To comply with applicable regulatory standards, banks and financial institutions in the digital asset field as direct or indirect service providers must comply with money laundering regulations and be aware of your transaction, or KYT, as part of the Know Yourself Extension. “Customer Service Program. To do this, they must be able to effectively control the risks associated with blockchain transactions. How do banks solve this problem without proper internal settings? What solutions can they use to comply with their due diligence standards?”
As of 2020, banks have varying levels of exposure to cryptocurrencies, but most of them are vulnerable in one way or the other. Currently there are two classes of banks that have access to cryptocurrencies:
Indirect link: These are the banks that do not directly trade cryptocurrencies, but allow providers of virtual assets to have their own accounts. These service providers must ensure that the funds in their bank accounts are “clean” and not linked to suspicious activity before transferring them from digital assets to cash assets.
Direct contact: These can be banks, funds, or cryptocurrency financial institutions that are directly linked to cryptocurrencies – for example, customer digital asset managers. In the United States and Germany, banks are now allowed to obtain licenses to own digital assets, and these financial services require an additional level of due diligence, transaction monitoring, and risk profiling.
According to the Basel Committee on Banking Supervision, the main body setting global standards for banking regulatory regulation: “The banking system for managing cryptocurrency risks should be fully integrated into overall risk management processes, including those related to money laundering […] and improving fraud control. The committee also updates information related to risk identification and risk assessment for banks related to cryptocurrencies in a timely manner.
The traditional compliance procedures for banks and financial institutions (for securities) consist of the following stages:
Get to know your customer.
Case management solution.
Banks need to find a way to integrate crypto transaction monitoring and risk profiling into their procedures. With multiple crypto software solutions available, it is now possible to combine all three steps into a single tool covering KYT (as part of KYC’s compliance procedures), anti-money laundering, and digital asset management solutions.
How do anti-money laundering compliance program solutions work?
Crypto compliance platforms act as automated risk specialists who record interactions between blockchain devices and track potential communications with other organizations. The program uses algorithms and behaviors as well as historical factors to create risk profiles.
One of the main advantages of these solutions is that the bank, depending on whether it processes the cryptocurrency directly or indirectly, can adapt its monitoring systems according to the requirements. The same principle applies to other service providers such as cryptocurrency exchanges. After the customer has configured the risk parameters, he can configure alert systems.
Since the system automatically tracks all transactions in real time and around the clock, the extra manual work is usually minimized to understand the source of funds. It also reduces most of the usual preparation and training time. Since banks are no longer just tracking regular legal transactions, as they are now also studying cryptocurrency and paper transactions and from monetary to cryptocurrency transactions, they have to work with the blockchain technology on which the transactions are built.
However, banks and financial institutions, which must prioritize data privacy and security, particularly with regard to the Financial Action Task Force (AML) rule, face the question of how to maintain data security with third-party compliance programs. One possible solution is to put in place dedicated servers, where all data is stored in the corporate server infrastructure of the bank.