Crypto Jun 29, 2020

New AML and KYC Policies Reduce Darknet Transactions in Crypto Exchanges

AML and KYC policies have caused significant effects in the crypto sector,…

Money laundering has become a central concern across all global law enforcement agencies. While cryptocurrencies have turned out to become both an economical and efficient means of international funds transfer, the crypto sector has created a fertile breeding ground for trans-boundary money laundering and terrorist funding.

Governments and regulatory bodies have responded to this problem by enacting a series of strict anti-money laundering (AML) laws meant to ease the process of combatting money laundering that takes places via cryptocurrency exchanges and custodian services.

How AML and KYC Policies Affect Crypto Exchanges

Potent AML frameworks include foolproof Know Your Customer (KYC) protocols, which are employed in users’ identification and verification. The combination and AML and KYC processes serve to enable relevant authorities point out suspicious cryptocurrency activity.

In the European Union, financial laws differ for fiat-to-crypto exchanges and crypto-to-crypto exchanges while, in the USA, all cryptocurrency exchanges are required to enable KYC protocols and install effective AML programs (regardless of the types of cryptocurrencies that they support).

Nonetheless, while AML and KYC for crypto exchanges and wallets have begotten a host of benefits across the sector, it also means that such stakeholders have realized an increase in transactional expense – with exchanges becoming more vulnerable to data breaches.

Just recently, LocalBitcoins, a major peer-to-peer (P2P crypto exchange, reported a significant drop in the number of dark web transactions that were passed through the platform. Interestingly, the P2P exchange claimed a 70 percent reduction in transactions emanating from crime-riddled dark web marketplaces in the period following LocalBitcoin’s decision to adopt stringent AML and KYC policies.

The cryptocurrency exchange has since lost its status as the world’s biggest P2P cryptocurrency trading platform. Arcane Research, a cryptocurrency research firm, inferred that the significant event was the result of LocalBitcoin’s adoption of AML and KYC policies.

The LocalBitcoins Case Study – AML and KYC for an Improved Crypto Sector

The decision by LocalBitcoins to become more regulatory-compliant was a landmark event that resulted in a number of benefits.

Sometime in 2019, the firm was cleared by the Finnish Financial Services Authority (FIN-FSA) to operate in the crypto sector. Considering the fact that Finland has the reputation of strict cryptocurrency regulation, the P2P platform was expected to adhere to the strong AML and KYC requirements prescribed by the financial regulator.

While the move by LocalBitcoins to adopt the strong policies was seen as a break from the norm of P2P exchanges that have been exploited by darknet criminals for a long time, the decision came as progress to the law enforcement need to crack down on illicit crypto transactions.

As a side benefit, the platform’s Chief Marketing Officer Jukka Blomberg reported a significant rise in performance over the past three months – an aspect that led LocalBitcoins to conclude that the demand for cryptocurrencies had improved significantly.

The Flipside

As mentioned already, darknet marketplaces responded accordingly to LocalBitcoin’s resolve to adopt AML and KYC policies in a bid to uphold the compliance standards set for the crypto sector.

As a consequence, the majority of crypto users that use P2P platforms, and who are known to value transactional anonymity, are bound to avoid exchanges that are regulatory-compliant.

Just like LocalBitcoins, these platforms are bound to lose customers at a very high rate – and possibly be forced to close shop once they run into massive losses.

Otherwise, a number of LocalBitcoin’s competitors have exploited the current opportunity to attract the wave of the one-time popular P2P. Take the example of LocalCryptos that moved to support various cryptocurrencies following LocalBitcoin’s decision.

Importantly, the LocalCryptos announcement highlighted that the P2P platform would prioritize user interests of “privacy and freedom” – users will be allowed to hold the private keys to their crypto at all times.




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