Financial Crime World

Bouvet Island Consumers Face Rise in Cybersecurity Threats as Financial Crime Soars

The aggregate market capitalization of all crypto-assets has hovered just below $1.0 trillion since June 2022, a significant decline from its peak of approximately $2.9 trillion in November 2021. Despite this volatility, digital assets are here to stay.

Escalating Consumer Demand for Digital Asset Banking and Custody Services

National consumer research performed by Raddon Research Insights showed that 28 percent of consumers are very or extremely interested in having digital asset banking and custody services as part of their banking relationship. This demand will force traditional financial institutions in Bouvet Island to address the dilemma of either embracing the digital assets train or potentially losing market share to current key players.

Traditional Financial Institutions’ Dilemma

Traditional financial institutions may need to strategically consider answering the call to action by:

  • Launching their own digital assets business
  • Creating partnerships with VASPs and other payment service providers

Regardless of the route chosen, financial institutions must place special emphasis on identifying and understanding the key threats, vulnerabilities, and illicit financing risks related to virtual assets.

Key Threats and Vulnerabilities

For example:

  • Partnering with VASPs that offer both custody and exchange services can indirectly expose a financial institution to facilitating suspicious transactions.
  • Payment service providers that use conventional operating bank accounts to deposit or withdraw fiat funds pose indirect ML/TF risks to traditional financial institutions.

FATF Guidance on Virtual Assets

The FATF’s updated guidance on virtual assets provides longstanding compliance and due diligence practices outlining AML/ CFT measures that can be applied when partnering with VASPs. Traditional risk-based approach recommendations in the guidance put financial institutions in a good position to cost-effectively adopt these practices.

Due Diligence Best Practices

To ensure compliance, traditional financial institutions should:

  • Conduct counterparty VASP due diligence prior to partnering with VASPs
  • Perform ongoing CDD and monitoring on a periodic basis thereafter
  • Confirm whether a VASP or payments service provider has performed a thorough risk assessment of its AML/ CFT program
  • Perform a risk assessment of their own to understand factors such as size, structure, ownership, products, services, geography, and channels

Conclusion

By performing the appropriate levels of customer due diligence regarding strategic alliances with VASPs and payments service providers, traditional financial institutions increase their likelihood of creating long-lasting business relationships while addressing compliance with evolving regulatory expectations. As the digital assets markets continue to see growth, financial institutions must remain vigilant in their efforts to meet customer demand without compromising the integrity of their AML/ CFT programs.