Thought Leadership | February 26, 2024

AML challenges and innovations for crypto

by Conrad Eliott

On February 7th, 2024, Crystal and the Chamber of Digital Commerce organized a webinar roundtable that brought together crypto regulation experts. The event’s purpose was to discuss the existing financial crime risks and anti-money laundering (AML) needs of the industry and to explore what the future may hold for the sector.

Kristopher Klaich, Director of National Security Policy at the Chamber of Digital Commerce chaired the roundtable. His guests were:

  • Marina Khaustova, Chief Operations Officer at Crystal, formerly CEO of the organization.
  • Carole House, Executive in Residence at Terranet Ventures and former Director of Cybersecurity and Secure Digital Innovation at the US National Security Council in the White House.
  • Jeremy Sheridan, Managing Director at FTI Consulting and former Assistant Director of Investigations in the Senior Executive Service branch of the US Secret Service’s Office of Investigations.

The conversation was thought-provoking and a must-see for role players in the crypto compliance environment
Here is a summary of the key points raised, and we urge you to watch the full discussion.

AML risk in the current crypto compliance environment

Kristopher Klaich opened the panel by discussing how recent events on the ground and in the legislative environment had impacted compliance conversations and are shaping next actions.

He reminded us that when Hamas invaded Israel on October 7, 2023, crypto industry role-players snapped to horrified attention.

At the time it was reported that AML shortcomings at Binance had enabled proxies of the terrorist group, often based in US sanctions-designated regions, to fundraise via crypto, then convert digital assets into cash which helped sponsor the operation.

Meanwhile, back in the US, Massachusetts Senator Elizabeth Warren continued championing the Digital Asset Anti-Money Laundering Act. This gained bipartisan support at the epicenter of government, and cranked up the pressure to usher in AML legislation that will bring reporting requirements for decentralized finance (DeFi), including crypto, in line with those for traditional finance (TradFi).

Public-private partnerships and crypto compliance

The roundtable agreed that public-private partnerships in the crypto industry can both nurture and rein in DeFi and referred to ‘The Preventing Illicit Finance Through Partnership Act’ introduced by Senators Hagerty and Lummis on 17 January 2024.

The bill proposes deepening information-sharing and co-operation between law enforcement and private businesses to help ferret out illicit activities in the crypto industry without hampering DeFi’s development unduly.

The panelists did, however, point to difficulties encountered in public-private partnerships:

Lack of clarity
Marina noted there is lack of clarity in different legislative frameworks governing crypto trading reporting requirements, especially in cross-border investigations, and as a result teams are not responding fast enough.

She also observed that companies newly engaged in crypto trading often set up incomplete AML framework   – by not having investigators in their compliance teams.

She emphasized the need for improved fit-for-purpose training for everyone in the sector.

The need for international AML standards
Carole praised several crypto compliance initiatives amongst businesses and government officials, such as information-sharing and company liability protection. But she stressed that progressive policies are of little use unless wholly put into practice.

She further urged jurisdictions to adopt international AML standards to create a universal reporting and intelligence-sharing system.

She added that the under-resourcing of key government departments is an additional hurdle and that jurisdictions have been slow to adopt virtual assets standards and highlighted the need to prioritize more effectively.

Lack of cohesion in US reporting requirements
Jeremy spoke from the perspective of law enforcement, and expressed confidence that the policing of crypto trading was well-developed.

However, when referring to the regulatory legal apparatus, he added that the differing reporting requirements of US states from each other, and again between states and federal government, was a handicap to law enforcement.

He also lamented the multitude of different agencies that AML compliance teams must deal with. He further suggested a dedicated body to legislate about and monitor the crypto industry.

International co-operation in crypto compliance

All panelists expressed frustration about the barriers of jurisdictional differences:

Carole made the point that the cross-border nature of and the speed at which transfers are made make it very challenging to draw up legislation.

Marina added that communication between authorities at the country or regional level about suspicious activity is slow. Additionally, criminals have often already embraced emerging technologies far faster than authorities can legislate and law enforcement can combat.

Jeremy said that different laws and practices in different regions, allied or not, make acting upon identified risks difficult, or even impossible.

The panelists all felt that a holistic, universal approach to battling financial crime via crypto is increasingly essential.

AI and the future of crypto compliance

While all panelists agreed on the positive impact AI can provide in the future, they acknowledged the risks to privacy, referring to the privacy versus anonymity debate.

Carole emphasized that businesses must be using AI to be competitive in the contemporary financial world, particularly in the areas of automation of monitoring and advanced pattern recognition. AI is already integrated currently into monitoring systems, and likely to increase.

Jeremy raised the topic of data integrity and security for AI and pointed to its ability to enhance monitoring blockchain activity, with the potential positive impact here outweighing the potential negative impact.

Marina believes AI can help reduce false positives and assist in early intervention or prevention of fraudulent activity. She emphasized that blockchain analytics firms and companies can assist law enforcement by feeding behavioral models to them, to predict and prevent, rather than respond and prosecute.

Book a call with us here to learn how Crystal can help transform your approach to crypto compliance.

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