COMMENTARY: The Application of AML Regulation Will Be Good for Crypto Exchanges

When talking about crypto exchanges, it’s common to divide them into the big, stable, safe, reliable ones on the one hand, and the little, unknown, shady, and suspicious ones on the other. However, the Financial Conduct Authority (FCA), the UK’s financial regulator, seems not to have a very high opinion of any of them.

In particular, when it comes to anti-money-laundering (AML) compliance, it seems like the FCA believes the exchanges have really dropped the ball.

Many countries enacted money-laundering laws in the last century, but it was in the months and years immediately following 9/11 that virtually the whole world got on board with the idea that we all need to help dry up the sources of funds for international criminal organizations.

Whereas AML regulation was initially directed primarily against drug dealers, the new emphasis was more on combating terrorism. Interestingly, it soon became apparent that the two were intimately connected. For example, the Taliban in Afghanistan financed much of its activities via the sale of opium, the precursor of heroin and other opiates.

AML regulations are intended to prevent “dirty” money from entering the financial system. When applied to financial institutions (including but not limited to banks), they typically include rules about reporting suspicious transactions and opaque sources of funds. In addition, many countries have criminal AML statutes that in principle apply equally to all persons within the given jurisdiction.

Cryptocurrency dates back to 2009 with the release of Bitcoin. One of the reasons it was invented in the first place was for it to serve as an anonymized method of engaging in financial transactions, independent of the laws and policies of any nation. This, of course, is exactly the sort of activity that AML laws find so objectionable, not to mention a premeditated assault on every nation’s presumed monopoly on the issuance of currency.

It should come as no surprise, therefore, that governments and national financial regulators have looked askance at cryptocurrency from the beginning. It was just a matter of time before they found a line of attack worth pursuing.
In June, the FCA issued an advisory warning both the cryptocurrency industry and its consumers that most crypto exchanges were failing to comply with the UK’s AML regulations and were in danger of facing punitive actions.

Then, on June 26, the FCA lowered the boom on Binance, the world’s largest crypto exchange. The FCA issued a consumer warning regarding various parts of Binance’s business structure, in effect prohibiting the exchange from offering any regulated financial services within the UK. This was widely reported as Binance being “banned” in the UK. While that is a bit of an exaggeration (more on that below), the action was nevertheless a considerable blow to Binance’s prestige and ability to operate.

Among other things, Binance was required to prominently include on its Web site a warning to any UK visitors that the company was prohibited from undertaking any regulated activity in the UK. This was, to put it mildly, not good news for Binance’s business model, nor for its good name.

The fact is, the “ban” is not quite as earth-shattering as the headlines might suggest. That’s because most of what Binance does isn’t even regulated in the first place, for better or worse. Still, Binance and a number of other crypto exchanges are in the process of trying to get FCA approval for regulation, and this action certainly will delay approval at the very least.

The big question for Binance, the other crypto exchanges (Coinbase, Kraken, Gemini, and many others), and their customers is: Where do we go from here? In the short term, at least, things look to be getting tighter. In July, some UK banks—prominently, Barclays and Santander—blocked all payments to Binance from their customers. Just a few days later NatWest did the same. So the world of crypto investment and payment is threatening to shrink in the UK, and it remains to be seen the extent to which the changes there will cause a ripple effect throughout Europe and the rest of the world.

There is every reason to believe that cryptocurrency will be with us from now on, in one form or another, for better or worse. That being said, AML rules have been a strategic tool to help police the most dangerous people in the world, and it would be encouraging to see these rules successfully applied to crypto. When that happens, many (not all) of the current crypto-skeptics will be happy to welcome the exchanges into the fold.

—Michael B. Cohen is vice president of global operations for MyChargeBack, New York, N.Y.