We live in a world where global value flows are becoming more complex, with cryptocurrencies playing a significant role in moving funds. From the perspective of banks and other financial institutions, how can we address crypto-related financial crime risks and create thoughtful regulatory policy without hindering innovation?

That was a key question explored during a panel discussion at the 8th Global Conference on Criminal Finances and Cryptocurrencies on the vital role financial institutions play in preventing and detecting money laundering through crypto assets.

Moderated by Yulia Murat (The Wolfsberg Group), the panel included Joana Neto (European Banking Authority), Nico di Gabriele (European Central Bank), Olga de Truchis (Société Générale) and Pamela Clegg (United Texas Bank).

Yulia Murat summarises the key takeaways below:

Payment transparency and risk management

The global economy faces the challenge of achieving payment transparency in cross-border payments. This issue is particularly important from a regulatory policy perspective.

With the right approach, cryptocurrencies can have a positive impact. They can serve as a tool for financial inclusion and innovation, providing greater access to financial services for individuals and groups who have previously been excluded from the traditional banking system. Considering its inherent risk profile, crypto can also function as a catalyst for meaningful regulatory reforms worldwide.

Cryptocurrencies are linked to technological advances such as immutable ledgers and publicly accessible blockchains. Sophisticated blockchain and related crypto analytical tools have been developed to make use of the data recorded and to enable the analysis and monitoring of cryptocurrency transactions. These tools are helping financial institutions and other actors to decipher complex data and continue to effectively manage their risks.

Regulatory challenges

Despite these advances, challenges persist in the development and regulation of cryptocurrencies, including:

• Anonymity and pseudonymity: A significant challenge is balancing the right of individuals to privacy – one reason many users flock to crypto – with the need to prevent money laundering or other forms of financial crime, for which identification is central.
• Regulatory fragmentation: Another challenge is addressing fragmented and inconsistent regulations across jurisdictions, as well as uneven implementation. As cryptocurrencies become more widely accepted, governments and relevant international bodies need to work together to develop consistent and standardised regulations applicable to the crypto ecosystem and to implement these effectively.
• Decentralisation vs. centralisation: Whereas centralised crypto asset service providers – those where the controlling entities and/or persons are easily identifiable – are easier to regulate, more decentralised crypto exchanges and services pose challenges for regulatory oversight.

Blockchain as a tool in AML/CFT

Crypto’s use of blockchain technologies can enhance efforts in anti-money laundering and countering the financing of terrorism (AML/CFT).

For example, it is useful in forensic analysis: Advanced tools can analyse transaction patterns, identify links between addresses, and be applied to techniques designed to enhance anonymity and obscure transaction details, like mixing services or privacy coins.

Blockchain is also linked to smart contracts, i.e. digital agreements that are automatically executed when certain terms and conditions are met. Smart contracts can be used to automate compliance and enforce regulations directly on the blockchain.

Moreover, the technology allows for instant transaction verification: Real-time monitoring allows for quick detection of suspicious activity.

Finally, blockchain technology can be used for information sharing. Where legally allowed, blockchain could facilitate secure collaboration between financial institutions, regulators and law enforcement. Collaboration could specifically focus on innovations like zero-knowledge proof, i.e. a cryptographic method that can prove the validity of a statement without revealing anything beyond its validity.

The role of traditional financial institutions

With flows of money becoming more and more intertwined with the emergence of cryptocurrencies, traditional financial institutions are increasingly involved in managing crypto value flows.

Banks, for instance, are crucial for crypto on- and off-ramps, bridging fiat currencies and digital assets. On-ramp is the process of buying cryptocurrency with fiat money, while off-ramp is the process of selling cryptocurrency, converting it back into fiat, and often transferring it to one’s bank account.

Banks can be exposed to crypto assets either directly or indirectly. Direct exposure includes banks providing services directly to clients in the crypto industry, such as crypto exchanges. When this is the case, it is important to consider what products are offered and whether, for example, any funds from the exchange’s customers are passed through the bank. Direct exposure may also involve a bank engaging in crypto ventures itself or offering blockchain-related services to its clients.

Indirect exposure may involve a bank providing services to another client operating in the financial services industry, which in turn passes funds from their own crypto client to the bank. In this instance, the bank may not be aware of their exposure to crypto. Blockchain analytics and transaction monitoring tools are particularly useful to identify such exposure.

The panel discussion emphasised that traditional financial institutions hardly have a choice but to pay attention to cryptocurrencies:

“If you’re not doing crypto, crypto will be done to you.”

Balancing innovation and financial crime risk

Crypto is likely here to stay, presenting both opportunities for innovation and challenges for regulation. It’s essential that we strike a balance between addressing the financial crime risks, such as money laundering and terrorism financing, and fostering an environment that encourages entrepreneurship and innovation.

To this end, financial institutions, regulators and tech firms must work together to ensure compliance, transparency and safety in the evolving landscape of cryptocurrencies.

Learn more

• Watch the panel discussion on YouTube.
• Learn more about the conference
• Learn more about the Wolfsberg Group