Digital currencies have now become part of the global financial system

Author: Siân Jones Translation: Zoe Zhou

Source: Crypto Valley

From January 10, 2020, digital asset businesses operating in the UK must comply with national anti-money laundering and anti-terrorist financing (AML / CTF) regulations.

The EU's 5th Anti-Money Laundering Directive (5AMLD) will strengthen actions taken by EU member states to combat money laundering and terrorist financing. One of the basic changes to the directive is to include certain digital asset-related activities. EU member states must make the necessary changes to their national legislation before January 10, 2020 for the directive to take effect.

In order to achieve the goal of the directive becoming effective, the United Kingdom has passed the Anti-Money Laundering and Terrorist Financing (Amendment) Regulations 2019 and amended the Anti-Money Laundering, Terrorist Financing and Capital Transfers Regulations (MLRs) 2017. However, the UK's approach goes beyond the requirements of the fifth anti-money laundering directive. The fifth anti-money laundering directive focuses on digital asset business, that is, the exchange of digital assets with fiat (traditional) currencies, and escrow wallet providers.

In October 2018, the Anti-Money Laundering Financial Action Task Force (FATF) revised the agreement to clearly clarify that the content of the agreement applies to financial activities involving digital assets and digital asset service providers (VASPs). The FATF's definition of digital asset activity is much broader. The UK has taken action to bring the scope of its MLRs closer to what the FATF recommends.

The regulator that regulates anti-money laundering / terrorist financing in the UK's digital asset business is the Financial Conduct Authority (FCA).

Who will be affected?

These changes apply to the following types of digital asset businesses operating in the UK:

Digital asset trading provider

  • Companies that exchange fiat currencies with digital assets, or companies that exchange one digital asset with another
  • A company that promotes or provides a market that brings together potential buyers and sellers to exchange fiat money and digital assets, or to exchange one digital asset with another.
  • Issuer of a new digital asset, such as an initial coin offering or initial exchange offering (IEO).
  • Companies operating ATMs exchange fiat money and digital assets.

Managed Wallet Provider

  • Companies that provide customers with digital asset management and protection or use private encryption keys to hold, store, or transfer digital asset services.

In the UK, digital assets are defined as follows:

It is a digital representation that uses distributed ledger technology and can express cryptographic values ​​or contractual rights through electronic transfer, storage, or transactions.

How will it affect the affected people?

All digital asset businesses need to assess the money laundering and terrorist financing risks it will face. Businesses will develop and maintain policies and procedures to effectively manage and mitigate the risks of money laundering and terrorist financing identified in their risk assessments.

In fact, the affected people need to conduct due diligence on the individuals and businesses they contact, including verifying their identities and understanding their customers' economic activities and sources of wealth. They will need to monitor transactions and report any suspicious activity to the National Crime Agency (NCA).

Controls must be commensurate with the size and nature of the business and the level of risk. In other words, companies will need to adopt a risk-based regulatory approach, strengthen due diligence, and monitor activities that pose the greatest risk to customers and activities for money laundering and terrorist financing.

Board members and senior management must have the skills and experience to effectively identify and reduce the risks of money laundering and terrorist financing.

A risk assessment is not enough. Companies need to regularly check the operating environment of the digital asset business, established business relationships, and regularly review company policies and processes to ensure they remain effective and fit for purpose.

Register with FCA

From January 10, 2020, digital asset companies can register with the FCA. Any company that provides digital asset-related activities before this date can continue to comply with MLRs, but must register with the FCA by January 10, 2021. Therefore, FCA encourages companies to register as soon as possible.

FCA's goal is to assess registrations within three months. Applications for existing companies must be submitted by June 30, 2020 in order to determine registration in a timely manner. Companies that have not completed registration before January 10, 2021 must cease their activities.

The new digital asset business must be registered before starting operations.

As part of the registration process, companies will need to provide FCA with evidence that they have assessed the risks of money laundering and terrorist financing facing their business. Evaluations must take into account the products and services they provide, the types of customers they handle, the delivery channels, and the countries in which they provide services.

Companies must convince FCA that they have implemented strong controls that effectively mitigate the risks of money laundering and terrorist financing identified in the FCA assessment.

Board members and senior management also need to demonstrate that they have the expertise necessary to perform their duties. FCA's assessment of board members and senior management can be conducted through interviews with key role leaders.

The FCA encourages the use of independent third parties with relevant expertise to help the board and senior management understand the risks and meet their regulatory obligations.

to sum up

From January 10, 2020, the digital asset business of the United Kingdom and the entire European Union will be subject to the same "anti-money laundering and anti-terrorist financing" as the financial services business, thereby creating a more level playing field.

The FATF made it clear that its proposal applies to digital assets and VASPs, which firmly established a global trend, that is, to align the digital asset business with traditional finance and regulate the global trend of crypto innovation. Digital currencies have now become part of the global financial system.

Although this will undoubtedly bring challenges to digital asset companies and increase operating costs, it will also bring some opportunities. Combining digital asset business with traditional financial services and having them assume the same "anti-money laundering and anti-terrorist financing" obligations will help solve one of the biggest challenges facing digital asset business and obtain financial services such as banking facilities. It also enables more institutions to participate in the digital asset business.

Understanding the risks of money laundering and terrorist financing faced by businesses and being able to find ways to mitigate these risks is of practical significance. The key is to ensure that there is sufficient understanding of the risks so that a targeted, risk-based control approach can be established. Effectively reduce risks while supporting business goals, and continue to maintain the company's competitiveness and customer focus.