With an industry-leading dataset of 50,000 entities and counting, Crystal has coverage of many types of service providers including a growing number of local exchange services.
Following research by our intelligence and data team, we have identified a growing trend of informal remittance businesses, or ‘local exchanges’, accepting crypto assets for settlements.
In particular, a pattern has emerged where mobile wallets are a growing method of accessing crypto assets, bringing forward a new era of accessible and user-friendly crypto payments.
What is a mobile payment wallet?
A mobile payment wallet, often referred to simply as a mobile wallet, is a digital wallet that resides on a user’s mobile device, such as a smartphone or tablet. They are increasingly popular across Africa and South Asia as a way for people to transact and store money.
How are mobile wallets used to buy crypto assets?
- A user will arrange a trade with a local exchanger, generally in a peer-to-peer model. Services are generally discovered through social media platforms like Facebook or Telegram, though there are often physical in-person exchangers as well as online-only platforms.
- The user will fund their mobile wallet with the local currency which is then sent to an account at a third-party platform.
- These are converted to US Dollars.
- These funds are then sent to the local exchanger’s account on the third-party platform.
- US Dollars are converted to cryptocurrency and returned to the user.
What are the risks and challenges of using a mobile crypto wallet?
Informal remittance services have existed for hundreds, if not thousands, of years across the world.;
Enhancing these services with crypto assets, that may offer a cheaper, faster experience is a natural evolution as societies and cultures that are generally cash-based seek ways to develop. It is heartening to see blockchain technology being adopted to improve remittances for migrant workers who send money back to loved ones.
That being said, with this adoption of technology comes a correspondingly greater risk of abuse by criminal and terrorist organizations.
- Poorly developed risk management controls
Many local exchanges have poorly developed, if at all, risk management and control frameworks to prevent money laundering and this is unlikely to change anytime soon. Furthermore, supervision and enforcement against these local exchanges is equally challenging; they may be in remote, or even hostile environments and beyond the reach of authorities.
- Dependence on trust
Furthermore, many of the payment systems work on a trust basis due to the involvement of intermediary platforms. Once funds are sent from the buyer to the local exchange, the buyer must trust that they will ultimately receive funds. This is precarious, as in many cases the service is provided almost entirely online through a messaging application.
There are some natural controls, however, that may mitigate this risk. Firstly, access to liquidity for large orders may be difficult for the local exchange to manage, meaning there will be at least some dependency on larger exchanges that are likely to be in the view of a regulator, and with access to transaction monitoring tools such as Crystal Expert.
Secondly, national supervisory and enforcement authorities are still able to investigate and disrupt services that provide a platform to criminal or terrorist organizations. Despite ‘fact through repetition’ to the contrary, the reality is that many local exchange service providers are lawful and proactively support investigations into criminality or terrorism.
The regulatory landscape and future outlook
The prevalent use of mobile wallets as a primary vehicle for cryptocurrency transactions not only offers convenience but also embodies an inclusive approach to financial services. Mobile wallets serve as accessible onramps, democratizing access to cryptocurrencies, particularly for individuals without traditional banking access.
However, the engagement of national entities, such as postal services and mobile wallets, requires an examination of the regulatory landscape. Key questions emerge about the regulatory framework governing these mobile wallet services and their role in the broader financial ecosystem.
As we closely monitor these developments, it becomes evident that the integration of mobile wallets into the cryptocurrency landscape is not a passing trend but a structural shift.
The symbiotic collaboration between traditional financial institutions and fintech services is paving the way for a more inclusive and accessible crypto environment.
The natural corollary then is that preparedness for crypto, whether hard baked into your organization’s strategy or not, is now no longer an option.
To learn more about Crystal’s solutions for crypto compliance and investigations, and how we can help your organization mitigate risk, contact us here.
