# De-Fi-ing the regulators
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-04-27
Category: BUSINESS
Category URL: https://financedigest.com/category/business
Meta Title: Crypto Exchanges in San Francisco Lead in SARs Filings - AML
Meta Description: Discover the latest insights on criminal activities in the cryptocurrency and DeFi space. Stay informed on emerging trends and regulations to protect your
URL: https://financedigest.com/de-fi-ing-the-regulatorshtml

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_By_ **_Edward Moss,_** _Head of Market Research, and_ **_Deleep Nair,_** _Solution Engineering, Symphony AyasdiAI_

Financial institutions last year filed more than 3 million suspicious activity reports (SARs) in 2021 – and money services businesses (the category that includes cryptocurrency exchanges) located in San Francisco (which include Coinbase, Binance and others) filed more SARS than all [securities firms and casinos combined](https://www.financedigest.com/emvco-and-pci-ssc-combine-expertise-on-3-d-secure-2-0.html "EMVCo and PCI SSC Combine Expertise on 3-D Secure 2.0"). That’s according to [Dynamic Securities Analytic](https://securitiesanalytics.com/2021-cryptocurrency-exchanges-suspicious-activity-reports/) s, a Florida-based anti-money laundering consultancy. Because there are no cryptocurrency categories on the SARs forms, it can’t be confirmed what percentage of San Francisco’s filing were by [crypto exchanges](https://www.financedigest.com/verasity-vra-lists-on-tier-1-cryptocurrency-exchange-crypto-com.html "Verasity $VRA Lists on Tier-1 Cryptocurrency Exchange Crypto.com") but increased activity in the space was the most likely explanation, according to DSA. FinCEN issued guidance in 2019 stressing the need for dealers in “convertible virtual currencies” to register as money services businesses and comply with [anti-money laundering](https://www.financedigest.com/anti-money-laundering-time-to-take-a-new-approach.html "ANTI-MONEY LAUNDERING: TIME TO TAKE A NEW APPROACH?") requirements.

As previously mentioned in [our previous article](https://www.globalbankingandfinance.com/overcoming-the-money-laundering-risks-posed-by-decentralized-finance/), DeFi remains largely unregulated and observes minimal KYC (Know Your Customer) or AML checks. Traditional centralized finance has a clear regulatory framework and centralized virtual asset service providers (VASPs) are tied to the standards set for traditional [financial institutions](https://www.financedigest.com/a-cloud-migration-guide-for-financial-institutions.html "A Cloud Migration Guide for Financial Institutions"). That’s because they’ve been designated as DSPs ( [direct stock](https://www.financedigest.com/factors-that-affect-the-direction-of-the-stock-market.html "Factors That Affect the Direction of the Stock Market") purchases) so they have started to become regulated by the SEC and the Federal Election Committee (FEC) because they’re money providers. The rest is the wild west, creating [huge opportunities for financial growth](https://www.financedigest.com/quad-flat-no-lead-packaging-market-huge-growth-opportunity-between-2017-2027.html "Quad-Flat-No-Lead Packaging Market Huge Growth Opportunity between 2017-2027") but unfortunately, corruption, exploitation and easy crime as well.

Monero is a popular cryptocurrency among [ransomware attackers](https://www.financedigest.com/preventing-an-operationally-crippling-ransomware-attack-do-you-know-where-your-risk-exposure-lies.html "PREVENTING AN OPERATIONALLY CRIPPLING RANSOMWARE ATTACK – DO YOU KNOW WHERE YOUR RISK EXPOSURE LIES?"), as noted previously.

It’s estimated that about 10-20% of ransoms are paid in Monero – and that’s [expected to rise](https://www.financedigest.com/instant-view-us-may-payrolls-rise-up-than-expected.html "Instant View: US May payrolls rise up than expected"). At the same time, an increasing number of marketplaces that are on the dark web are [exclusively accepting crypto](https://www.financedigest.com/exclusive-tp-icap-to-launch-crypto-trading-platform-with-fidelity-standard-chartered.html "Exclusive: TP ICAP to launch crypto trading platform with Fidelity, Standard Chartered") for everything from guns to drugs.

Criminals are also getting smarter about DeFi regulation efforts. Within the dark web, there are places that give tips and tricks on how to further hide your coins. [Criminals are checking](https://www.financedigest.com/criminals-terrorists-back-foot-thanks-innovative-identity-check-tech-e-money-prepaid-fintech-financial-services.html "Criminals and terrorists on the back foot thanks to innovative identity check tech for e-money, prepaid and fintech financial services     ") these tips to see whether their actions will catch regulators’ eyes. Anti-analysis allows criminals to check their own Bitcoin wallets and see whether they have any sort of association with criminal activity.

**A Look into the Modern Criminal**

Recognizing the inherent vulnerabilities of separate fraud and AML (FRAML) units, many firms have started to explore how they can [share data](https://www.financedigest.com/european-shares-edge-higher-on-healthcare-lift-weak-china-data-stokes-worries.html "European shares edge higher on healthcare lift, weak China data stokes worries"), intelligence, processes, and people, and foster a holistic approach to financial crime prevention. [Moving to a converged state also enables firms to introduce greater](https://www.financedigest.com/move-over-pcl-greater-londons-suburbs-take-the-lead-this-summer.html "Move over PCL, Greater London’s suburbs take the lead this summer") workforce flexibility, increase staff enthusiasm, and improve operational efficiencies.

