Anti-money Laundering and Counter-terrorism Financing Methodology for Cryptocurrency Exchanges in the European Union

Abstract

In the light of rising popularity of the crypotcurrency, an increasing amount of revolutionary applications to the technology are being invented. However, in addition to all of the beneficial applications to the cryptocurrency, the technology has brought some unintended consequences as well – easier and safer approach for criminals to launder money and evade international sanctions. Having recognized the risks of the technology to the financial sector and the lack of regulations in the European Union concerning cryptocurrencies, an amendment to the directive “on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing” has been proposed. One of the key additions of the proposed amendment is the inclusion of virtual currency, including cryptocurrency, exchange and digital wallet service providers as obliged entities under the directive. This inclusion will require all of the mentioned virtual currency service providers to design and implement some certain anti-money laundering and counter-terrorist financing (AML/CTF) measures as, for example, customer due diligence, customer money laundering and terrorist financing risk assessment, and reporting of suspicious activities. However, the directive or the amendment to the directive does not provide clear guidelines to the design and implementation of the AML/CTF measures. This paper aims to provide suggestions for the adjustments to the AML/CTF measures that could be made in order to adapt the measures to the specific circumstances of the cryptocurrency exchanges. The paper begins with the explanation of the underlying technological and conceptual principles of the cryptocurrencies through the Bitcoin cryptocurrency platform. Next, the information that is available on the specific design and implementation principles regarding the AML/CTF measures is aggregated and all of the required AML/CTF measures are described in depth based on the information available in the regulations and official guidelines. Afterwards, the registration process for cryptocurrency exchanges is researched in order to acquire information on the current situation of the cryptocurrency exchanges. At the end, based on all of the collected and analyzed information, specific suggestions are provided regarding the adjustments to each of the AML/CTF measures that could be made in order to facilitate the unique circumstances of the cryptocurrency exchanges, while remaining compliant with the regulations. Additionally, a research framework was developed that summarizes all of the regulations, guidelines, software tools and methodologies for each of the AML/CTF measures.