EN | Legal Subtrack: Compliance and AML in Digital Assets Regulatory Expectations and Best Practices

Okay, it's an honor to be here. Thank you for joining us. And I will introduce for this panel Marina Ktova from Crystal Intelligence, Katherine Cloud from Sama, Alvaro Castro from Bellow and Rowan Warl from DTIF. For start the first question for the panel we will discuss about compliance AML and regulatory framework is what makes Latin America and Brazil one of the most important region for real world digital assets.

I can start us off on that one. Um so I think at least from our perspective um I think the key side of digital assets that we see is that it's continuously growing. I think in Brazil alone we know that there it's very commonly used among consumers and it's growing more and more in usage. So I think what we're starting to see is more of a focus on that as it is continuously being used by consumers every day. And I think as a response to that, what we're seeing is that the regulators are now starting to respond to those developments by introducing regulation, introducing things like travel rule to try and encourage and add those safety measures that we're all used to in Tradfi.

They're now trying to add that into crypto to encou not only encourage customers to use more crypto, but also to make sure that those customers that are already using it are doing it in a safe way that is kind of backed by the regulation, backed by the protections that we are all used to with traditional finance.

Yeah, ju just to add as well, I think regulatory certainty has been one of the biggest components of actually developing this whole market across all different jurisdictions. as you've seen this uh I'm I'm UK based so there's a lot going on there in terms of regulatory certainty coming everyone knows about Mika in the EU uh Latin America there's there's a whole lot of opportunities as well in terms of regulatory harmonization and actually making these markets talk to each other and I think yeah we can maybe talk about that more more today

yeah and I also just want to add to that that you know uh the problem with adoption right now is not that you don't have you anywhere to go to um you have to find you know platform um which you know um allows you to trust this platform which allows you you know to do more and feel yourself more protected and uh uh this only may happen again with the support of the regulation and al actually I'm looking at the Brazil market at this moment and I see um a lot of changes you know that is coming to this market um because you see a big shift uh from a lot of you know private transactions um that will be happening towards institutions with the help of uh government but I think it's happening for good. Um we just um published a report uh last week about Brazil current state of digital asset market and yeah of course it's a lot uh of P2P transactions right now uh in a lot of private transactions um but also a lot of people who have suffered from various amount of scams the amount of money lost uh in only in 2024 um was exceeding um several dozen billions uh by Brazilian people. So yeah, I can see how yeah the changes are definitely going to be helping here.

Please.

Oh yes, just uh to add uh specific uh point that I that I I'm always looking to is that uh particularly in Latin America and mainly in Brazil, we have uh regarding adoption, we have we tend to have very violent scale of adoption and we have numbers that that can uh prove that. For example, when when it was it was a research that I made my myself and I according to the the regulator official data in 2011 very 53% of Brazilians had a banking account. It was 2011. 2023 it the the same number it was 97%. So it we have many examples of the the this adoption this the this fast uh scale of things in in Brazil and we also have a very particular uh thing uh related to our central bank because it it's a regulator that tends to be very close to the market.

It's very common uh in Brazil to have what we call consulta in in which the the central bank calls the the players to to learn with them how they are operating how they propose things and the open finance for example it was a very good example on that it's the same thing happening to to crypto and I think we have also uh a very good opportunity to build something different to build something that uh we can export even export to other uh other jurisdictions and to learn. So for example in the open finance in the example that that that I gave we learned a lot of things from the UK from the European Union experience. So I think it's a very the these two factors uh the the the violent adoptions I'm not I'm not an English speaker so the violent word is was the best that crossed my mind and the the the opportunity to be closed uh to the regulator uh to build something uh it makes Latin America a very good opportunity for for companies. I think just as well to add on that, I was very impressed when I came to Brazil, I think 10 or so years ago on holidays and I was at the beach and I could pay with pics and I think that was an incredible innovation that you could actually do that where in Europe and other countries you still had to pay with cash here. So I thought that was just it blew my mind how innovative it actually was here.

So I think there's there's so much going on here which is really impressive. And in this sense, what role do compliance and blockchain analytics plays to do um Latin America a safer market for digital assets?

