‘clean up’ illegally acquired money. There are typically (3) three processes to money laundering; placement, layering and integration.

Financial institutions have a number of ways they detect money laundering through, KYC, system controls i.e. chainalysis, holding periods and various other new technologies.

Why it is Important for Fiat On-Ramps

In the case where fiat (local currency) is transferred and converted to cryptocurrency, there have to be extra procedures by exchanges, platforms and related cryptocurrency companies to comply with strong AML and compliance measures to ensure that illicit funds are not transferred into the platforms.

This also relates to adequate KYC procedures by these platforms. It is a recipe for disaster if KYC/AML measures are not adequately done by the exchange and payment provider when trying to facilitate fiat onRamps.

While cryptocurrency has made massive strides to shake off the perception of its silk road reputation in the early days. Cryptocurrency has acquired new legitimacy and mass adoption but the journey is not over as government organizations like to make a target for crypto.

It is important to note that cryptocurrencies and blockchain technology offer the most transparent and open transaction mechanism that the world has ever seen. All transactions on the blockchain are recorded and are open to all - this level of transparency tows in the right part of ensuring compliance and fighting illicit transactions. The FBI’s highest financial recoveries have been in cryptocurrency.

However, before the money is converted into crypto it typically has to come from a fiat rail and the compliance team, and channel managers need to ensure the money is from a legitimate source.

Simply create an account, and start exploring the incredible Bitget-Verse today!