In recent years the growth within the blockchain / cryptocurrency industry has been phenomenal.  Following the hike in the value of cryptocurrencies that happened in 2017 we have been seeing new blockchain businesses sprouting like mushrooms all over the globe.  According to Forbes, the global blockchain market is anticipated to grow to over USD60 billion by 2024 as more companies adopt distributed ledger technology and mass-use cases appear.

Interestingly, the use of cryptographically secured chain of blocks (i.e. “blockchain”) was originally described way back in 1991 to define a method to implement a system where document timestamps could not be tampered with.  Nonetheless, the first proper use of blockchain technology occurred in 2008 as the underlying technology of the infamous cryptocurrency, Bitcoin. Unfortunately, it is very well known that the first commercial use of Bitcoin and other virtual currencies was mainly within the underworld as it fuelled transactions on the dark-web especially on illegal marketplaces such as Silk Road.  As a result, the recent growth of the industry and the reputation that virtual currencies may be perceived to have, may raise an obvious question:

  • Will the widespread use of blockchain technologies and crypto currencies increase money  laundering activity and funding of terrorism?

The increase in online businesses providing cryptocurrency-related services such as miners, exchanges and wallets made cryptocurrencies more mainstream and the number of users increased substantially.  Users vary from regular speculators trying to get lucky with the currencies’ volatility to avid believers of a decentralised economy. Apart from cryptocurrencies, companies providing services based on blockchain technologies funding their business by issuing their own virtual coins have boomed and attracted numerous users and investors in 2018.  Given such expansion, the lack of regulation and the inherent pseudo-anonymous nature of cryptocurrencies, these companies may easily attract money launderers who simply want to exchange their illicitly earned money with another form of exchangeable value that will disguise the origin of their funds.


Regulating the Blockchain and Cryptocurrency ecosystem

The business growth in the number of companies involved in cryptocurrency and blockchain technologies together with their inherent risk of anti-money laundering and funding of terrorism (AML/FT) has been observed by a number of regulators, banks and other financial institutions causing certain challenges for such companies to be able to operate.  Even though they are dealing in virtual currencies or virtual ledgers, all these businesses require access to regular fiat currencies as well as banking and payment services.

Due to the perceived Money Laundering and Funding of Terrorism (ML/FT) risk, several banks and financial institutions just decided to avoid doing business with blockchain/crypto companies. Not to lose the business opportunity others mandated the implementation of certain customer due diligence (CDD) and know your customer (KYC) measures. With this scenario, the risk of AML/FT may be lowered as clients would be identified and verified at the point in which the exchange of traditional fiat currency into a pseudo-anonymous virtual value is happening.

Eventually, certain regulators also started to catch up. Similar to banks and financial institutions, some regulators decided to ban blockchain/crypto business completely whilst others decided to introduce a regulatory framework.  When looking at the Virtual Financial Assets Act issued by the Malta Financial Services Authority (MFSA), any issuer of virtual financial assets is a subject person in terms of the Prevention of Anti-Money Laundering and funding of Terrorism Regulations (PMLFTR).

This implies that any entity issuing Virtual Financial Assets, regular crypto currencies or other virtual value being issued by blockchain based companies is subject to the same customer due diligence requirements a traditional bank or financial institution is subjected to.  Thus, each entity issuing Virtual Financial Assets need to implement procedures to be able to adequately identify and verify the applicant for business and assess whether the latter represents specific risks such as political exposure, potential sanctions or may be involved in any known illicit activities.  These risks may be easily identified by using the services offered by companies such as StartKYC.  StartKYC offers access to databases of Politically Exposed Persons (PEP) Lists, Sanctions and Adverse media via their user friendly portal or/and API service with no setup fees and no excessive commitments.  In order to get access to the service clients may easily purchase a package here and get instant access or request a quote for a custom package.

Rigorous screening on all transactions through which fiat currency is exchanged into virtual currency will help to ensure that the flow of virtual funds is being verified and that the volume of transactions perceived to represent a high risk of ML/FT is minimised.  This will lower the ML/FT risk but will certainly not eliminate it as virtual currencies can still be moved from crypto currency accounts with high scrutiny to accounts with low or no scrutiny and thus get them out of the regulators’ radar. This scenario is very much comparable to the movement of fiat currencies from highly regulated jurisdictions to offshore jurisdictions with poor AML/FT measures.  Similarly, as more jurisdictions set up regulations and enhance AML/FT requirements on virtual currencies, transactions flowing below the regulatory radar will keep on decreasing and the resulting ML/FT risk may shrink to a point in which virtual currency transactions would be considered lower risk transactions (maybe as “low” risk as regular fiat transactions).



The legitimate use of crypto / blockchain technologies as well as their long-term sustainability has raised a lot of debate. In this regard, an interesting point of view to consider crypto / blockchain technologies may be obtained by looking back at the time when legal tender was being first introduced.  Individuals and businesses were accustomed to transacting by bartering goods and commodities or by coins made up of precious metals. When legal tender such as banknotes were introduced a number of doubts were faced on the integrity of the whole system. Numerous questions were raised including;

  • why should one rely on the value attributed to a “piece of paper” or document
  • how would one know whether the “piece of paper” is genuine or not and is not a mere copy?
  • what if the institution issuing the legal tender is compromised or somehow fails?

These questions are equivalent to similar questions being raised today with respect to crypto / blockchain technologies;

  • why should one rely on the value attributed to records within a ledger that is based on an algorithm?
  • how would one know whether the algorithm is genuine or whether it is actually some pirate code?
  • what if the blockchain network is compromised?

Through this article we are not trying to give the impression that there are no risks when dealing in crypto / blockchain technologies.  We still strongly recommend that one exercises high scrutiny when transacting or dealing in such technologies or virtual assets. However, we are suggesting that when the right legal framework is adopted, the use of crypto / blockchain technologies may actually be beneficial to each economy that embraces them and that by making good use of these same technologies, challenges being faced with the traditional way of conducting business may actually be eased.

The information, views and opinions in this article are being provided solely for educational and informational purposes and should not be construed as advice. StartKYC Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions included in this article.