Ensuring cryptocurrency compliance

Best practices for cryptocurrency businesses

As cryptocurrencies gain traction, market entrants come from a wide range of industries. Traditional financial services providers may be the last to get in on the act, as the very ethos of cryptocurrency is its lack of a tether to banking systems and the facility for peer-to-peer transactions. As more businesses consider issuing non-fungible tokens (NFTs), what protection exists for investors? As we have previously discussed, cryptocurrency compliance is not yet governed by a dedicated regulatory framework. But the government is aware of the need to develop regulation. 

In 2021, the South African Intergovernmental Fintech Working Group (IFWG) published a position paper on crypto assets, setting out three pillars of regulation:

• Implementation of an anti-money laundering (AML) and counter-terrorism financing framework
• Framework for monitoring cross-border financial flows
• Application of financial sector laws

Currently, crypto assets are subject to FSCA regulation in terms of section 1(h) of the Financial Advisory and Intermediary Services Act (FAIS) Act. This means that individuals who provide advice or intermediary services related to crypto assets must be authorised as a financial services provider. However, in practice, crypto is rarely purchased through an intermediary; that runs counter to the principles of cryptocurrency. So what should businesses who want to enter the crypto arena or issue NFTs do to gain and maintain the trust of investors and protect the market from unscrupulous actors?

Comprehensive risk assessments

Although specific cryptocurrency legislation does not exist, there are existing laws that need to be obeyed. Crypto firms should adopt a risk-based approach to anti-money laundering and counter-terrorism financing (AML/CTF) compliance. This involves conducting individual risk assessments by collecting and verifying customer information (know your customer (KYC) requirements) and building risk profiles. Understanding the risks associated with cryptocurrency transactions, such as anonymity and transaction speeds, will enable businesses to implement appropriate compliance measures.

Managing stakeholders

Effective communication and collaboration with stakeholders is essential for successful compliance in the crypto space. Employees should be trained on best practices, emerging criminal methods, and regulatory changes. Crypto businesses should ensure that senior management and compliance teams have strong lines of communication. A money laundering reporting officer (MLRO) should be appointed to oversee the AML/CTF programme. Additionally, a positive relationship with financial regulators and authorities will facilitate meaningful engagement and ensure any compliance breaches are speedily remedied. 

Effective compliance team

A knowledgeable and skilled compliance team is crucial for the effectiveness of a cryptocurrency compliance programme. The team should include individuals with expertise in finance, policymaking and law enforcement. This blend of key skills will enable the business to navigate the complex regulatory landscape and anticipate emerging regulations. Compliance teams should be well versed in AML/CTF threats and possess a strong understanding of the crypto risk landscape.

Understand criminal typologies

Crypto businesses need an understanding of criminal typologies to spot the red flags that signal money laundering attempts and other illicit activities. Typical cryptocurrency money laundering techniques include layering (moving illegal crypto assets through “layers” of transactions), dusting (making large numbers of small cryptocurrency transactions to overwhelm monitoring systems), money mules (third parties, often financially vulnerable people, coerced into conducting transactions on a criminal’s behalf), and many more. If businesses become familiar with these tactics, they can develop robust controls to detect and prevent suspicious activities.

Integrate compliance technology within cryptocurrency compliance processes

Just as cryptocurrency leverages new technology, sophisticated software exists to collect the necessary data and automate processes like customer identity verification. It can also monitor transactions. Some key technologies to consider are:

• Digital identity verification
• Artificial intelligence (AI) for managing and categorising data
• Blockchain for storing and verifying transactions securely 

Sooner or later…

Whether you are an early adopter or a laggard (we’re not being insulting; these are two of the names for five personality types in terms of their willingness to embrace and adopt innovation, developed by Everett Rogers in 1962), you will probably engage with cryptocurrency at some point in your lifetime. You may be an issuer of an NFT. We know of a project intending to issue NFTs linked to learner outcomes in digital skills training for disadvantaged youth! Wherever you fall on the crypto continuum, adhering to best practices and staying informed about evolving regulations will not only mitigate risks but also contribute to the long-term success and legitimacy of the crypto space.

For more information

SD Law is a firm of experienced attorneys based in Cape Town, with offices in Johannesburg and Durban. If you want to know more about cryptocurrency or non-fungible tokens, call Simon on 086 099 5146 or email sdippenaar@sdlaw.co.za.

Further reading:

• Cryptocurrency – the wild west or a carefully regulated environment?
• Non-fungible tokens and intellectual property
• What is decentralised finance (DeFi)?
• Cryptocurrency and your will
• Decentralised finance – regulatory developments

SD Law

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