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Cryptoassets

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Cryptoassets in UK AML Compliance – Brief Overview

  • Cryptoassets in UK AML compliance refer to digital assets that can be stored, traded, or used digitally.
  • UK regulators treat crypto as high-risk because of its pseudonymous nature, cross-border exposure, and over-reliance on third-party exchanges and wallets.
  • The firms and activities that are more vulnerable to AML controls are those that exchange, hold, or transfer crypto.
  • The cryptoassets fit into the AML and sanctions framework because they are no different from assets.

What Is a Cryptoasset Under UK AML Rules?

Cryptoassets under UK AML rules are digital representations of value or money that use technology like blockchain to record data and can be transferred, traded, or stored digitally.

The main types of cryptoassets, which are often different from each other, include:

  • Exchange tokens: these are mainly used for investment or exchange purposes, work as a digital money for buying, storing, or trading, like Bitcoin or Ethereum.
  • Utility tokens: these are like digital tickets, which are used to access specific services and goods online.
  • Security tokens: these are like digital shares, which provide rights or interests in a business.

The cryptoassets are treated as “funds” and “economic resources” for UK AML rules, as they can be used as funds for paying and moving value, and are economic resources, because they are valuable and can be used, traded, or invested.

The UK law focuses on how the cryptoassets function and not on the technology behind them.

Examples of Cryptoasset Activity

The key examples of Cryptoasset activity are as follows:

  • Suppose a person uses exchanges to buy bitcoin or another crypto and stores it in a digital wallet. The crypto could come from illegal activity, and due to the pseudonymity, detecting the person becomes difficult.
  • People making payments or investments in cryptoassets could use them to move illegal money, which makes the monitoring harder.
  • Crypto held by corporate, trust, or nominee structures as a part of business assets or for benefiting someone else, making it harder to know who actually owns the control.
  • The cross-border crypto transfers that involve UK firms can be risky because of quick money movement across countries, which may be harder to monitor and enable illegal activity to go unnoticed.

UK Laws and Regulatory Framework for Cryptoassets

UK laws and regulatory framework for cryptoassets are as follows:

  • The business dealing with cryptoassets must be registered under the Money Laundering Regulations 2017, to prevent money laundering and terrorist financing risk.
  • The Financial Conduct Authority (FCA) plays a crucial role in checking and supervising crypto businesses to make sure that they follow the law.
  • The regulators expect crypto firms to block or freeze the cryptoassets of the designated person under the UK sanctions lists.
  • The UK is implementing more rules and expects crypto firms to follow the rules and stay compliant.

Key AML Risks Linked to Cryptoassets

The key AML risks associated with cryptoassets are as follows:

  • The core challenges include pseudonymity and traceability, as people often use false and alternative names, making it harder for crypto firms to identify the person and the risk associated with them.
  • Cryptoassets can be used to evade sanctions and move illegal money easily.
  • Crypto transactions often happen quickly, and the transactions cannot be reversed once confirmed, no matter if they are sent to an illegal person.
  • Crypto firms often rely on third-party exchanges and wallets and have no control over how well they follow AML rules, making them more vulnerable to money laundering risk.

Common Compliance Challenges for Firms Dealing with Cryptoassets  

The common compliance challenges for dealing with cryptoassets include:

  • Firms may have a lesser and inadequate understanding of cryptoasset products, how they work, and what risks they may pose, leading to poor compliance decisions.
  • Firms may fail in checking who their customers are and who controls the crypto wallet, resulting in higher ML/TF risks.
  • Poor transaction monitoring for blockchain activity leads the firms to miss suspicious activity, such as illegal money movement and unusual transaction patterns.
  • The over-reliance on third-party tools without proper governance and oversight results in weak AML controls and compliance failures.

Best Practices to Control Cryptoasset Business Risk Exposure

  • The firms should implement risk-based policies and procedures, and focus more on high-risk rather than treating every risk the same.
  • Cryptoassets firms should implement enhanced due diligence for high-risk crypto activity and carry out extra checks to prevent illegal activity.
  • Using blockchain analytics and transaction monitoring helps in detecting unusual patterns, activities, and large fund transfers to prevent money laundering and other financial crimes.
  • Staff should be well-trained specifically about the risks linked with cryptoassets, as it works as a defence mechanism against illegal activity.

Supervisory Expectations, Risk, and Enforcement

The FCA expects the firms to focus on having strong systems, controls, and maintaining governance to ensure that the rules are being followed.

The consequences of failing to implement cryptoasset AML controls will lead to fines, penalties, license restrictions, and increase the vulnerability to money laundering.

The risk assessment should be recorded and well-documented to support the regulatory investigations. If the firms failed to properly register, they need to increase the scrutiny to ensure that the gaps and issues are fixed.

How AML Consultants UK Helps Firms Manage Cryptoasset Risk

AML Consultants UK is helping firms to take a risk-based approach to focus on high-risk assets. AML Consultants UK review the AML policy, procedures, and controls to make sure the firm is adhering to AML laws and regulations properly. It helps in guiding the firms through registration with the FCA and provides remediation support to fix the compliance gaps and meet regulatory expectations.  

AML Consultants UK provides independent advisory support for regulated firms to manage risk linked with cryptoassets and ensure that they comply with the AML rules and regulations.    

Cryptoassets in UK AML - FAQs

Under UK AML rules, a cryptoasset is a digital asset which can be traded, stored, or used digitally.

No, not all cryptoasset firms are regulated by the FCA, but they need to follow some specific, limited rules.

The cryptoassets are considered high-risk for money laundering because of their pseudonymous nature, speed and irreversibility of transactions, and over-reliance on third-party exchanges and wallets.

Yes, non-crypto firms do need controls for cryptoasset exposure to manage and prevent money laundering and other financial crime risks.

The consequences of implementing controls incorrectly will result in firms facing fines, penalties, license restrictions, and reputational damage.

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