International conditions are complex for cryptocurrencies. Due to the Russian invasion of Ukraine, specific sanctions for the cryptocurrency market are increasing. Additionally, crimes associated with cryptocurrencies reached a new all-time high in 2021, with illicit actions hovering around $14 billion globally, according to the 2021 Crypto Crime Report by Chainalysis; Although such figures may seem significant, it is important to mention that they only represent 0.15% of the total transactions with digital assets.
In parallel, the European Union reached a provisional agreement on a set of rules for the crypto ecosystem. The regulation, known as Markets in Crypto-Assets (MiCA)will come into force in 2023 and will become the world’s first regulatory framework for digital assets.
In this context, Chainalysis offered 6 compliance tips for traders and exchanges.
Collect customer information and compare it to existing sanctions lists
Any business based on cryptocurrencies or digital assets should explore collecting KYC information from new users upon registration, recording customer names, addresses, phone numbers, emails, and related documentation. As part of the KYC process, companies must check this information against sanctions lists to refrain from doing business with any sanctioned individual, entity or country.. Because each country maintains its own sanctions list, the easiest way to do an assessment is to use a service like Thomson Reuters or Refinitiv, which consolidate and update sanctions lists daily.
Block IP addresses based on sanctioned jurisdictions
According to the guidance of the United States Office of Foreign Assets Control (OFAC), exchanges must use IP address detection to prevent users in sanctioned jurisdictions from accessing their products and services.
Continuously monitor transactions
Exchanges can examine transfers to ensure they do not include cryptocurrency addresses identified as sanctioned parties or countries. Transaction monitoring alerts are crucial so that compliance teams can take immediate action if one of their users attempts a transaction with a sanctioned entity or country.
Review the due diligence of corporate counterparties
Not only individuals and jurisdictions are sanctioned, sometimes service providers are also subject to sanctions. Suex and Chatex, for example, are two Russia-based cryptocurrency exchanges that fall into this category. Exchanges must identify their corporate counterparties to ensure that these organizations are also not subject to sanctions.
Detect violations of travel rules
Exchanges can use the travel rules information to further filter transfers. Exchanges can use travel rule integrations to set risk-based parameters that automatically restrict trades, inbound or outbound, with sanctioned or non-compliant Virtual Asset Service Providers (VASPs) with due diligence criteria.
Report when interactions are found with designated parties
If a user’s activity is indicative of sanctions violations, US-based exchanges should assess whether they are legally required to file a Suspicious Activity Report. (SAR) to the Financial Crimes Enforcement Network (FinCEN) and necessary regulatory reports to OFAC. Exchanges based in another country must follow the reporting requirements defined by their jurisdiction. If sanctioned activity is identified after this period, exchanges should assess whether voluntary self-disclosure is appropriate.
“The general context of crypto ecosystems in the world is changing, so companies and companies that develop in this sector must be prepared for such changes.”, explained the research company. “A robust and functional strategy on compliance is essential for the satisfactory development of companies, and for the achievement of their business objectives”, they added from the firm.
“With increased scrutiny of crypto markets by the Argentine government in recent months, including moves to limit access to crypto through traditional financial institutions and the official ARP-USD market, compliance must be a priority. When it comes to sanctions compliance, there is no room for error, but exchanges, custodians, and brokers can benefit from the inherent transparency of blockchain networks along with analytics tools, to ensure compliance and that the opportunities offered by digital assets remain securely accessiblesaid Caroline Malcom, Head of International Policy at Chainalysis.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information set forth herein should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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