Compliance in the crypto world

We are entering a new paradigm, in which new technologies have modified traditional financial models, where the DeFi Model [1](Decentralized Finance Model) begun to modify basic macroeconomic applications.

In this new finance model, the general rule is decentralization and self-regulation by the so-called “crypto market”.

It is important to note that within this new market, there are minimum guarantees for the agents involved in it, such as traders and financial intermediaries (exchanges), among others.

To provide a level of transparency within these operations, it is essential that the mechanisms for the Prevention of Money Laundering (PLA) are applied, such as the mechanisms defined by the FATF through the so-called travel rule 16.

This is how we can see the existence of a direct relationship between the so-called financial compliance and the crypto market.

In this article, we will explain the term compliance and, likewise, its relationship with the crypto market.

Financial compliance consists of ensuring compliance with the rules by companies. Its aim is to maintain investors’ trust and ensure that markets are efficient, transparent, and fair.

Over time, compliance systems have become more sophisticated and complex as regulators work to monitor everything from business activity and accounting standards to tax evasion and money laundering.

New rules often emerge after a bubble or crash, with a big push toward more regulation; like the 2008 financial crisis, which exposed several weaknesses in the US banking system.

The international organization par excellence, in charge of monitoring and establishing transparency standards at the international level is the “Financial Action Task Force”, known by its acronym FATF, with headquarters in Paris, France. It is the highest global intergovernmental organization that monitors and fights the crimes of the international financial system in collaboration with more than 200 countries that follow its guidelines, along with other organizations and companies.

In order for countries to operate in accordance with the FATF international parameters and recommendations, and to strengthen their systems and prevent crimes, the organization issues its famous “Recommendations” – since it does not legislate in the strict sense of the word – known as ” International Standards on the Fight against Money Laundering, the Financing of Terrorism, and the Financing of the Proliferation of Weapons of Mass Destruction”, these being the foundations of transparency and management of financial entities, means of payment and service providers of virtual assets.

Among its Recommendations, in 2019, the agency issues, among other modifications to its standards, the “Travel Rule 16”, or “Travel Rule”, which heralds a new era, as the regulations for the ownership of virtual assets begin. This type of regulation has its origins in the years seventies, with the Bank Secrecy Act (BSA), administered by the Financial Crimes Enforcement Network (FinCEN). For the first time in history, banks required banks to cooperate with the Government of the United States to combat financial crimes and, in turn, prevent Banks from granting tools that facilitate Money Laundering.

Now, what does the Travel Rule seek to regularize? The Travel Rule indicates and recommends that the FATF member countries and the VASP “Virtual Assets and Virtual Asset Service Providers” must require for the exchange of assets an identification of the user and other requirements explained later, with a real name for the transactions.

But what is the difference between the KYC “Know Your Client” and KYT “Know Your Transaction” verifications with the Travel Rule? In the first place, it should be explained that the KYC is a process of identity verification of potential users who use these platforms, so that the veracity of the person’s identification can be affirmed with accuracy and that it does not correspond to any type of scam or fraud.

Its objective is to establish an efficient risk matrix through the collection and supervision of data and documentation of the people who seek to register, as well as to identify and have the basis of the PEP “Politically Exposed Persons”, among others. This entire process has a digital onboarding, which is a 100% remote identity verification, without the need to personally address any entity. This process is a legal requirement for financial services companies, although, without a standardized system, the implementation and execution vary according to the jurisdiction.

On the other hand, we have KYT, a management tool that allows both VASP users and financial institutions to automatically track transactions, gathering centralized information on the parties involved and references of dubious crypto transactions.

Now, the Travel Rule creates a compatible data transmission between other VASPs, generating synergy between issuers, while the KYC and KYT verification processes are an internal process of each company to analyze and filter incoming transactions and users with suspicious qualities or that go against the parameters established in the standards. Suspicious characteristics are automatically raised to the FIU (Financial Information Unit) and/or to the control body of each country.

The Travel Rule, on the other hand, obliges virtual asset service providers, financial institutions, and obliged entities in FATF member countries to share information on the sender of the transfer and the receiver of transactions above USD/EU 1,000. – The information requested by Travel Rule 16, includes names, account numbers, physical addresses, and DNI or personal identification numbers.

It should be made clear that the Travel Rule does not seek to replace the internal mechanisms of KYC and KYT, but that they would work in a complementary way for the verification of assets.

CONCLUSION

After having carried out an analysis of the different existing mechanisms in terms of compliance and PLA through the provisions of the FATF; We can understand that the Travel Rule came to generate an even greater tool to fight money laundering and financing of terrorism; It is an obligation on traditional financial institutions to share information about their customers and take responsibility for reporting suspicious activities without this being a violation of customer privacy.

Little by little, the need to provide a higher level of transparency in transactions in the crypto world becomes a necessity in order to be able to guarantee certain minimum guarantees to investors in that market.

The current existing regulations on regulatory transparency in compliance in the legal systems of the countries of the region are low, hence the need for them to begin to comply with the provisions of the FATF and begin to work on internal regulations.

[1] DeFi refers to a system in which software written in blockchains makes it possible for buyers, sellers, lenders and borrowers to interact as a peer or with a strictly software-based intermediary rather than a company or institution that facilitate a transaction. For more details of this term, visit: https://www.america-retail.com/opinion/opinion-defi-un-nuevo-modelo/

 

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1 comment

  1. alvishnu Reply

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