A New Regulatory Frontier: The future of AML standards for cryptocurrency

With countries across the globe getting increasingly serious about understanding and regulating virtual asset markets, it seems that the days of the Wild West are all but over for cryptocurrency providers and traders. In June, the G20 is slated to draw up a set of global AML regulations for crypto-markets during this year’s meeting in Japan – the latest in a series of increasingly rigorous efforts to define and oversee these new financial frontiers.

Like the EU’s 5th AML Directive issued last year, next month’s G20 meeting will seek to address the money laundering and terrorist financing risks posed by both centralized and decentralized cryptocurrency exchanges. (It’s also likely that the impact of these regulations on providers will depend heavily on this exact distinction – that is, whether they’re operating a centralized or decentralized exchange.) And, in fact, it’s likely that AMLD5 could provide a strong base for the regulations drafted by the G20, though several other examples and sources could also provide helpful frameworks.

The challenges of regulating crypto-exchanges aren’t borne out solely by those drafting or enforcing these directives: virtual asset service providers and even financial institutions will have new responsibilities to shoulder, adding to an ever-growing need to demonstrate operational agility and due diligence. But understanding how these regulations will impact stakeholders – and how they will ultimately shape the future of virtual asset markets – requires digging deeper into a number of key factors related to crypto-exchanges, international trends in AML legislation, and the global financial sector.

Language Matters

Ambiguity is the death knell of ineffective policies and regulations. This is, of course, why financial regulators and governing bodies around the world have been eagerly working to define and solidify the language and terminology surrounding cryptocurrency markets. Already, AMLD5 has provided a framework for defining virtual currencies, drafting a legal definition that effectively brings all digital representations of value under the purview of regulatory oversight. The broadly defined parameters established by AMLD5 are, of course, designed to ensure that financial criminals are unable to seek out a ‘no-man’s land’ within which to conduct illicit business, but they also have a gatekeeping effect on the cryptocurrency sector as a whole, creating significant barriers to entry for both new and existing virtual asset markets and traders. This isn’t necessarily a bad thing, though – particularly for strong players in the market like Bitcoin and Ethereum.

It’s likely that the upcoming G20 legislation will seek to further clarify and hammer out the details of this definition and other relevant terminologies, in order to ensure that their regulations are concrete enough to be effective. And the fact that the meeting will be held in Japan could also play a role in shaping the language and stipulations of this legislation: after all, the country is quickly proving to be a leader in developing robust and effective regulations for virtual asset markets.

I Am Regulated, Therefore I Am

At present, cryptocurrency exchanges are still only used by a rather slim percentage of the global population. Currency of any kind, after all, only holds value insofar as people believe it does, and the general public have yet to accept bitcoin or other cryptocurrencies as useful or valuable.

But the ever-growing regulatory interest in these markets could ultimately help to bolster the credibility of virtual asset markets. By entering global regulatory frameworks, crypto-exchanges gain legitimacy, and users are ensured greater oversight of their virtual assets. In a sense, regulating virtual asset markets helps to solidify and expand their presence and long-term sustainability.

Lessons from – and for – The Financial Sector

While financial institutions continue to struggle with their own growing regulatory challenges, they can also provide valuable lessons for both regulators – looking to tackle money laundering and other financial crimes in the cryptocurrency sphere – and those operating in cryptocurrency markets, whether as providers or traders.

Perhaps one of the greatest lessons from the banking sector is that having well-centralized operations can significantly ease compliance challenge. This is even more critical for virtual asset markets: decentralized crypto-exchanges will likely find these new compliance regulations all but insurmountable. Regulators, of course, are well aware of this: in several countries, legislators are already looking at banning decentralized crypto-markets, because of how difficult they are to track and regulate.

Meanwhile, centralized virtual asset markets – while still needing to adhere to these new regulatory frameworks – could ultimately come out ahead, gaining greater credibility across all stakeholder groups.

For financial institutions, the expansion of regulatory oversight into cryptocurrency markets could also provide opportunities, allowing for new partnerships, data sharing, market activities, and greater industry leadership. How these changes ultimately impact the financial sector will depend largely on how proactively FIs can take advantages of these opportunities – and how well they continue to manage their existing compliance challenges.

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