AML and KYC Guidance for Crypto Exchanges and Wallets

Blog / AML and KYC Guidance for Crypto Exchanges and Wallets

Cryptocurrencies and crypto exchanges have entered our lives recently and have grown tremendously. While the total market value of cryptocurrencies was below $ 18 billion until 2016, it has risen above $ 100 billion since 2017. With the growth of cryptocurrencies, the number of crypto exchanges also increased significantly.

This article will explain the money laundering and terrorist financing risks the crypto industry faces and how the crypto exchanges can ensure Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance.

Why Is The Crypto Industry Facing Money Laundering and Terrorist Financing?

The rapid growth in the crypto industry brought some disruptions with it. Criminal activities such as money laundering and terrorist financing pose a significant threat worldwide. Criminal organizations aim to hide the source of the crime by laundering the money they get from the offense. Criminal organizations and terrorist groups provide financial income to their organizations with money laundering and terrorist financing activities. They damage society, the environment, and the states by committing more significant crimes.

All efforts to prevent money laundering are called Anti-Money Laundering. Regulators established to avoid financial crimes have published regulations and guides on preventing financial crimes from past to present. The crypto industry was late to fulfill AML obligations due to the controversy of its rapid growth. Crime organizations took advantage of the complexity of crypto AML regulations. Instead of more established institutions such as banks, they attempted to carry out money laundering and terrorist financing activities over crypto exchanges.

"Criminals laundered $2.8 billion in 2019 sing crypto exchanges, finds a new analysis."

AML & KYC Compliance Processes for Crypto Exchanges and Wallets

After these threats faced by crypto exchanges, AML regulators took action and published AML recommendations and obligations for crypto exchanges. ISomeregulators have issued new AML regulations for crypto exchanges in this process, while some have included crypto exchanges within existing AML regulations and laws. Still, work on the AML compatibility of crypto exchanges is not finished. As the process is more recent, governments and regulators continue to work on anti-money laundering and publish new regulations.

FATF Recommendations for Virtual Assets and Virtual Asset Service Providers

FATF completed its recommendations on cryptocurrency regulation on June 21, 2019. "Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers" explains how to work countries, regulators, and virtual asset service providers must take on virtual assets. According to the FATF guideline, Virtual Asset Service Providers must apply a risk-based approach and risk assessment like other financial institutions. Countries that are members of FATF are responsible for implementing these measures. These measures in the guide are expected to ensure the transparency of virtual asset transactions and keep funds related to crime and terrorism away from the crypto industry.

Risk-Based Approach to Virtual Assets

Virtual assets such as blockchain, bitcoin, crypto assets, virtual currencies have the potential to change the economic environment radically. Virtual assets have many potential benefits, such as facilitating, speeding up, and cheapening payments. However, its features such as speed, global reach, and anonymity have become a new financial tool for those who want to escape regulators and supervisors. Therefore, virtual assets face the risk of being a tool for the financial transactions of criminals and terrorists.

After discussions about virtual assets, some governments made regulations about virtual assets, while some countries completely banned virtual assets. Nations going to regulate virtual assets could not act fast enough and could not fill the gaps in the regulatory system.

5AMLD - A Guide for Virtual Asset Service Providers in Europe

It was announced that the 5th AMLD published by the European Union in 2018 would be applied to virtual currency exchange platforms and custodian crypto wallet providers. The European Union is taking solid steps together with FATF to combat financial crime. It does not hesitate to impose fines on organizations that do not meet their obligations. In the rest of the article, we will explain how virtual assets such as crypto exchanges should serve according to the European Union and FATF standards and the precautions to be taken.

What You Need to Know About Regulations of Cryptocurrency

AML Compliance Program of Cryptocurrency Exchanges

One obligation that crypto exchanges face is to have an Anti-Money Laundering compliance program like other banks and financial institutions. The " risk-based approach " is the key to an AML compliance program in FATF and EU standards is the "risk-based approach." In addition to this, in order for an AML compliance program to achieve its goal, it must work perfectly from start to finish. A qualified AML compliance officer must run the compliance program of cryptocurrency exchanges because businesses can face heavy fines and administrative penalties due to failures in AML compliance.

How to Build the AML Compliance Program

Customer Onboarding Process Under KYC and AML Obligations

Today, the customer onboarding process is the first step to creating a good customer experience. Therefore, businesses aim for their customers to open accounts quickly, easily, and smoothly. However, companies must protect themselves from risks and fulfill their obligations in the customer onboarding process. According to European Union regulations and Financial Action Task Force recommendations, Crypto exchanges have to perform customer account opening processes under AML and KYC requirements.


Crypto Exchanges Case Study

This case study was prepared for Eksit and provides information on how cryptocurrency exchanges ensure AML compliance.

Learn More

Customer Onboarding Process Under KYC and AML Requirements

Know Your Customer Requirements for Crypto Exchanges

Know Your Customer procedures are for the business to recognize the person who will become the customer. If we talk about how this happens in general, the business collects customer data during customer account opening and checks the accuracy of this data. In this process, the accuracy of the data is as important as collecting the data. Because, If the data is incorrect, all checks under the AML compliance program will lose their functionality. Today, various software like Sanction Scanner helps verify this data.

Some data collected are (These data may vary from region to region):

  • Customer's full name
  • Customer's date of birth
  • Proof of customer address
  • Customer ID

Implementation of CDD Procedures

Risky customers are headaches for all businesses. In fact, the definition of a risky customer is somewhat broad. While companies cannot work with some customers that seem risky, there is no situation that prevents them from working with some risky customers. Customer Due Diligence procedures are how businesses control their customers and collaborators. Crypto exchanges are required to perform a risk assessment by implementing CDD procedures.

How is the customer's risk level determined?

  • It is checked whether the customer is on the list of sanctions, wanted, or banned countries.
  • It is checked whether the customer is connected with any terrorist organization.
  • It is checked whether the customer is a politically exposed person.
  • It is checked whether the customer has news in the adverse-negative media data.


AML Screening Solution for Cryptocurrency Exchanges - Case Study

AML Screening Solution for Crypto Exchanges and Wallets

Our AML Screening and Monitoring Software provides crypto exchanges to control their customers in sanction, PEP, and Adverse Media data. Cryptocurrency exchanges can perform a global comprehensive risk assessment by checking on more than 3000 sanctions and PEP lists of more than 220 countries. With our AML Screening Service, businesses can meet global and local AML obligations and be protected from regulatory penalties. With our international sanction, PEP, and adverse media data, we offer solutions that meet the AML needs of businesses in every region of the world. In addition, we strengthen your business' AML compliance globally and locally by developing our solutions according to the Financial Action Task Force and European Union regulations.


"With Sanction Scanner, we can scan the receiver and sender in current sanction and PEP data in seconds. With the API, we automatically perform the entire control process without delaying customer transactions."

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