Managing the Risk of Virtual Currencies’ Emerging Threats

Actimize AML Product Team, Anti-Money Laundering

One of the biggest unknowns in the financial services world right now surrounds the inability to estimate both the positive and negative impact of virtual currencies on the banking system. Some have argued that virtual currencies, like Bitcoin, are on a disruptive level akin to the internet, whereas others have argued that they could seriously undermine the global currency system and enable rampant crime. Like most things, the truth likely falls somewhere in the middle.

From a financial crime perspective, there has been a tremendous level of concern about the usage of virtual currencies to enable criminal activity including fraud or money laundering activities such as tax evasion, terrorist financing or drug trafficking. Often, individuals who support this view point out the case of Silk Road and how Bitcoin was used as an anonymous currency to enable people to buy drugs, prostitutes, or even hitmen.

What is often lost in discussions around these issues was the truth around what actually occurred. While Bitcoin was used to acquire the above mentioned items and activities, the facts are that the FBI was able to use the information stored within the Blockchain ledger to help identify the owners of the Silk Road website who enabled this activity. The problem for criminals in a financial crime sense is that the Blockchain ledger is a permanent record of activities related to a Bitcoin.

So while a Bitcoin may be convenient for one off or occasional criminal activity, the data held within the Blockchain is the antithesis of what individuals in organized crime are trying to do. Investigators can go back at any time and look at the records of a Bitcoin to identify its movement and ownership. Thus if someone attempts to store or transact a Bitcoin with a financial institution, not only can the institution monitor where the Bitcoin is going in the future, it can look into the past to see where it came from!

As financial institutions begin to work more with individuals, businesses and other entities in accepting, transacting, storing, and mining virtual currencies, what is a compliance officer to do? The following three anti-money laundering concepts can work together to help risk and compliance officers prepare and address the concerns regulators and internal stakeholders may have around virtual currencies:

1.Customer Due Diligence: CDD/KYC is the most pertinent solution that can be used to battle financial crime in virtual currencies today as CDD/KYC is designed to help provide detailed information on beneficial ownership, asset verification and identification. Dynamic onboarding, risk assessment analytics and news monitoring are all well-known CDD tools that can be applied to virtual currencies. Dynamic onboarding questionnaires can ensure that bankers ask and receive the right information on ownership and asset identification from the beginning to meet existing AML policies. Risk assessment analytics can ensure that these classes of customers are risk rated and monitored appropriately. Last, since Virtual Currency businesses are very much in the news, news monitoring services can ensure that financial institutions have the most up to date information surrounding these businesses to protect themselves against any potential abuses.

2.Transaction Monitoring: Virtual currencies produce a treasure trove of data which can be used for monitoring purposes alongside traditional financial instrument datasets. Reviewing how existing monitoring system can consume and monitor these transactions for potential AML typologies. Further, ensures vendors are actively looking to create specific analytics targeting these types of transactions in the future.

3.Watchlist Filtering: There is a fear that these businesses aid individuals and other businesses currently being sanctioned by global governments. With the intersection of the CDD/KYC system at onboarding and continuous monitoring of these entities against watchlists, continued vigilance around identification, classification, monitoring and investigation of entities related to virtual currencies is possible.

As we witness the disruption of the traditional banking model, it is an exciting time to be in the financial world. However, while change can be difficult, the structure and data available within virtual currencies enable institutions to not only manage their risk, but almost certainly, to actually manage it better going forward.


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