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What are cryptocurrencies and what are they for ?

Cryptocurrencies is/are electronic money that move from one person to another without a financial intermediary such as banks that use ‘cryptography’ to secure the financial transactions, control the creation of additional units, and verify the transfer of assets. The most prominent one is Bitcoin launched in January 2009 by a man named Satoshi Nakamoto whose identity is unknown.

When dealing with cryptocurrencies, you can use them for :

  • Trading — which involves short-term buying and selling of one or more cryptocurrencies.
  • HODL — which involves buying and holding one or more cryptocurrencies as an asset.
  • ICO — which involves raising money for a defined project that you have in mind using a new cryptocurrency. An ICO is often described as a mix of a Kickstarter campaign with an IPO (Initial Public Offering). Businesses raise funds by distributing coins (AKA tokens) that can be redeemed later for the service the company plans to offer.

AML/CFT Regulation

Cryptocurrencies have been a large influence for almost a decade and now governments are looking for ways to regulate them so as to protect various stakeholders.

Whilst some jurisdictions pose more minimum regulatory requirements on cryptocurrency platforms, the overall global landscape is changing.

Some Countries already have been looking into this and have guidance notes based on Anti-Money Laundering and Combating of Financing of Terrorism (AML/CFT) through digital currencies.

Under the European Union’s Fourth Anti-Money Laundering Directive (4AMLD) passed in June 2017, member states will have 18 months to begin AML/CFT regulatory oversight for cryptocurrency transactions. The US, Taiwan, Vietnam, India and many other jurisdictions have also passed, or are in the process of passing, laws that implement AML/CFT regulations for Digital Currency Exchanges (DCE).

Some jurisdictions are taking an even harder stance. In January 2018, South Korea banned all anonymous cryptocurrency trading. China has seen the mass exodus of DCEs and in February 2018 released an AML Regulatory Framework that will apply not just to DCEs, but also to cryptocurrency miners and wallets.

In Sub-saharan Africa, the Kenya Blockchain Taskforce was formed under the Ministry of ICT to devise ways of capitalizing on Blockchain & AI into the Country. Recently a petition in parliament pressed for a committee to look into regulation of cryptocurrencies. Based on the issues already raised from the petition, there seem to be discomfort on cryptocurrency use from the legislative sector. In order for innovation to be adopted by the masses, it has to abide by some regulations and or guidelines. The legislators called for a need for regulation in the cryptocurrency market and guidance notes associated with trading in virtual currencies such as Bitcoin. Some of the key concerns , real or perceived business risks include:

  1. Anonymity of parties transacting.
  2. Money Laundering/ Financing of Terrorism (ML/FT)

1. Anonymity of parties transacting.

Currently, Bitcoin users have public addresses, that act like a bank account, that appear as a random string of around 30 alphanumeric characters. Therefore, they have no identity layer and the users cannot be traced efficiently upon request.

Identity of peers transacting means that the peers using the digital currencies don’t have identification details connected to their virtual bank accounts also known as public addresses.

In the cryptocurrency space, one can have more that one public addresses which is not essential for providing one’s identity. Cryptocurrency exchanges** provide users with bitcoin wallets. These wallets replace bitcoin addresses with your name. They are also not essential for providing necessary identification details because you can provide a name that is not yours. This shows the ineffectiveness of cryptocurrency wallets to prove identity.

Proposed suggestion — A KYC feature can be sugeested as a requirement in every crypto-currency exchange so as to address anonymity and therefore each cryptocurrency user account will be credible and accountable just like a normal user in a FIAT account.

Also, if the cryptocurrency exchanges are regulated by the State, that will emphasize inherently on the customer due diligence as a requirement for transacting and overall credibility of the exchange.

2. Money Laundering/ Financing of Terrorism (ML/FT)

Money laundering is the processing of assets generated by criminal activity to obscure the link between the funds and their illegal origins.

Terrorism financing raises money to support terrorist activities. While these two phenomena differ in many ways, they often exploit the same vulnerabilities in financial systems that allow for an inappropriate level of anonymity and opacity in carrying out transactions.

Money laundering requires an underlying, primary, profit-making crime (such as corruption, drug trafficking, market manipulation, fraud, tax evasion), along with the intent to conceal the proceeds of the crime or to further the criminal enterprise.

Hence virtual currencies have this anonymity factor which is highly favorable for ML/FT activities that involve the diversion of resources away from the economy and these diversions can have negative impacts on the financial sector and external stability of member states.

Current Solution — Because of the negative consequences of these forms of financial abuses on member economies and financial systems, the IMF has been very active for over ten years in the Anti-Money Laundering and Combating of Financing of Terrorism (AML/CFT) area.

They suggest AML/CFT controls as the solution. When AML/CFT controls are effectively implemented, they will mitigate the adverse effects of criminal economic activity and promote integrity and stability in financial markets that can spur the use of virtual currencies.

It is necessary for the local cryptocurrency exchanges to be AML/CFT compliant because it is an international standard being monitored by the International Monetary Fund (IMF) and the Financial Action Task (FATF). From the IMF:

“Effective anti-money laundering and combating the financing of terrorism regimes are essential to protect the integrity of markets and of the global financial framework as they help mitigate the factors that facilitate financial abuse.”

Min Zhu, Deputy Managing Director of the IMF


It is clear that for mass adoption of cryptocurrencies in the global community, we have to ensure that participants in the trade are acting in the best interest of each other and the community in general. This is by removing the anonymity of the parties and transactions by ensuring due diligence procedures are being adhered to which will assist in making the trade AML/CFT compliant.

This will bring the positive effects of cryptocurrencies uses, which enhances convenience, channels more public funds through taxation of new businesses arising, and a leap in technological advancement in the financial sector.

References :

  1. Medium — https://medium.com/@nejcnovaklaw/eu-introduces-crypto-anti-money-laundering-regulation-d6ab0ddedd3
  2. Virtual Currency Guide — https://www.iomfsa.im/media/1606/virtualcurrencyguidance.pdf
  3. IMF — Money Laundering https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/31/Fight-Against-Money-Laundering-the-Financing-of-Terrorism
  4. Bitcoin Regulation — https://www.trulioo.com/blog/bitcoin-regulation/
  5. Regulation for Cryptocurrency Exchanges — https://www.lexology.com/library/detail.aspx?g=edb72eb5-f0eb-45d5-bee4-0d1a03dc2a9c

Compiled by DLBRT : Amos Mburu & Akram Mathu

Source : https://medium.com/@akrammathu95/suggested-guide-on-cryptocurrency-mass-adoption-in-kenya-and-beyond-by-being-aml-cft-compliant-b1f38354107b

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