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Major Crypto Exchanges Run Afoul of Money Laundering Regulations

Major Crypto Exchanges Run Afoul of Money Laundering Regulations

Last updated 30th Nov 2022
Disclosure

By Michael B. Cohen, Vice President of Global Operations for MyChargeBack

When talking about crypto exchanges, it’s common to divide them into the big, stable, safe, reliable ones on the one hand, and the little, unknown, shady, and suspicious ones on the other. However, the Financial Conduct Authority (FCA), the UK’s financial regulator, seems not to have a very high opinion of any of them.

In particular, when it comes to anti-money-laundering compliance, it seems like the FCA believes the exchanges have really dropped the ball.

Anti-Money-Laundering Background

Many countries enacted money laundering laws in the 20th century, but it was in the months and years immediately following 9/11 in 2001 that virtually the whole world got on board with the idea that we all need to help dry up the sources of funds for international criminal organizations.

Whereas anti-money-laundering (AML) regulation was initially directed primarily against drug dealers, the new emphasis was more on combatting terrorism. Interestingly, it soon became apparent that the two were intimately connected. For example, the Taliban in Afghanistan financed much of its activities via the cultivation of opium poppies and the sale of opium, the precursor of heroin and other opiates.

Anti-money-laundering regulations are intended to prevent “dirty” money from entering the financial system. When applied to financial institutions (including but not limited to banks), they typically include rules about reporting suspicious transactions and opaque sources of funds. In addition, many countries have criminal anti-money-laundering statutes that in principle apply equally to all persons within the given jurisdiction.

Crypto Moves In

Cryptocurrency dates back to 2009 with the release of bitcoin. One of the reasons why it was invented in the first place was for it to serve as an anonymized method of engaging in financial transactions, independent of the laws and policies of any nation. This of course is exactly the sort of activity that anti-money-laundering laws find so objectionable, not to mention a premeditated assault on every nation’s presumed monopoly on the issuance of currency.

It should come as no surprise, therefore, that governments and national financial regulators have been looking askance at cryptocurrency from the beginning. It was just a matter of time before they found a line of attack worth pursuing.

The FCA Takes Action

In June of 2021, the FCA issued an advisory warning both the cryptocurrency industry and its consumers that most crypto exchanges were failing to comply with the UK’s AML regulations and were in danger of facing punitive actions.

On June 26, the FCA lowered the boom on Binance, the world’s largest crypto exchange. The FCA issued a consumer warning regarding various parts of Binance’s business structure, in effect prohibiting them from offering any regulated financial services within the UK. This was widely reported as Binance being “banned” in the UK. While that is a bit of an exaggeration (more on that below), it nevertheless was a considerable blow to Binance’s prestige and ability to operate.

Among other things, Binance was required to prominently include on their website a warning to any UK visitors that their company was prohibited from undertaking any regulated activity in the UK. This was, to put it mildly, not good news for their business model, nor their good name.

The fact is that the “ban” is not quite as earth shattering as the headlines might suggest. That’s because most of what Binance does isn’t even regulated in the first place, for better or worse. Still, they and a number of other crypto exchanges are in the process of trying to get FCA approval for regulation, and this action certainly will delay approval at the very least.

What Comes Next?

The big question for Binance, the other crypto exchanges (Coinbase, Kraken, Gemini, and many others), and their customers is: Where do we go from here? In the short term, at least, things look to be getting tighter. In July of 2021 some UK banks, prominently Barclays and Santander, blocked all payments to Binance from their customers. Just a few days later NatWest did the same. So the world of crypto investment and payment is threatening to shrink in the UK, and it remains to be seen the extent to which the changes there will cause a ripple effect throughout Europe and the rest of the world.

There is every reason to believe that cryptocurrency will be with us from now on, in one form or another, for better or worse. That being said, AML rules have been a strategic tool to help police  the most dangerous people in the world, and it would be encouraging to see these rules successfully applied to crypto. When that happens, many (not all) of the current crypto-skeptics will be happy to welcome the exchanges into the fold.

News Desk

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