The Office of Foreign Assets Control (OFAC) had on October 15, 2021, provided guidance on how cryptocurrency exchanges should comply in the industry. It’s no news that many federal regulations scrutinized the cryptocurrency industry after OFAC placed a ban on SEUX OTC in relations with ransomware.
Hence, the guidance is established to protect the cryptocurrency companies including cryptocurrency exchanges, wallet providers, virtual assets service providers (VASPs), OTC traders and miners.
The guidance provides the following:
1) A difference between Virtual and Digital Currencies: A Digital currency is a larger category of assets while a virtual currency is a subset of Digital currencies. In any case, both terms could be used interchangeably.
2) A breakdown on how to ‘block” digital currencies: Whenever a digital asset that ought to be blocked eventually gets blocked, no party is allowed to access the asset again. In the case where a fiat currency gets blocked, it should be placed in an interest bearing account. In addition, companies do not have the right to convert already blocked digital assets to fiat currencies before placing them in an interest bearing account.
3) An explanation of OFAC’s stringent liability rule: This means that exchanges who violate the rules are to be charged. For instance, if you unknowingly engage in a forbidden transaction, you have gone against the rules and you will be penalized.
In the recent guidelines, OFAC also expanded on the essential components that every Sanctions Compliance Program (SCP) should have. They include:
a) Management Dedication: Just like the non digital financial services, the Head of Management should ensure that the compliance team have adequate tools and are thoroughly incorporated into the daily activities of the organization.
b) Assessing Risk: Digital asset companies are required to thoroughly review their potential exposure to illicit transactions, screen their clients to prevent risks and also protect their high risk customers. For this to be possible, the risk assessment methodology should be personalized to suite each company’s business.
c) Internal Controls: In as much as this aspect needs to be personalized to suite the companies business, it’s mandated to have some features such as:
i. Screen the company’s data and incorporate them into their SCP.
ii. Include the use of Geolocation tools, appropriate blocking of IP address and screening against sanctions.
iii. Use of appropriate blockchain analytics tools like Chainalysis KYT to identify transactions involving digital asset addresses associated with prohibited individuals or businesses identified on the OFAC Sanctions list or even situated in prohibited areas.
iv. Participants in the digital asset industry should regularly audit and test their schedules in their SCPs to access how effective they are in practice.
v. Employees should be trained at least annually on compliance so as to show the employee’s activities, the business structure of the company and their risk profile, and also to incorporate new technologies in the digital currency space.
Despite the fact that OFAC expects the digital asset industries to adopt an SCP, there are some issues that has remained unaddressed. For instance,
1) Rejection of incoming funds from sanctioned persons, and ensuring that outgoing funds from exchanges are not directed to sanctioned persons is yet to be practically feasible.
2) By charging a person(s) indirectly exposed to a prohibited wallet, one would wonder how to guarantee that the next transfer of a digital asset after the initial transfer has been made wouldn’t land in a prohibited wallet.
3) The digital asset industry is faced with a challenge of deanonymizing counterparties. However, exchanges are advised to leverage on existing blockchain tools that can assist them to identify risk wallets.
4) More clarity is needed on how SFCs can be built around Decentralized Autonomous Organizations (DAOs). For instance, A DAO may lack unidentifiable top management to implement OFAC related policies and also, it’s yet to be ascertained on the team that should be trained in order not to break the rules.
In conclusion, OFAC wants all companies, exchanges involved in the digital asset industry to adopt an SCP and also document their efforts adequately when creating and implementing SCPs leading to a need for an experienced guide.
If you have any questions about this advice or you need to know how you might apply these guidelines to your business, contact us with: firstname.lastname@example.org and follow our social media platforms for further guide.
WHAT EVERY CRYPTOCURRENCY EXCHANGE NEED TO KNOW!
Financial Action Task Force (FATF) is a body responsible for setting up policies to combat money laundering, and terrorist financing worldwide. The body regularly sets out rules regarding cryptocurrencies and blockchain-based assets. Some of them include: Virtual Assets Red Flag Indicators being used for Suspicious Activity Reports (SARS) and the ‘Travel Rule’.
What is FATF Travel Rule?
The FATF Travel Rule is a regulation based on the U.S’s Bank Secrecy Act (BSA) which aims to report and record suspicious transactions that exceeds a specific threshold. This rule requires that each payment order of $3000 or more will require the following details of the transactors: name and address of the originator, amount of the payment order, and date of the payment order. This information would be shared amongst cryptocurrency exchanges while processing the transactions.
Since Decentralized Finance Platforms, DeFi, permits users to transfer cryptocurrencies directly through the use of software that eliminates a third party, FATF has instructed National Anti-money Regulators to hold the managers of DeFi exchanges to similar compliance expectations from Centralized Exchanges.
In May 2019, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) explained that Decentralized Applications, ‘Dapps’ fall under the same requirements of the Bank Secrecy Act as it applies to centralized exchanges and also noted that the DeFi sector is yet to implement basic Anti Money Laundering (AML) protocols.
On the other hand, in the updated FATF publication, FATF didn’t urge regulations for the software that enables DeFi transactions. According to them, “A DeFi application (i.e., the software program) is not a Virtual Asset Service Provider (VASP) under the FATF standards, However, creators, owners and operators or some other persons who may maintain control or sufficient influence…may fall under the FATF definition of a VASP.
Approaches towards regulating Stablecoins
In the updated FATF guideline, approaches towards stablecoin regulations were given. FATF advised National regulators to apply many of the FATF Travel Rule principles to stablecoins. Stablecoins are a form of cryptocurrency with its value based on a commodity, government-issued currency or other cryptocurrency. FATF claims that if a stablecoin has an operator or issuer, then the entity qualifies as VASP as well.
