What are AML obligations in Crypto?

Regulators use the term Virtual Asset Service Providers³ (VASPs) to categorize businesses that handle cryptocurrencies. Under modern AML frameworks, VASPs are treated as obliged entities, essentially putting them on par with banks and other financial institutions for AML/CFT compliance. In the European Union, the Fifth Anti-Money Laundering Directive⁴ (AMLD5), implemented in 2020, explicitly brought crypto service providers into scope. EU law now requires verifying their customers’ identities, monitor transactions, report suspicious activities, and register with the competent authorities. Similarly, in the United Kingdom, as of January 2020 the Financial Conduct Authority⁵ (FCA) became the AML supervisor for cryptoasset businesses, requiring any firm carrying out crypto exchange or custody services by way of business to undergo FCA registration and meet AML requirements.

Once registered or licensed, cryptocurrency providers must implement a range of AML measures much like any traditional financial institution. These typically include performing thorough Customer Due Diligence/KYC checks on all customers, maintaining records of identities and transactions, and screening customers against sanctions or politically exposed persons (PEP) lists. Firms must conduct ongoing monitoring of transactions and users’ activity to detect anything suspicious or abnormal.

Businesses are legally obligated to file a Suspicious Activity Report (SAR) with the relevant authorities if they suspect money laundering in a transaction or account activity. Additionally, regulators require crypto businesses to have internal AML policies and staff training, as well as an appointed Money Laundering Reporting Officer (MLRO) to oversee compliance. Moreover, as international standards evolve, crypto firms are now expected to comply with rules like the FATF travel rule⁶, which in practice means collecting and sharing sender/recipient information for cryptocurrency transfers above certain thresholds. In sum, crypto asset providers are being held to the same AML/CFT standards as banks, a significant change from the early days of cryptocurrency, and one that aims to close regulatory gaps that criminals might exploit.

AML compliance in cryptocurrency is not just a legal obligation but also vital for maintaining the integrity of the financial system. Because cryptocurrencies can be abused for layering and moving illicit funds, authorities worldwide view compliance by crypto platforms as crucial to crime prevention. Non-compliant or unregulated crypto exchanges can become safe havens for criminals, acting as conduits for illicit funds to enter the legitimate economy. Such platforms risk severe regulatory action and reputational damage. For legitimate crypto businesses, investing in compliance ultimately protects the business itself, preventing inadvertent facilitation of crimes, avoiding hefty fines, and preserving customer trust. Given the fintech nature of many crypto companies, a strong compliance culture also helps secure banking partnerships and investment, as partners and regulators gain confidence that the firm is managing risk responsibly.

Both the EU and UK authorities have demonstrated that they will strictly enforce AML rules in the cryptocurrency space. Regulators can levy substantial fines or even shut down companies that fail to meet their obligations. For example, the UK’s FCA has not hesitated to reject crypto firms⁷ that cannot demonstrate sufficient AML systems (as noted, a large majority of applicants did not initially pass the bar in the UK’s registration process). Law enforcement agencies are also increasingly adept at tracing blockchain transactions and have executed major seizures where crypto was used to launder funds or perpetrate fraud. This environment means crypto businesses must be proactive. Compliance is not optional but an essential part of operating in the industry. By establishing comprehensive AML programs companies can both satisfy regulators and help thwart illicit use of digital assets.

To effectively detect and prevent money laundering, crypto companies and compliance professionals should be vigilant for patterns of activity that may indicate illicit behavior. Typical red flag⁸ indicators in cryptocurrency transactions include:

• Unusual transaction patterns: Customers who engage in atypical transaction behavior may be attempting to avoid detection through structuring or layering. Examples of atypical behavior include making multiple high-value transfers in rapid succession or repeatedly sending amounts just below reporting thresholds.
• Unreliable client identification information: Inconsistencies or frequent changes in a customer’s profile can be a warning sign. Examples include users providing unverifiable or fake identification documents, or repeatedly altering personal details such as email, IP addresses, or financial information, which may suggest identity fraud being used.
• Anonymity-enhancing techniques: The use of services that obscure crypto fund sources is a major red flag. This includes customers using more than one type of virtual asset, mixing/tumbling services, privacy coins, or decentralized peer-to-peer exchanges, or exchanges that do not perform KYC.
• High-risk source of funds: Suspicious virtual asset activities typically involve transactions connected to illicit sources such as fraud, ransomware, or darknet markets, as well as those tied to online gambling or unregulated platforms. They often feature large or unusual fund movements with unclear or unverifiable origins, the use of credit or debit cards to move or withdraw funds (crypto-to-plastic), or the involvement of anonymous entities like shell companies and mixing services.
• Use of high-risk or unregulated jurisdictions: Transactions that involve countries with weak AML controls or that are on FATF’s grey/black lists raise concern. Funds moving to or from exchanges in jurisdictions with inadequate regulations increase the likelihood of evasion attempts.

Crypto businesses should have monitoring systems tuned to catch these warning signs and should investigate or report such incidents as required. Many compliance teams leverage blockchain analytics tools that can trace transactions across addresses and flag connections to known suspicious entities. By recognizing common red flags early, firms can take steps to block or freeze questionable transactions and report them, thereby cutting off avenues that money launderers might use. Regulators like FATF and national bodies regularly update guidance on red flag indicators, so compliance staff should stay informed of the latest typologies of crypto-enabled crime.