Blockchain Compliance Bulletin #4

ISSN 2632-0533
04
9 772632 053006

KYC (Know Your Customer) measures focus on verifying
the identity of customers and sufficiently understanding
their background and risk profile. They are part of the
general AML (Anti-Money Laundering) duties almost all
companies are requested to take care of.
The 4th AMLD (Anti-Money Laundering Directive, Directive
(EU) 2015/849) states that «customer due diligence
measures shall comprise», among other things, «identifying
the customer and verifying the customer’s identity
on the basis of documents, data or information obtained
from a reliable and independent source.»
Hence, crypto-businesses are under a statutory duty to
establish AML programs which are similar to those of
traditional institutions: client identification at the time of
onboarding, transaction monitoring for suspicious activities,
sanction lists screening, ...
In its July 2014 Opinion, the European Banking Authority
(EBA) recommended bringing into the scope of the
AMLD crypto-to-fiat exchanges and providers of virtual
currency custodian wallet services to mitigate the risks
of money laundering and/or the financing of terrorism
arising from those activities.
Legislative amendments to this effect were ultimately
agreed in the context of the 5AMLD negotiations such
that providers engaged in exchange services between
virtual currencies and fiat currencies, as well as custodian
wallet providers are “obliged entities” within the
scope of the AMLD.
As is well known, the AMLD5 is required to be implemented
into national law by 10 th January 2020.
In the crypto-world, third-party providers usually run KYC
processes. Also when an external tool is used, the blockchain-company
remains responsible for such controls.
While the identification of a customer is now quite
an easy task, it must be noted that the crypto-market
exposes its operators to unique risks and challenges,
especially when it comes to the detection of suspicious
activities.
A Pain in the Neck:
The Crypto-Assets Provenance
The nature of the blockchain and its underlying encryption
features allow for a higher degree of privacy and
anonymity for certain crypto-assets.
On the one hand, the counterparty of a crypto-transaction
is identified not by a name or an account number,
but by a cryptographic address. These addresses can be
created at any time, by anyone, anywhere in the world.
And many of them have no available KYC information.
On the other hand, the blockchain itself preserves and
makes accessible by anyone all the addresses and the
transactions involved.
Further, emerging cryptographic mechanisms (including
zero-knowledge proofs, ring signatures, and other
privacy-focused approaches) might impact an organisation’s
ability to determine the provenance of some
crypto-assets.
In a recent written advice (9 January 2019 | ESMA50-
157-1391), the European Securities and Markets Author-
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