Virtual Token – At a Glance
Virtual tokens are digital tokens transferred, managed and stored using distributed ledger technology (DLT). These exist in digital format and are managed electronically on a shared, decentralised database that ensures security and transparency.
Virtual tokens vary based on their usage. Payment tokens, such as Bitcoin, are used as a medium of exchange for digital money transfers and are treated as currencies or commodities. Utility tokens provide access to specific services or features within a given ecosystem, and are often less regulated, such as BAT, LINK, and MANA. While asset-backed or security tokens represent ownership and are highly regulated, such as gold-backed tokens.
Digital tokens can be transferred easily across borders and are open to anonymity, which allows criminals to misuse them for money laundering or financing terrorism.
Minimal KYC verification for virtual tokens enables non-disclosure of real identity, cross-border transfers, and instant token swaps, allowing criminals to avoid regulatory oversight. Further, limited regulations make DPTs vulnerable as criminals exploit digital payment tokens to convert funds into multiple token formats, hampering detection and fragmenting transaction histories.
Key red flags in virtual token activities include:
FATF issued global standards to prevent the misuse of virtual assets for ML/FT activities. VASPs must perform customer due diligence (CDD), sanctions screening, suspicious transaction reporting(STR), and record keeping, ensuring transparency and processing only legitimate funds.
Further, FATF mandates countries to understand ML/FT risks in the VASP sector, ensure licensing or registration and supervise the sector as it does for financial institutions. VASPs must comply with the Travel Rule, which requires them to collect originator and beneficiary information for virtual asset transfers.
VASPs should take a risk-based approach to understand significant risks to their business. With this, FATF also requires them to carry out source of funds checks, identify UBOs for token issuers, implement controls for high-risk jurisdictions, and use blockchain analytics.
RapidAML helps compliance teams with automated solutions for KYC/KYB checks and name screening of wallet owners and token issuers. It also automatically checks digital currency addresses to identify links to illegal activity and performs risk scoring to calculate the risks and potential impact from virtual asset exposures.
Further, its transaction monitoring software tracks token-based payments. RapidAML ensures complete workflow automation and enhances STR/SAR reporting, thereby meeting regulatory requirements.
Cryptocurrency is a type of virtual token that acts as money and can be used to buy, sell or store value. This has real monetary value, while a virtual token may or may not possess real monetary value.
No, a virtual token is only considered a virtual asset when it can store value, be cashed out or traded. For such virtual tokens, AML rules are applicable.
Red flags for virtual tokens misuse include the use of anonymity tools, rapid funds movement, transactions to high-risk jurisdictions, inconsistent customer profiles with transaction sizes, etc.
Entities comprising virtual asset service providers (VASPs) and financial institutions (FIs) that deal with virtual assets must comply with AML requirements for virtual tokens.
Institutions use platforms such as RapidAML to perform KYC/CDD processes that involve document verification, screening, transaction monitoring, and blockchain analysis.
