Blockchain and Cryptocurrencies: Money Laundering and Terrorist Financing Risks in Cyprus
Table of Contents
Introduction
FinTech has raised new possibilities of efficiency, transparency, and innovation. The laser focus on these opportunities has created new avenues for money laundering and terrorist financing that regulators and compliance professionals in Cyprus cannot just overlook. The increasing ease of pseudonymous transfers, cross-border transfers, and the somewhat decreasing authority of centralized exchanges has made crypto-assets an area of concern for the supervisory authorities. The National Financial Crime Center has enacted-laws, regulations, and directives against Crypto Asset Service Providers (CASPs) jointly with CySEC, in view of AML directives or suggestions on the forthcoming Markets in Crypto-Assets Regulation (MiCA).
This article focuses on the risks for money laundering and terrorist financing posed by blockchain and crypto-assets, on the regulatory responses shaping the state of compliance in Cyprus, and on the reasons why companies have to reinforce their AML frameworks today.
Regulatory Context: EU and Cyprus Approach
EU-Level Regulations
- AMLD5 and AMLD6 – The Fifth and Sixth anti-money laundering Directives extend AML obligations to virtual asset providers and create sharper liability rules governing financial crimes.
- MiCA – The Markets in Crypto-Assets Regulation (MiCA) will fully come into effect in 2024–2025, creating a pan-European framework for CASPs, which are then licensed, subject to prudential measures, and with adequate AML/CTF controls.
- FATF Guidance on Virtual Assets – The Financial Action Task Force has set global standards encouraging countries to institute a "travel rule" for crypto transactions to promote transparency in transfers.
Cyprus Application
CASPs in Cyprus are supervised by CySEC and are expected to comply with AML obligations under the Prevention and Suppression of Money Laundering and Terrorist Financing Law. The more relevant institutions at the Republic of Cyprus Level are:
- CySEC – Registers and supervises CASPs, which must observe the country's AML/CFT frameworks.
- Central Bank of Cyprus (CBC) – Issues AML directives affecting financial institutions.
- ICPAC (Institute of Certified Public Accountants of the Republic of Cyprus) – Provides AML guidance to accountants.
- Cyprus Bar Association (CBA) – Responsible for the AML obligations of lawyers in relation to client onboarding.
This truly shows how serious Cyprus is about aligning itself with EU directives while addressing in turn the risks as identified by MONEYVAL evaluations and FATF mutual assessments.
Understanding Blockchain Risks
While the very transparency of blockchain with its distributed ledgers creates some impediments in AML workings because of its decentralized and pseudonymous nature: Some of the risks of anonymity include criminals exploiting privacy coins (like Monero and Zcash)-
- Mixers and tumblers - essentially services that mix cryptocurrencies with others to hide their origins, thereby frustrating attempts to track transactions.
- Cross-border transfers - by design, instantaneous and cross-border, usually evading traditional banking controls.
- DeFi protocols - These decentralized finance platforms facilitate peer-to-peer transactions with limited oversight.
- NFTs and tokenization- Digital assets are increasingly used to transfer value and obfuscate.
In the Cyprus landscape, where investment firms, CASPs, and fintech companies are rapidly embracing digital assets services, these risks have pronounced exquisite importance for compliance training and forensic blockchain monitoring tools.
Terrorist Financing Concerns in Digital Assets
Historically, terrorists have been accused of tapping into the traditional financial systems. With the advent of cryptocurrencies, they are instead given a new mechanism in which they might raise, move, or store lucrative funds. Key risk areas include:
- Small, fragmented transactions-fundraisers breaking down the amounts to capable levels below the usual thresholds.
- Crowdfunding through crypto wallets-donations solicited via Bitcoin or stablecoins.
- Exploitability of weak jurisdictions-These operations are most likely to be dictated on territories with immature AML controls.
- Utilization of privacy technologies-There are some technologies which include encryption and anonymization and they aid in hiding the identity of parties involved and the trails of the transactions.
The UNSC and the EU Sanctions Regime have stressed that AML/CTF oversight of digital assets needs to be improved in order to address such threats. Sanctions screening and wallet monitoring should be the potency of Cyprus firms.
Industry Challenges for Cyprus Firms
Despite the regulatory framework, Thus, obliged entities face main challenges within Cyprus:
- A Regulator Overlap: Firms need to be sent through several frameworks: AMLD5/6, MiCA, CySEC circulars, FATF guidance, and MONEYVAL recommendations.
- Gaps in Technology: Most compliance teams do not have blockchain forensics tools to carry out transaction tracing.
- Without Enough Resources: Compliance officers carry the burden of training and do not have adequate expertise to evaluate emerging risks, especially within CASPs and technology startups.
The Center 8 AML and crypto compliance training sets out to close these gaps and provide practitioners with the regulatory knowledge as well as practical skills in monitoring.
Practical Relevance: Compliance Expectations
In Cyprus, financial firms cannot treat blockchain-related AML obligations casually. The supervisory authorities have already issued warnings and even fines for breach. Here's what firms are required to do:
1. Know Your Customer and Enhanced Due Diligence procedures should be established with further due diligence procedures in the case of crypto clients, as well as high-risk clients and transactions.
2. Transaction monitoring: Utilize blockchain analytics platforms to notify suspicious activities.
3. Implement FATF Travel Rule Sharing: Notify counterparties of sender/receiver information in respect of transfers above the stated thresholds.
4. Sanctions screening: Ensure that wallets and crypto exchanges are screened against EU, OFAC, and UN sanctions lists.
5. Board-level accountability: Compliance officers together with senior management should be held accountable for the implementation and ongoing maintenance of AML frameworks
Sector Relevance in Cyprus:
CASPs are those that would have to obtain a CySEC authorization and demonstrate compliance with MiCA and AML laws. CIFs are beginning to integrate crypto services and thus have to comply with both. Accountants and lawyers have to conduct AML checks when advising on crypto transactions or structures.
In the process of getting Cyprus's financial and fintech ecosystem transformed, Blockchain and cryptocurrencies go all the way. For serious money-laundering and terrorist-financing risks, they cannot be ever-underestimated.
For the compliance officers, AMLs, and risk managers in Cyprus, they need to always stay ahead of all these expectations through their understanding of regulatory expectations while they apply concepts of blockchain forensics and establish sound monitoring systems.
Centre 8 offers specialized CPD-certified training in Blockchain and Crypto AML Compliance designed for CASPs, CIFs, accountants, and legal people and professional training. This way, by investing in training, firms remain on the radar of CySEC and EU and do not just protect their operational activities concerning regulatory penalties but also, by extension, their reputation as well.
References
- FATF Virtual Asset Guidance – fatf-gafi.org
- MiCA Regulation – eur-lex.europa.eu
- AMLD6 Directive – eur-lex.europa.eu
- CySEC Circulars – cysec.gov.cy
- Central Bank of Cyprus AML – centralbank.cy
- MONEYVAL Evaluations – coe.int/moneyval
- United Nations Sanctions – un.org/securitycouncil/sanctions