crypto and AML

Fiat Currency, Digital & Crypto Assets and the AML framework

Digital and Crypto Assets have undoubtedly established their presence in the global financial ecosystem and everyday life, following the general public’s growing interest in using and investing in them. Authorities seeking to preserve the effectiveness of anti-money laundering (AML) regulatory frameworks have realised the need to regulate the digital and crypto asset space is needed to ensure market integrity and financial stability.

In this article, the SALVUS Regulatory Compliance team discusses fiat currencies, digital and crypto assets and how they compare through the AML regulatory framework. The following questions are answered using the contents and definitions provided within the EU Regulation on Markets in Crypto Assets (MiCA) and the latest European AML directives:

1. What is a Fiat Currency?
2. What is a Digital Asset?
3. What is a Crypto Asset and a Crypto-Asset Services Provider?
4. What are the money laundering risks emanating from crypto assets?
5. AML regulatory updates

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1. What is a Fiat Currency?

Within the European Union (EU), a fiat currency is considered any lawfully established currency, that was introduced

  • by the central bank of any EU Member State,
  • by the European Central Bank (ECB) or by virtue of power conferred by the ECB,
  • by an issuing legal authority in any other country outside the EU.

Generally, fiat currencies are not backed by any commodity, such as gold, but rather by the same governance or authority that issues them. Thus, their value derives from the supply and demand, as well as the stability of the issuer. Major global currencies such as the euro or the U.S. dollar are fiat currencies.

2. What is a Digital Asset?

A digital asset is any asset that can be issued and/or transferred using Distributed Ledger Technology (DLT) or Blockchain Technology. As of now, digital assets are known to take one of the following forms:

  • Crypto assets,
  • Stablecoins,
  • Non-fungible tokens (NFTs) and,
  • Security tokens.

Interestingly, Central bank digital currencies (CBDCs), are – effectively – the digital forms of fiat currencies.

3. What is a Crypto Asset and a Crypto-Asset Services Provider?

According to the EU Regulation on Markets in Crypto Assets (MiCA), a crypto asset is a digital representation of value or rights, which may be transferred and stored electronically, using DLT or similar technology.

The said regulation is pending the final vote by the European Parliament (EP) to take effect and will be immediately enforceable for all EU Member States. In this respect, regimes developed on a national level will be repealed by the transposition of MiCA into national law. In this way, authorities ensure a harmonised regulatory environment for crypto assets across the EU.

A Crypto Asset Service Provider (CASP) is considered any person whose occupation or business is the provision of one or more crypto asset services to third parties, on a professional basis. Any CASP offering services in and from the EU will be subject to the provisions of MiCA.

It is worth noting that until MiCA is in place, a CASP in each member state is required to ensure compliance with the AML regulatory provisions. While saying that, the Cyprus National Competent Authority (NCA), CySEC, added in its directives the MiCA requirements. Therefore, we can say that CySEC is acting proactively in comparison to other NCA and be in a position to implement MiCA requirements in its registered CASP entities.

4. What are the money laundering risks emanating from crypto assets?

Beyond MiCA, the need of regulating the space of digital and crypto assets was initiated due to the different money laundering (ML) risks arising from their unique nature. Crypto assets can

  • be used to quickly move funds globally, almost instantaneously and most of the time through irreversible transactions.
  • facilitate pseudonymous transactions or transactions that favour anonymity.
  • be conducted without any customer and counterparty identification, especially for cross-border transactions.
  • be associated with jurisdictions that face increased activity of money laundering and terrorism financing (TF).

Naturally, the above risks constitute a burden for the acceptance of crypto assets in the conduct of legal activities. The said burden is expected to be lifted through the introduction of robust AML regulatory provisions and controls.

5. AML regulatory updates

Under the 5th AML Directive (AMLD5), the AML framework shall be extended to include crypto assets, considering the management and prevention of arising risks. In this context, the European Commission (EC) through the introduction of a broad AML legislative package, presented the following concerning crypto assets

  • A new AML/CFT regulation that will treat any CASP as an obliged entity under the AML/CFT framework;
    • CASP entities are required to comply with AML/CFT obligations including but not limited to customer identification, transaction monitoring and risk assessment.
  • The revision of Regulation 2015/847/EU allows the trace of crypto asset transfers;
    • Crypto asset transfers will be treated as cross-border wire transfers.
    • The adoption of the Travel Rule where information about the originator and the beneficiary of the transfer will need to be disclosed.

Final thoughts

To conclude, the rapidly developed sector of digital and crypto assets demands regulators to build the appropriate conditions that ensure investor protection and economic stability. These conditions result in the combination of regulatory initiatives such as MiCA, and the enhancement of existing regimes such as the AML/CFT framework. Throughout this process, obliged entities must follow regulatory developments and determine the compliance requirements they are subject to.

For this to be achieved, stakeholders employed in entities supervised by CySEC and the Central Bank of Cyprus (CBC), as well as professionals involved with AML matters in other EU regulated entities, must remain aware through targeted training. Aiming to support investment and financial services, SALVUS Funds in cooperation with the Institute for Professional Excellence (IforPE), have developed a self-study course titled Anti-Money Laundering: Fiat, Digital Assets & Crypto Assets. The course is designed for professionals that hold key positions in Cyprus Investment Firms (CIF), CASP and other CySEC regulated entities, as well as auditors and lawyers obliged under the AML legislation. Professionals who undertake this course are introduced to the characteristics of digital and crypto assets and how they compare against fiat currencies from the AML point of view.

How SALVUS can help your crypto-business

The Crypto-Assets team at SALVUS has been involved in the licensing and registration of several fintech projects over the years. We have had real first-hand experience in the crypto space and have successfully built on that to hone our skillset and expertise.

Our CASP registration service guides crypto-businesses into becoming supervised entities in Cyprus and in complying with the Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) regulatory framework.

Contact us at [email protected] or call us at +357 7000 7898 if you have any questions or require support with your obligations under the AML/CFT legislation.

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The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.

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