The Challenges of Cryptocurrency Compliance – How Banks Can Overcome Them

Cryptocurrency is a digital or virtual currency that has revolutionized the financial services industry. Cryptocurrency offers both opportunities and poses unique challenges to banks, financial institutions, businesses, and individuals across the globe.

In recent years, the rapid growth of the cryptocurrency market has raised serious concerns regarding regulatory compliance, risk management, and financial crime.

The blog explores the compliance challenges related to cryptocurrency and strategies to effectively address these challenges, mitigate risks, and meet compliance.

The 3 Key Regulatory Compliance Challenges of Crypto Assets

The rapid growth of crypto assets, such as cryptocurrencies, has brought forth a host of compliance challenges for banks and other financial institutions.

1. Decentralized Nature and Lack of Regulatory Guidelines

With no centralized authority or governing body to monitor crypto transactions, it is difficult to identify the parties involved.

Governments and regulatory bodies are also struggling to keep up with the pace of technological advancements, resulting in a lack of clear guidelines for financial institutions. This lack of regulations and transparency makes it easier for criminals to exploit crypto assets for illicit activities such as money laundering and terrorist financing.

2. Higher Degree of Anonymity

The anonymity and pseudonymity associated with cryptocurrency transactions pose a significant risk, making it difficult for financial institutions to keep track of the source and the destination of the funds.

The KYC procedures associated with traditional banking do not easily apply to cryptocurrencies. Also, cryptocurrency transactions are linked to wallet addresses rather than individuals, which creates compliance gaps that banks need to address with an effective financial crime risk management (FCRM) plan.

3. Crypto-Enabled Financial Crimes

Criminals exploit the unique features of crypto assets for activities such as:

  • Money laundering
  • Tax evasion
  • Financing Terrorism
  • Human trafficking
  • Corruption
  • Political funding

It is difficult for financial institutions and law enforcement agencies to trace the transaction path that involves cryptocurrencies, making it a favorable means of payment for illegal actors.

Strategies to Overcome Compliance Challenges Due to Cryptocurrency

The following strategies can help financial institutions address the challenges posed by crypto assets such as cryptocurrency.

1. Enhance AML and KYC Process

AML, KYC, and CFT regulatory measures play a crucial role in ensuring the legitimacy of cryptocurrency transactions and ensuring financial crime compliance (FCC). To prevent financial crimes linked with cryptocurrency, banks need to take measures such as:

  • Implement robust AML and customer due diligence measures to detect and prevent money laundering activities in the cryptocurrency space.
  • Follow KYC procedures to verify the identities of cryptocurrency users and reduce the risk of illicit transactions.
  • CFT provisions to further enhance security by preventing the financing of terrorism through cryptocurrencies.
  • Accept cryptocurrencies from approved Virtual Asset Service Providers (VASPs) only.

Compliance with AML, KYC, and CFT regulations helps protect financial institutions from legal and reputational risks. It also demonstrates banks’ or financial institutions’ commitment to combating financial crimes.

2. Blockchain for Compliance

Blockchain is a trustworthy, transparent, and distributed ledger technology (DLT) that banks and financial institutions can leverage to streamline financial transactions and boost their compliance efforts. It can help:

  1. Trace/track the flow of cryptocurrency funds
  2. Increase the transparency and accountability of cryptocurrency transactions
  3. Identify and report suspicious activities
  4. Detect patterns of money laundering
  5. Automat AML and KYC compliance processes with Smart contracts
  6. Reduce the risk of fraud and hacking

However, leveraging Blockchain technology and analysis requires specialized technical expertise to be an effective tool in crypto compliance efforts.

3. Behavior-Based Suspicious Activity Monitoring

Banks and financial institutions can use behavior-based monitoring to detect suspicious activity in cryptocurrency transactions.  This involves analyzing the behavior of cryptocurrency users. It helps banks identify unusual patterns of activity indicating potential involvement in illicit activities.

For instance, a sudden increase in the transaction volume or transactions involving unusual locations indicates red flags for money laundering or terrorist financing.

Leveraging advanced and emerging technologies such as advanced analytics, AI/ML, NLP, etc., can help

  • Improve the detection of suspicious activities
  • Accurately analyze the user behavior
  • Identify true threats
  • Reduce false positives/alarms

4. Peer-to-Peer Analysis and Risk-Based Monitoring

Peer-to-peer analysis can be useful in monitoring cryptocurrency transactions, as peer-to-peer exchanges are often used by criminals to convert cryptocurrencies into fiat currency. By monitoring these exchanges, banks can identify suspicious activity and prevent money laundering.

Risk-based monitoring is another effective technique for cryptocurrency compliance. By assessing the risk associated with each transaction and assigning a risk score, banks can focus their resources on high-risk transactions while processing low-risk transactions quickly. This approach enhances the effectiveness of transaction monitoring and reduces false positives.

5. Implement Robust Risk Management Framework

To operate safely in the cryptocurrency environment, banks and financial institutions must ensure effective enterprise risk management.

The inherent risks associated with cryptocurrencies require banks to implement robust risk management frameworks to protect themselves and their customers.

With an effective risk management process, banks can effectively assess the potential risks associated with each transaction/customer and evaluate:

  • Source of funds
  • Purpose of the transaction
  • Potential for money laundering or other illicit activities

Compliance Solutions for Banks and Financial Institutions

As the cryptocurrency industry continues to evolve, banks and financial institutions must seek compliance solutions to navigate the complex regulatory landscape.

One solution is to partner with specialized firms or managed service providers that offer expertise in the cryptocurrency and compliance space. These firms can assist banks in developing and implementing robust compliance programs tailored to their specific needs.

Anaptyss with 8+ decades of combined expertise provides tailored solutions to help banks and financial institutions stay compliant and secure in the world of cryptocurrencies.

To learn more about navigating the compliance challenges in the cryptocurrency industry, read our Whitepaper or contact us today at

Tasneem Abdulrahman

Manager - AML Compliance

Tasneem is an accomplished professional with 15+ years of experience in the global financial crime compliance industry. Her expertise spans Regulatory Compliance, AML Risk and Governance, Project Management, and Control Testing and Remediation, including audits and strategic management of operational risk events.

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