Malta Financial Services Authority Implements Crypto Intelligence Solution

Image: Money laundering euros,, via Flickr

The Malta Financial Services Authority (MFSA), the single regulator of financial services in Malta, has partnered with CipherTrace to implement a cryptocurrency intelligence solution to regulate virtual asset businesses licensed on the island.

The technology tool, called Compliance Monitoring, rates the risks of cryptocurrency businesses to protect consumers, investors and business partners, and will enable the MFSA to better identify fraud and prevent money laundering and funding of terrorism.

Malta has been pursuing the title of “Blockchain Island” as it aims to become a hotspot for blockchain and cryptocurrency. In June, the Maltese Parliament approved three bills on cryptocurrency and blockchain designed to attract foreign entrepreneurs and startups in the space. Some already made the leap including Binance, OKEx and BitBay which chose to either relocate or expand to the crypto-friendly island.

But the growth of blockchain in Malta has created “significant risks” of money laundering and terrorism finance in the island’s economy, an International Monetary Fund mission said in January. The IMF mission called on the Maltese authorities to ensure that virtual asset service providers fulfilled their anti-money-laundering requirements effectively.

The CipherTrace Compliance Monitoring solution, which uses machine learning to de-anonymize transactions, will enable the regulator to evaluate and monitor the trustworthiness of virtual asset businesses. It tracks the risk exposure of virtual asset businesses including cryptocurrency exchanges, collective investment schemes and initial coin offerings (ICOs) to gauge and measure potential exposure.

“Being strongly aware of the money laundering and financing of terrorism risks associated with entities operating in this sphere, the decision has been taken to engage the services of CipherTrace in order to reduce fraud and detect transactions with illegal sources of funds,” said Joseph Cuschieri, CEO of the MFSA. “CipherTrace Compliance Monitoring will provide the MFSA with powerful oversight tools to automate regulatory processes and audit the risk management of virtual asset businesses that are licensed in Malta.”

Crypto crime hit record heights in 2018 with some US$1.7 billion worth of funds being stolen and exit scammed. 3.6 times more cryptocurrency value was stolen during 2018 than in 2017 despite the so-called “crypto winter,” according to the CipherTrace Q4 Anti-Money Laundering Report.

Criminals use various methods and techniques to launder their ill-gotten gains including mixers and tumblers services, which blend potentially identifiable cryptocurrency funds with large amounts of other funds.

Founded in 2015 by Silicon Valley entrepreneurs, CipherTrace develops cryptocurrency AML, forensics and blockchain threat intelligence solutions. The company’s machine learning algorithms calculate risk levels for exchanges, addresses, wallets and other entities based on known associations, criminal addresses, and money laundering services. It also profiles hundreds of global exchanges, dark markets, mixers, gambling services, high-yield investment products, and ATMs to determine risk levels of transactions based on activity related to suspicious addresses and wallets.

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Switzerland Aims for Conducive Regulatory Framework for Blockchain, Crypto Companies

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The Swiss government has advised regulators not to create new legislations but instead make adjustments to existing laws to accommodate companies in the blockchain and cryptocurrency space. The amendments should focus on enhancing Switzerland’s position as a blockchain-friendly country, the Swiss Federal Council said last week.

Switzerland’s Federal Council released on December 14 a report on the legal framework for blockchain and distributed ledger technology (DLT) in the financial sector. The report argues that “Switzerland’s legal framework is already suitable for dealing with business models based on DLT and blockchain,” but that several adjustments need to be made.

The Federal Council said it wished to exploit the opportunities offered by digitalization and blockchain, citing the potential for innovation and enhanced efficiency in the financial sector and other sectors of the economy.

In order to do so it’s working on creating “the best possible framework conditions so that Switzerland can establish itself and evolve as a leading, innovative and sustainable location for fintech and blockchain companies.” At the same time, it noted the importance of combatting abuses and ensuring the integrity and good reputation of Switzerland as a financial center and business location.

The Federal Council cited the need for an optimal framework conducive to innovation and new technologies, and the need to pursue a principle-based and technology-neutral legislative and regulatory approach.

In particular, the Federal Council is proposing an amendment to securities law. The planned legislative amendment would enable the “legally secure transfer of uncertificated securities by means of entries in decentralized registers.” The amendment would be designed as technology-neutral as possible.

In financial market infrastructure law, it is proposing the creation of a new authorization category for infrastructure providers in the blockchain/DLT area. Related amendments to the Financial Market Infrastructure Act and the new Financial Institutions Act should focus on “creating more flexibility in order to better meet the requirements of blockchain/DLT applications,” it said.

The Federal Council has already instructed the Federal Department of Finance (FDF) and the Federal Department of Justice and Police (FDJP) to draw up a consultation draft in the first quarter of 2019 on the cited proposals.

Industry participants welcomed the Federal Council’s new blockchain strategy. Dr Mattia Rattaggi, chair of the policy and regulatory working group at the Crypto Valley Association (CVA), said the report is “entirely in tune with its goal to create the best possible framework conditions for ‘Crypto Nation Switzerland,’ while underlining the country’s integrity and reputation as a financial center and business location.”

“We feel that this approach best represents the principle of technological neutrality and is in line with the position taken by the CVA in the consultation process. Crucially, this approach ensures maximum consistency within the current legal framework while keeping it principle-based and flexible, while allowing changes to be adopted on a ‘need-to-regulate’ basis.”

Angel Versetti, co-founder and CEO of Ambrosus, a blockchain and Internet-of-Things platform for food and pharmaceutical supply chains, cited the importance of not stifling innovation and decentralization with excessive regulations, red tape and bureaucracy, “because this will reduce the democratic value proposition that blockchain offers.”

He added that Switzerland should consider only regulating companies that do business with retail customers and treat decentralized protocols as a common good.