Cryptocurrency and Financial Crime on the Rise in Bahrain
In recent years, there has been a growing concern for Bahrain’s financial sector as cryptocurrency and financial crime become increasingly intertwined.
The Rise of Digital Assets
According to a recent publication by the Treasury Department, the aggregate market capitalization of all cryptocurrencies has hovered just below $1 trillion since June 2022. This is despite a sharp decline from its peak of approximately $2.9 trillion in November 2021.
The rise of digital assets is not only driven by consumer demand but also poses significant risks for traditional financial institutions. A national consumer research performed by Raddon Research Insights showed that 28 percent of consumers are very or extremely interested in having digital asset services as part of their banking relationship, putting pressure on banks to either adapt to the changing landscape or risk losing market share.
Regulatory Uncertainty and Traditional Financial Institutions
Regulatory uncertainty aside, traditional financial institutions must prioritize identifying and understanding the key threats, vulnerabilities, and illicit financing risks related to virtual assets. This includes assessing direct and indirect risk exposure through partnerships with Virtual Asset Service Providers (VASPs) and payment service providers.
The Financial Action Task Force’s Guidance on Virtual Assets
The Financial Action Task Force (FATF)’s updated guidance on virtual assets provides longstanding compliance and due diligence practices outlining Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) measures that can be applied when partnering with VASPs. Traditional financial institutions must conduct thorough counterparty due diligence prior to partnering with VASPs, as well as ongoing Customer Due Diligence (CDD) and monitoring on a periodic basis.
Factors to Assess When Partnering with VASPs
When assessing the risks associated with partnering with VASPs, traditional financial institutions must consider the following factors:
- Size and Structure: specific registration and licenses held by the VASP, asset size, revenues, staff levels, and customer types
- Ownership: identify all beneficial owners and the percentage of ownership by foreign individuals and entities located in high-risk jurisdictions
- Products and Services: obtain information on and understand the purpose and intended nature of the business relationship, and determine the type of digital assets offered
- Geography: Does the VASP have a presence in high-risk countries? Where are their customers mainly located (domestic or foreign), and what percentage of PEPs and other high-risk customers exist?
- Channels: What types of client interaction channels available to customers of the VASP?
By performing the appropriate levels of customer due diligence regarding strategic alliances with VASPs, 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.