Banking and Financial Services

Rogue Trade: The AML & KYC Challenge in Monitoring Virtual Currencies

Author(s)

Saurav Banerjee and Nitin Kashyap

Subject Matter Expert, BFSI & Healthcare

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Summary

The rise of Virtual Currencies (VCs) continues unabated, with over 1600 cryptocurrencies listed in the cryptocurrency market, and over USD 330 Billion in market value. While most of the interest in these currencies is legitimate, driven either by curiosity or belief in their promise of faster, cheaper and more private flows of money, the same attributes have made them the favored currency for illegal transactions such as money laundering, identity theft and trade in illegal goods.

Functioning as points of entry into and exit from the cryptocurrency market, banks are under intense pressure to identify and prevent such criminalization. Our paper looks at the current regulatory challenges in governing this construct, and the prevalent techniques used in money laundering and identity theft to help analyze how banks can work at extending their Know Your Customer (KYC) and Anti-money Laundering (AML) norms to cover VCs as well.

Key findings include:

There’s a focus on regulating the distribution and trade in cryptocurrencies, but significant loopholes persist due to fragmented jurisdictions and inconsistent categorization
Digital KYC and AML tools, with advanced analytics and machine learning capabilities, can help banks model and cover all points of ingress and egress between fiat and virtual currencies
Banks have potential partners in responsible cryptocurrency exchanges, with a number of them adopting self-regulation and pushing local governments for regulatory clarity

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