On September 21, 2021, the SUEX cryptocurrency exchange was included in the sanctions list of the Office of Foreign Assets Control (OFAC SDN List) by the US Treasury. Chainalysis, which provides blockchain analysis services (technology that provides continuous recording of information in sequential blocks, on the basis of which cryptocurrency transactions are performed) also participated in the investigation.
According to analysts, SUEX was engaged in laundering illegal money by servicing ransomware, scam projects and darknet marketplaces. The SUEX case was the first case of the imposition of restrictions against a cryptocurrency exchange at the state level, but, alas, not the last. All this highlighted the need to develop a regulatory framework for this area. Maxim Kurbangaleev, an expert in the world of finance and business, tells us how sanctions are applied, why the modern regulatory mechanism is ineffective, and what development paths the cryptocurrency market has.
Sanctions: good or evil
The history of economic sanctions dates back to the 5th century BC, when Athens imposed an embargo against the neighboring city of Megara. In the Middle Ages, the practice of economic blockade became another way of waging war. It was forbidden to trade and conclude contracts with the enemy.
In the modern world, sanctions are considered by politicians as measures to combat the financing of real threats: terrorist groups, unreliable companies, individual officials and public persons. As practice shows, this mechanism works only if a common regulatory framework has been developed for all companies.
“Let us look at the history of the banking sector. The more developed it became, the more rules and restrictions had to be introduced to combat illegal, fraudulent actions. After all, banks had to protect themselves and their users. Now banking regulation is slightly different depending on the jurisdiction, but they all have a common base of rules on which AML (Anti-Money Laundering) requirements are based”, Maxim Kurbangaleev says.
Cryptocurrency is being integrated into everyday life, but the regulation is still not clear – Maxim Kurbangaleev
The cryptocurrency appeared in 2008. It was then that the world first heard about Bitcoin. For almost 15 years of its existence, new types of it have appeared, they have firmly entered the everyday life of residents of different countries. People use cryptocurrencies to pay for housing and communal services, goods in the supermarket, to repay debts and mortgages.
This development of the industry has forced regulators to pay attention to operations carried out with the help of cryptocurrencies. Expert Maxim Kurbangaleev believes that the problem lies in the lack of a common approach to digital currency:
“It seems to me that the regulator still has a poor understanding of how to deal with cybercrime in the crypto system. In recent years, there have appeared several analytical services that scan the blockchain and show where a specific unit of cryptocurrency has been used. If they find out that this cryptocurrency has been involved in money laundering, then they impose sanctions and that is it. But the paradox is that at the time of discovery, this crypto unit can be possessed by an ordinary user who has not committed anything illegal. It is not the user’s fault that they got a “dirty” cryptocurrency. I like the analogy with the fiat world in this regard. If you withdraw money from an ATM with which someone previously bought drugs, you are not responsible for it. But in the crypto sphere it turns out that way, so I think that the sanctions mechanism is not ideal. The industry needs to gather the best specialists to work together with the regulator to develop a strict set of rules that will protect market participants from fraud and excessive authorization,” Maxim Kurbangaleev explains.
How to develop crypto business legally? – Maxim Kurbangaleev
According to Maxim Kurbangaleev, despite the difficulties of regulation, it is possible to conduct cryptocurrency activities legally. To do this, first of all, you need to choose a jurisdiction where cryptocurrencies are allowed at the legislative level. They are Belarus, Great Britain, Germany, Spain, Italy, Canada, Lithuania, Malta, Norway, Poland, El Salvador, the USA, Ukraine, the Philippines, the Czech Republic, Switzerland, Estonia, Japan.
Only some of these countries license crypto activities, but the main thing is that all of them have existing laws regulating the turnover of cryptocurrencies in the country. “The legally fixed rules give an understanding of how to comply with AML requirements, how to fight fraudsters, how to protect your interests and the interests of the client, in other words, how to conduct business without threatening its existence,” the expert says.
It is recommended to start searching for licensed exchanges to purchase cryptocurrencies. “It is extremely important to have reliable partners who fully comply with AML requirements – both their own and local jurisdictions. You can check this with the help of consulting companies. The presence of a license from the exchange already means that it complies with local legislation, and careful compliance with AML requirements will guarantee a long-term relationship. Otherwise, when dealing with an exchange that is on the sanctions list, there is a great risk that your exchange will fall under certain restrictions,” Maxim Kurbangaleev clarifies.
Important part of AML — identification procedure or KYC
“Every business needs to know who they are dealing with. Working with users, it is important to verify their identity: request a passport or ID, a real photo to make sure that the real owner of the document contacted you. After that, it is necessary to check the client for presence in the sanctions list or blacklists. To do this, we need a staff of AML officers who will carry out the necessary checks, as well as promptly refine their AML internal control system. In case if legislation changes or a new type of fraud, against which urgent measures should be taken, is discovered,” Maxim Kurbangaleev shares.
In addition to customer identification, the expert advises not to forget about the classic cryptocurrency verification tools, such as Chainalysis, Reactor, Coinpath, Elliptic and others.
“Checking by such AML services will help to take measures in time, for example, if a “marked” cryptocurrency got into the exchange. Then you will be able to avoid problems with the regulator, and protect your customers from blocking, improving your reputation. In general, I believe that common standards for working with cryptocurrency have not been developed yet, it is necessary to use all means: both tools from the fiat world and from the world of digital currencies. Today this is the only way out that I see,” the expert sums up.
