Expanding To Another Country? Here Are The Risks

March 30, 2020
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Yes, expanding the geographic scope of your cryptocurrency money service business brings new risks. Here’s what you need to know.

Let’s say things are going well with your cryptocurrency business. Maybe you’re a bitcoin ATM owner and you’ve come out of your startup shell, or you’re a small exchange looking to test new markets.

Cryptocurrency money services businesses (MSBs)/money transmitters of all shapes and sizes will think about increasing their footprint at some point. And given the decentralized nature of cryptocurrency itself, any business model can potentially offer new services and products outside of the United States, whether that means setting up a new bitcoin ATM across the border in Toronto, or offering a prepaid access service online via an established exchange.

And even if you decide you’re only going to focus on domestic expansion for the indefinite future, there may be areas you’re looking at that put you into contact with international customers.

Here’s the point.

Any form of expansion of your cryptocurrency business means exposure to new risks

This means that any time your cryptocurrency business grows into a new market, offers a new service, or potentially serves a new kind of customer, it is going to have ripple effects for your compliance requirements.

You need to revisit and update your BSA/AML policies and procedures designed to mitigate those risks so that you can remain in compliance. In addition to U.S. regulations for dealing with foreign customers, you’ll also need to think about the bitcoin regulations in the countries you wish to expand to, as well.

Everything — your Know Your Customer/Customer Due Diligence, Enhanced Due Diligence, red flags, and policies for complying with the Funds Travel Ruleeverything will need to be updated.

So, where do you start?

That’s where we come in.

In this post, we’ll cover some of those risks in broad strokes to help you understand them better. We’ll also tell you which first steps your business should take toward building a more internationally-focused bitcoin compliance regime.

Why Is Expanding Crypto Business Internationally So Risky?

As crypto continues to grow in acceptance and popularity, cryptocurrency financial institutions increasingly seek to take advantage of its decentralized nature and serve international customers.

But many business owners are rightly concerned about the risks of doing business internationally and what kinds of policies and procedures they need to put in place for robust compliance.

Cryptocurrency Inherent Risks

Perhaps the foundational reason that cryptocurrencies are so risky from a business perspective is that the technology itself carries unprecedented inherent risks.

To wit, many of the key features users enjoy in crypto create some of its biggest risks. The rapid movement of large sums of funds makes transaction monitoring difficult. The pseudo-anonymity it offers means that even with a dedicated blockchain, there’s effectively no paper trail.

Lastly, the fact that transactions can be executed quickly between any two individuals on the globe regardless of an exchange rate or economic sanctions or other limits on the traditional finance sector makes it very difficult to detect financial crimes.

Make no mistake. These are key features that make cryptocurrency exciting and popular. It’s just also true that these features create risk, and there’s no getting around it.

Risks Related To Bitcoin Regulation

Now that we’ve covered the inherent technology risks, let’s turn our scope to the regulatory landscape.

Each country has its own regulations for the financial sector, but policy concerning cryptocurrency transactions and crypto AML are still evolving (and, in many places, still nonexistent).

Countries where crypto regulations are slim or absent can be attractive to entrepreneurs in the space because of the potential for growth.

However, the tradeoff is that in an entirely unregulated market, there’s more room for corruption and fewer (if any) modes of protection against financial crime.

How to expand and balance regulatory expectations around the world with a currency model that has no exchange rate and is completely decentralized and community-regulated is one of the largest challenges facing cryptocurrency in the coming years.

Another hurdle: The U.S. also prohibits domestic businesses from transacting in certain countries and with certain individuals. Countries that are subject to OFAC sanctions or areas defined by the U.S. Secretary of the Treasury or Financial Action Task Force (FATF) as at risk for money laundering and terrorism financing are automatically off the table for crypto businesses.

Not only are they off the table, crypto businesses are expected to make reasonable efforts to prevent individuals in those countries and areas from using their services. It’s not just a “don’t do it,” it’s a “constantly and proactively protect yourself from doing it” kind of rule.

Risks Of Doing Business Using Other Crypto Platforms

It’s entirely possible for a crypto business of any kind to offer a new kind of service online leveraging a third-party, peer-to-peer trading platform to facilitate exchanges.

It might be tempting to trust these third-party platforms with the AML compliance stuff, but simply put, you can’t. Even if you could, you shouldn’t.

Even if you know for a fact that the third-party platform you are using enforces KYC and AML policies, procedures, and processes, you don’t know how rigorous those policies, procedures, and processes are.

Additionally, remote online, web, and mobile cryptocurrency exchange platforms are accessible for virtually any party with an internet connection across the globe, including high-risk jurisdictions and countries subject to sanctions.

If you rest on your laurels and don’t enforce your own regulatory compliance, you could be missing key red flags and activity that put you in business with financial criminals, or worse, terrorists in sanctioned countries.

Simply put, you are responsible for your institution’s compliance requirements. Period.

Regulator Attitudes Toward Crypto Risk

Finally, generally speaking, regulators deem any new or emerging products, services, and/or transactional technologies, such as the exchange of cryptocurrency, as posing a heightened level of inherent risk.

Remember that reducing these risks isn’t possible, nor should that be the goal.

Good regulatory compliance is about risk mitigation.

So, if you understand the risks in broad strokes and are ready to expand your business, here’s how to get started.

What To Do First To Prepare For Successful Growth

The first step cryptocurrency businesses must take whenever they expand the scope of their business (whether that be offering a new service or opening a new location in a new jurisdiction) is revisiting the risk assessment.

A risk assessment is a critical first step to launching a crypto startup, and must be updated before any changes to the business model or geographic locations served are changed.

Even a seemingly small change can have major ripple effects. Opening a new kiosk one city over might expose you to an area of high financial crime or drug trafficking as determined by the federal government. This means that you’ll need to update existing policies or perhaps even draft new policies to mitigate your heightened risk profile.

Offering a new kind of service will also change your risk profile, because the nature of that service will have its own vulnerabilities and ingresses that financial criminals exploit, for which you must be on guard.

Whether you are launching a new bitcoin ATM/kiosk in a new city domestically or over a border; you are offering a new service online using a third-party platform; or you’re interested in launching an exchange that expands your footprint internationally, you need to start with a risk assessment.

Once that is complete and you have an accurate understanding of your risk profile, you can craft policies that help you mitigate your risk.

But the risk assessment is always step one.

Key Takeaways For Crypto Businesses

The summarize, if you’re making a change to your business, any change whatsoever, you need to revisit and update your risk assessment.

If you need help doing so, and/or crafting robust policies to enhance your AML bitcoin compliance ahead of a planned expansion, we can help.

Contact us for a free consultation here.

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