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UK Finance reports on the financial crime risks from crypt assets

Source: UK Finance

UK Finance, in conjunction with financial crime compliance firm Plenitude, has today released a report looking at the financial crime risk posed by cryptoassets and how to manage it appropriately.


Economic crime threats are continually evolving, impacted by the emergence of new technologies, services and products, and the cryptoasset sector is no exception. Ten years ago, Bitcoin mining had become the token of choice for darknet markets with over a third of cryptoasset transactions estimated to be illicit. Today the direction of travel is very different.

International standard-setters such as the Financial Action Task Force (FATF) have laid down the challenge for the crypto sector to become a regulated gatekeeper to the legitimate economy, with the UK and other countries legislating to bring cryptoasset firms within regulation for anti-money laundering and counter-terrorist financing.

This paper aims to support financial institutions as they navigate this transitional period. While the anti-money laundering regime is meant to support a risk-based approach this can be difficult to apply to the cryptoasset sector, given the semi-anonymous nature of cryptoassets and the fast pace of change across technology, business models and regulation. While many cryptoasset firms are developing and applying innovative technological approaches to financial crime controls, there are also new types of cryptoassets, exchanges and tools being used to enhance anonymity and defeat KYC and fraud prevention techniques. By summarising the range of cyptoasset business activity, associated financial crime risk and good practice, this paper aims to help financial institutions inform their risk appetite and take a more considered approach to risk management.

This paper also considers how the financial and cryptoasset sectors could partner and work together on a more collaborative basis in order to drive a more effective approach to risk management and the protection of consumers. Bitcoin was originally described by its pseudonymous inventor, Satoshi Nakomoto, as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party”, but today’s cryptoasset sector includes many legitimate cryptoasset firms that have taken on the trusted gatekeeper role and are actively collaborating with law enforcement and regulators. This partnership approach can be developed further to support more effective financial crime risk management such as intelligence sharing, blockchain analytics to trace and risk assess cryptoasset transactions and distributed compliance opportunities such as blockchain-based KYC platforms.

It is in everyone’s interests for crypto regulation to succeed on the basis that cryptoasset adoption is increasing exponentially, however, the financial crime and consumer protection risks need to be managed and different parties have varied roles to play. The regulated private sector has a critical role in ensuring that legal compliance translates into effective risk management, but policy makers and regulators also need to apply a risk-based approach. Policy makers in the UK are tailoring financial crime regulation to the risks and business models of cryptoasset firms, seeking to strike the right balance between reducing the harms of illicit finance and supporting innovation that benefits consumers and the economy. Regulation and clarity on expectations is only the first step and needs to be supplemented with an effective licensing process and effective supervision.

Given the rise in cryptoasset fraud, investment scams and consumer protection concerns, it is important that regulators help financial institutions to take workable and proportionate steps to protect customers, including issuing guidance on how to manage exposure to unregulated exchanges and unregulated products and services. It is clear that cryptoassets and the underlying technology offer a range of compelling use cases for financial and payment systems, that will enable further transformation of the financial services industry and other sectors, provided that the risks can be managed effectively. Efforts to enhance mutual understanding, support collaboration and deliver an effective regulatory framework with the required clarity will help the UK realise the potential of this new sector for consumers and for economic growth. We hope this paper contributes to these efforts and provides a useful perspective for both financial institutions and cryptoasset firms.

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