Ron Mendelson is the Director of Costa-Rica based International Business & Corporate Services consultancy firm, Fast Offshore. With over 24 years of real-world experience in iGaming Licensing and Payments, Regulatory Compliance, Tax-Efficient Corporate Structuring, Incubator and other Hedge Fund Licenses, Blockchain and Cryptocurrency related services, he advises a number of international clients on their business needs in the Americas, Europe, and beyond.
Over the last few years, cryptocurrency has continued its transition into mainstream adoption. People can now pay for weekly shopping, buy clothes, and even real estate with various cryptocurrencies such as bitcoin, ether, and litecoin.
But cryptocurrency is also increasingly being used as a form of payment on online gambling and casino sites. Offering increased security, convenience, and transparency, a growing number of operators are integrating crypto payment processing into their platforms. But how does cryptocurrency, which prides itself on anonymity and privacy, align with the anti-money laundering legislation that operators are bound to follow?
The crypto issue
Cryptocurrency has been a topic of much discussion in recent times. Large values of virtual currency can be acquired without having to go through checks and balances. This paves the way for nefarious users to utilize it as a tool in money laundering and terrorist financing activities, much to the chagrin of regulators.
Those running gambling sites are required by law and the terms of their gaming license, to conduct due diligence and to ensure compliance with AML/CFT and anti-financial crime provisions. They must ensure their platforms are not used for facilitating the laundering of illicit funds.
But this doesn’t mean operators can get away with not conducting checks on customers using their platforms and paying in cryptocurrency. These payments, regardless of size, are exactly that: payments. Therefore, KYC applies to them with no exception.
The KYC rules
Each jurisdiction has its own KYC process, which must be followed and apply to transactions using any virtual currency. At the client onboarding stage, steps must be taken to ascertain the identity of the player, as well as where they are located. Operators must execute this process, regardless of the payment method users chose. Even if someone is paying via an anonymous method such as crypto, their identity must be verified beforehand.
This verification still doesn’t solve the problem of understanding where the money came from. Of course, those that purchased bitcoin years ago will have seen the value of it increase significantly, but we still cannot understand which coins are legitimate and which are being used to launder money.
The KYC solution
What operators must do is to try and prevent illicit activity is to monitor the way balances are maintained and used. For example, when a player has reached or accumulated $2,000 in deposits, the operator must carry out KYC and DD processes. It should also be carried out on every single withdrawal, regardless of value.
The number and frequency of deposits and withdrawals must also be monitored to find any suspicious patterns. Large deposits, regular deposits, and multiple small-to-medium deposits in a short period should also be flagged. When suspicious activity is identified, a suspicious activity report must be created, and the jurisdictions financial intelligence unit should be informed.
Many operators aren’t aware that regular KYC processes apply to crypto transactions. Just because the withdrawal and deposit aren’t in fiat currency, doesn’t mean KYC is exempt. Failure to meet compliance requirements can result in significant fines, potential legal action, and extreme reputational damage. It’s also likely that your license gets revoked, that you, as an operator, find it incredibly difficult to get licensed, or work in the industry at all, elsewhere.
Some operators may labor under the misconception that the rules don’t apply to them, or they may have simply overlooked the requirement. And, although, they may not have been caught yet, the chances are higher as regulators are looking to crack down on both crypto and financial crime.
Additional recommendations and best practices due to the increased use of crypto in online gambling include:
The way forward: Being compliant
So, the answer is, yes, cryptocurrency payments and online gambling are compatible, but this compatibility relies on the will of operators. We know that crypto is a huge driver behind the industry’s projected growth, but this will only be a smooth journey if operators are compliant.
The risks of non-compliance are severe for the company, and each violation damages the credibility of the entire industry. It can also lead to an increase in underage gaming and allow access to restricted locations. Additionally, it makes banks and payment processors more cautious, third-party providers concerned and is likely to result in tougher requirements from license issuers.
Operators have a responsibility to be compliant and to keep the integrity of the industry intact. Make sure you are compliant, stay on top of evolving threats and obligations, and do your best to maintain ethical and legal standards in your operations.
At Fast Offshore, we have worked in the gambling industry for over 23 years, and we are familiar with compliance requirements. If you have any concerns or you haven’t considered cryptocurrency in your policies, Fast Offshore can assist you create KYC and DD policies that align with this ever-changing sector.