Historically, FRAML functions often operated as two distinct organizational units at FIs, with minimal [data or resource sharing](https://www.financedigest.com/global-shares-slide-dollar-gains-as-rates-rise-on-strong-data.html "Global shares slide, dollar gains as rates rise on strong data"), but organized criminal rings do not operate in silos. Thriving on fragmented [financial crime](https://www.financedigest.com/australia-financial-crimes-regulator-opens-investigation-into-britains-entain.html "Australia financial crimes regulator opens investigation into Britain’s Entain") controls at FIs, criminals benefit when data and process gaps prevent their true identity and criminal intent from being discovered.

[Bad actors are always looking for new ways](https://www.financedigest.com/five-ways-bad-bots-are-trying-to-crack-your-virtual-vaults-by-erez-hasson-strategist-application-security-at-imperva.html "Five Ways Bad Bots Are Trying To Crack Your Virtual Vaults") to hide their actions. NFTs and DeFi are newly popular venues for criminals to launder their dirty money, which [means the finance industry](https://www.financedigest.com/senior-managers-regime-what-does-it-mean-for-the-industry.html "SENIOR MANAGERS REGIME – WHAT DOES IT MEAN FOR THE INDUSTRY?") will need to keep current with the latest criminal trends. They’ll also [need to work closely with regulators](https://www.financedigest.com/regulators-need-to-strike-the-balance-between-protection-and-strangulation.html "REGULATORS NEED TO STRIKE THE BALANCE BETWEEN PROTECTION AND STRANGULATION") to make money laundering as difficult and risky as possible.

Financial institutions are finding it difficult to keep up with the changing times and are experiencing pain points such as too many false positives, difficulties [seeing a holistic view of risk](https://www.financedigest.com/heineken-sees-europe-resilience-offseting-asia-slowdown-risk.html "Heineken sees Europe resilience offseting Asia slowdown risk") on an entity basis and linkage between related suspicious activity. Financial institutions are in need to improve the efficacy of their cryptocurrency [fraud and AML products’ ability to discover and define the true risk](https://www.financedigest.com/how-can-you-reduce-the-risk-of-fraud-in-b2b-payments.html "How can you reduce the risk of fraud in B2B payments?"). A holistic view [increases the precision in which you score and triage alerts which will segue into an improvement in efficiency](https://www.financedigest.com/increase-your-business-efficiency-with-integrated-labels.html "Increase your Business’ Efficiency with Integrated Labels").

[**What’s Next**](https://www.financedigest.com/fintech-trends-in-2022-whats-next-for-crypto-and-esg.html "Fintech trends in 2022: what’s next for crypto and ESG ")

To address the [identified risks](https://www.financedigest.com/legal-entity-identifiers-leis-how-can-banks-minimise-risks.html "Legal Entity Identifiers (LEIs): how can banks minimise risks?"), the U.S. Department of the Treasury recommends consideration of several non-regulatory and regulatory [options:](https://www.financedigest.com/cryptoverse-is-bitcoin-out-of-the-woods-consider-the-options.html "Cryptoverse: Is bitcoin out of the woods? Consider the options")

- Encouraging the creation and enhancement of [private sector](https://www.financedigest.com/dollar-slides-on-contraction-in-private-sector-activity.html "Dollar slides on contraction in private sector activity") information-sharing programs to foster transparency among art market participants.
- Updating guidance and training for law enforcement, customs enforcement, and asset [recovery agencies](https://www.financedigest.com/the-surprising-actual-goal-of-successful-debt-recovery-agencies.html "The (Surprising) Actual Goal of Successful Debt Recovery Agencies").
- Using FinCEN recordkeeping authorities to support information collection and enhanced [due diligence](https://www.financedigest.com/why-due-diligence-is-so-important-for-direct-debit-customers.html "Why due diligence is so important for Direct Debit customers")
- Applying AML/CFT requirements (such as suspicious activity reporting and know-your- customer procedures) to certain art [market participants](https://www.financedigest.com/powder-dispenser-market-market-2019-2029-where-should-participant-focus-to-gain-maximum-roi.html "Powder Dispenser Market Market (2019 – 2029) | Where Should Participant Focus To Gain Maximum ROI ") and/or obligating them to create and maintain AML/CFT

#### However, regardless of whether firms directly transact with VASPs, they must appreciate that most, if not all, institutions have some level of indirect risk through their customers. For many firms, this represents an area of unknown risk. This raises the question as to whether most firms see a viable reason to enter the crypto space now. In the short term, many firms may be able to avoid significant risk and regulatory scrutiny. However, a few will not, especially as cryptocurrency use and its exploitation by networks of organized crime and other bad actors continues to grow and regulatory attention amplifies.

#### These assets offer such incredible opportunities for a new digital economy that their power should not be taken lightly or dismissed as new generation financial toys. They have the potential to completely disintermediate the traditional banking system. The growth to $3 trillion in market value in less than a decade indicates the potential is huge. Volatility of these prices should not be seen as weakness. It’s the birthing signs of a new challenging economy. And with such new power comes new risks and opportunities for these technologies to be exploited and to encourage dangerous activity. We, as a system, need to collectively and diligently educate, understand and manage this growth before it gets away from us.


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