Crypto: The Importance Of BSA/AML Compliance

News, Opinion, Regulation | May 21, 2020 By:

It is no surprise that some lawmakers have referred to the cryptocurrency markets as the “Wild West.” All new ways of doing things take some time to settle down a bit. Of course, it does not help that crypto at its historic core is anarchic—meant to revolutionize currency and revolt against traditional banking systems. But when you pioneer a new frontier, much like the “Wild West,” there is some initial disorder and disarray, followed by the potential for a better world possibly, though not always, realized through hard work, discipline, and cooperation. While the “Wild West” had its sheriffs and deputies attempting to establish or restore order, the crypto markets have BSA/AML compliance and its ubiquitous importance in this burgeoning age of Bitcoin.

BSA and AML: The Basics

First of all, a basic understanding is critical in determining the importance of BSA/AML compliance in the cryptocurrency market. Here is a summary of some key terms to get everyone on the same page:

  • Bank Secrecy Act (BSA): Also known as the Currency and Foreign Transactions Reporting Act, this law from the 1970s requires all financial service businesses, including banks and non-bank financial institutions, to work with the federal government in investigating and prosecuting criminal cases concerning fraud, money laundering, and the funding of terrorism.
  • Anti-Money Laundering (AML): AML requires all financial service businesses to enact policies that prohibit money laundering. The government dictates that these same institutions that support their efforts in seeking justice in accordance with the BSA also be mindful of AML policies. All financial institutions must have AML initiatives or policies in place to help combat money laundering.
  • Financial Crimes Enforcement Network (FinCEN): FinCEN is the segment of the U.S. Department of Treasury tasked with enforcing all BSA and AML regulations.
  • Money Services Businesses (MSBs): MSBs are businesses that offer financial services outside of the traditional banking system. They are considered “non-bank financial institutions” and can offer a number of different financial services, including:
    • Money Orders
    • Check Cashing
    • Currency Exchange
    • Cash-to-Cryptocurrency 

As non-bank financial institutions, all MSBs are required to comply with the rules and regulations enforced by FinCEN. Since cash-to-crypto companies are defined as MSBs by FinCEN as of the published guidance in 2013, they too must adhere to regulatory compliance requirements.

How Proper Compliance (or Lack Thereof) Affects the Crypto Market

Compliance with all BSA and AML regulations is important to the entire crypto market—from the customer to the service provider. Here is a closer look at how compliance affects—and improves—the lives of different people from major touchpoints in the cryptocurrency lifecycle:

  • Customers: While the effects of these compliance policies on the average customer tend to be as minimal as transaction limits being imposed or communications being sent with regards to compliance, there are some ways compliance affects customers that, while more nuanced, are quite significant. For one, a cash-to-crypto company or other crypto MSB that has strict compliance guidelines that are followed stringently is often more reputable, making it more likely that that company can continue to offer its services without interruption or being shut down completely. In addition, the better the compliance and the better the reputation, the easier it will be for these companies to offer even more useful services and overall value to their customers. Finally, with the proper consumer protections in place to comply with the BSA and AML, these companies will protect their customers from fraudulent activities that could lose them vast sums of money.
  • Crypto providers: Strong and rigorously enforced BSA/AML compliance policies will keep these MSBs safe from regulatory penalties or other challenges from FinCEN and other law enforcement agencies. As mentioned previously, good compliance policies will build the crypto company’s reputation, making it easier to create and maintain strong banking relationships with more traditional financial institutions, which is particularly helpful because, according to some financial industry insiders, easing investors’ and bankers’ reservations about cryptocurrency is still no easy feat, especially because of compliance concerns.
  • Service partners (local businesses offering Bitcoin services): If these partners who offer crypto services work with BSA/AML-compliant crypto providers, they will be protected from liability should regulators or legal agencies get involved. In fact, some crypto MSBs like DigitalMint handle all aspects of compliance and reporting, enabling the retail location partners to focus on their business instead of compliance. Another positive of working with BSA/AML-compliant crypto companies is the continuation of service without interruption that their customers will notice.

Steps to Take That Will Shore Up Compliance in the Crypto Industry 

Regulating this new, bold, and entirely different industry is no easy task, but if crypto MSBs can figure out ways to step up their game in terms of BSA/AML compliance, they stand to not only build their own reputations but also to legitimize and uplift the entire industry. Here are a few steps these companies can take now to get things moving in the right direction:

  1. Cooperate. Cooperate. Cooperate.—Everyone involved with cryptocurrency needs to collaborate and cooperate on standardization of compliance policies. If cryptocurrency is to be as safe as any other form of payment, then it needs to be viewed by the public in that way and trusted as such. To do this, the bar needs to be raised and enforced in such a way as to make it nearly impossible for any “rotten apples” to sustain their illicit businesses. This means open and consistent communication with the regulators; they are not the enemy. In fact, crypto MSBs should be proactive and help shape the regulations these organizations develop.
  2. Communication and Awareness—Banking institutions, investors, and, most importantly, the general public need to know what Bitcoin and cryptocurrency are, and they even need to know about BSA/AML compliance and what cryptocurrency MSBs are doing to safeguard their consumers. This will make a relatively unknown entity, known. And it will help build people’s trust in this type of currency.
  3. Independent Reviews—Once a crypto MSB has a BSA/AML policy in place, it should regularly hire a reputable independent third-party examiner to determine the effectiveness of their policies; to identify gaps in those policies and procedures; and to ensure compliance with new or altered regulations.
  4. No Anonymity—Reject all anonymous transactions. Make sure all transactions are verified with personally identifiable information that can be validated. Following Know Your Customer (KYC) protocols and using resources from the Office of Foreign Asset Control (OFAC) can all help with this.

The Takeaway: We Must Keep Crypto Compliant in This Bold New Age

As is the case with most major technological advancements and movements, the regulators and lawmakers have had some difficulties keeping pace with the cryptocurrency market. Many respected crypto MSBs will tell you that Bitcoin and other digital payments are the next step in currency evolution. They are looking for this to be as common as any other payment form. However, as new crypto companies are popping up regularly, FinCEN and state regulators might be unable to prevent non-compliant companies from offering services, allowing nefarious actors to continue using Bitcoin in a manner that delegitimizes it in the eyes of the public. And yet, with the proper cooperation between the regulators and the crypto businesses—and with full BSA/AML compliance across the industry to raise the bar for every cryptocurrency MSB—Bitcoin will be one major step closer to being trusted throughout the financial industry and public at large.