According to FATF, many platforms claim to be decentralized, but their daily operations are managed by a person or organization. Hence, regulators are advised not to depend on a platform’s own attestations while interpreting and implementing the Travel Rule widely.
Also, FATF advised all countries that are yet to implement and adopt the Travel Rule, to take action as soon as possible. According to them, “Countries may wish to take a staged approach to enforcement of Travel Rule requirements to ensure that their VASPs have enough time to implement the necessary systems”. They suggested that any exchange that succeeds in complying with the Travel Rule could go ahead to restrict transactions between suspicious exchanges up to a particular financial limit or they could alternatively process transactions from exchanges if they can verify the identities of both the originator and the beneficiary.
Inference from the updated Travel Rule
The implication of the updated Travel Rule guide to cover DeFi is that, it adapts its original expectations for centralized cryptocurrency exchanges and extends same principles into new areas of the industry.
FATF warned that failure to have VASP compliant exchanges in any country would pose a tough decision to international countries on dealing with weak or non-existent implementation. Cryptocurrency exchanges are advised to scrutinize unhosted wallets. Unhosted wallets are a group of digital addresses used for storing private keys outside the conventional exchanges with less oversight.
In addition, exchanges might need to limit their transactions with any cryptocurrency platform including Decentralized platforms that are yet to implement FATF recommendations against illicit finance. This will also include exchanges that are yet to implement the Travel Rule or build an overall compliance program.
Cryptocurrency exchanges who are Virtual Asset Providers must develop AML system, conduct due diligence on customers and check transactions for evidence of illegal money.
Regulators are advised to use blockchain analytic tools to track transactions involving unhosted wallets or completely shun them out of cryptocurrency companies.
To have an experienced guide on compliance policies contact us with: email@example.com and follow our social media platforms for further guide.
The Cyberchain Event 2021 which hosted experts in the Blockchain and Cybersecurity space, had our senior partner, Mr Adedeji Owonibi speak on the topic: “The Need for Forensics Experts in a Digital Economy”.
In his speech, he spoke about the different opportunities that the blockchain technology has to offer especially to youths which includes: coding, blockchain gaming, and becoming crypto forensics investigators . He mentioned that the space is still very new and everyone is still learning including the governments around the world and law enforcement agencies.
A&D Senior Partner, Mr. Adedeji Owonibi
He reiterated on the fact that the criminal elements gave the popularity to Bitcoin, hence the need for the ecosystem to be regulated so as to prevent crypto currency related crimes. Going further, he mentioned that anyone could be a victim of these crimes as a result of becoming our own banks, and called on all crypto currency users to take responsibilities and ensure security of our assets.
Conversely, in becoming our own banks, there have been reported cases of cryptocurrency related crimes and the appalling situations victims experience simply because we neither know what to do nor where to report. In addition, the law enforcement agencies and various cooperate bodies involved in crime prevention are yet to understand the technology behind cryptocurrency which makes it pseudonymous, the blockchain technology.
As a result, there is a need for intensive education and trainings for individuals, cooperate bodies, government agencies and law enforcement agencies so as to enable us to be proactive. To make this education easier, A&D Forensics has partnered with Blockchain Intelligence Group (BIG) to bring this training home.
While concluding his speech, Mr Adedeji Owonibi expressed that the rate and amount of needed cryptocurrency investigations by law enforcement is becoming alarming, and called on to the bad actors who think that they could easily leverage on cryptocurrencies to note that the transparency in Blockchain will give them out swiftly, whether they use Dexes, swap NFTs or use unhosted wallets, because all are now visible with a click on Crypto Forensic Tools.
He further advised crypto traders to trade clean so that help can be rendered from the industry at needed times.
The Cyberchain 2021 Event also had some lead persons from different exchanges like: Binance, Okex, FTX, Hagglex, Tradefada, Bitmama and community representatives from SIBAN, BNUG, Redswan, UNIC, TPG Hub, Bholdus, CloudFlex etc in attendance.
In another news, the highlights of the Cyberchain Event included a Cybersecurity Hackathon dubbed Cyberthon . Among the finalists were students from Federal University of Technology Minna, Federal University of Technology Akure and others.
A&D Forensics also encouraged the first place winners by offering to sponsor their training on the Certified Cryptocurrency Investigation Course.
The Certified Cryptocurrency Investigation Course (CCI) and the Certified Cryptocurrency Compliance Specialist(3CS) training equips practitioners with the comprehension and competence to trace and investigate transactions on the Blockchain using various cryptocurrency investigation tools provided on-site at A&D Forensics lab.
To advance your career with this training, register to choose your preferred cohort with the link: https://adforensics.com.ng/cryptocurrency-training/
A&D Forensics, the Africa’s Leading Blockchain Intelligence Service Provider is proud to sponsor the Cyberchain Event with the Theme, “Enabling the Digital Economy” at Lagos Oriental Hotel, Lekki Victoria Island, Lagos, Nigeria in November, 2021.
Government Agencies, Exchanges and Financial Institutions are all invited to come, learn and understand cryptocurrency, the dark-sides and how to stay above board at all times,
As a Cryptocurrency Exchange, you will be opportuned to meet with our experts and gain more knowledge on how to boost your compliance programmes and flag cryptocurrency related crimes.
SIT IN ON OUR COLLOQUY
Our Senior Partner and Lead Facilitator, Cryptocurrency Investigations, Mr Adedeii Owonibi will be taking to the stage for ‘“The Need For Forensics Experts in a Digital Economy” on November 20th, 2021.
Visit our booth at the Cyberchain Event and our team will be on ground to answer every question you have.
Kindly visit our website https://adforensics.com.ng/ and follow our social media platforms for further updates