Oh, I can take this and uh we can see this in many countries where we are present, we're developing globally and I think um the real changes uh you see when uh all layers of the existing market start looking into the same data and look at this data with the same um you know under same categorization, same taxonomy. Um what I mean by that uh that you know you have central bank and the regulators then you have um law enforcements the enforcement units uh right and then you have key market players financial institutions all of them clearly understanding what's happening into the market where are the flows going how they are circulating within the market how the country is interacting with other countries um and uh the only way to power it up is again with blockchain analytics u which gives you transparency and real-time assessment of what's going on um uh in the country and I think without this um actually um there cannot be any kind of um proactive feedback loop uh and that's also critical for any kind of you know movement forward because of course you can be introducing uh any kind of changes and the legislation uh but you need to be in constant conversation with the market and you need to be uh aware again how it's deployed and what changes actually it brings up and we can see this uh in many territories um for example in UAE again um a very tight A very short feedback loop leads to a situation that uh there is a um there's a good opportunity for financial institutions to constantly um improve what they do and to very much focus on the territory where they are operating focusing again on the protection of uh um and safety of the users. Yeah,

I could just add on to that. I think the role that Crystal and others that are also focusing on this space, it's it really provides that trust. So by having that really kind of proactive feedback loop and almost immediate feedback loop with the regulators, the central bank, it it's in it's putting that layer of trust again that we kind of have all come to get used to and almost expect within traditional finances. And it allows that type of information sharing to be incorporated into crypto, which I think we can all agree has not been regulated until recently. And I think one of the biggest barriers almost to the growth of crypto was that there wasn't this regulation in place.

There wasn't that feedback loop. So I think it's in order for crypto to continue growing but growing at the kind of exponential rates that we all want it to we naturally these types of blockchain analytics companies were going to be built and I think where like we also come into play is that we have a very good relationship with Crystal and it's it's not just looking at okay what are the analytic side of it but it's also looking at what can we what's the information that we get on consumers who are choosing to pay with crypto or choosing to do crypto transactions and again how can we then provide that back to the regulator so that they better understand exactly what it is that they're trying to regulate, so that they can protect consumers, that they can draft regulation that's more proactive rather than reactive, but also so that they can allow the innovation that's naturally happening within this space to continue to happen.

Please, do you want to add something?

Yeah, I just wanted to say that, you know, of course, we can be focused on the onchain data and onchain monitoring, but without your angle, guys, without adding this off-chain component, like what does it mean in real life? it doesn't make sense. So yeah, it's like uh you can look at the blockchain and the ledger, anyone can do this, but it's a question of how much this off-chain data um can you layer on top and that's that's really when it becomes precious. The market needs to collaborate to create this unified database of shared information. Yeah,

I think one important factor for me here is you talk about analytics and intelligence and what you can actually gather here. That's critically relying on data foundational data standards and elements to actually be able to understand what everyone's speaking about, where they're speaking about it, to understand what this token actually is, for example, what asset does it relate to, what entity does it relate to? all of these really critical elements of what you need to understand to understand something holistically. You can get this through consistent identification, through consistent templates, taxonomies and that all feeds up into the regulatory supervision layer as well. They can understand this is exactly what's going on within the market.

That gives them confidence to understand. They might be able to even get a more datadriven regulatory framework. So not necessarily throwing the rule book at all crypto exchanges, you must do this, you must do that. It's more now we understand how the market works. Now we know how it's integrated with other assets and what the entities are doing.

This is just a holistic approach and it all starts from critical data elements that are standardized.

Yeah. And ju just a quick addition here some complex I'm sorry some complexity that that that we have also in in this market there are two layers that I always uh uh I'm always keen to to to face is that how can we translate it in a simple way to to the user for them to understand what's going on to understand what's changing and and to trust because is the the knowledge and understanding what's going on is is very relevant base of trust to to build to build and also the layer of the the very complex and vertical chains of providers when we have a transaction for example in a credit card in Brazil if if you do something with blockchains you need to deal with I it's right now crossing my mind at least six to seven providers that we can that we need to connect the dots we need to convince and if one of them is blocking you'll have a problem you you can you can't move forward. So I think this one this one is is one of the the biggest pain points in my opinion for blockchain and for crypto and for our market to to escalate to to reach what what we got with the the adoption of banking accounts for example. Yeah, but if you may if I may uh I want to add that um you know it may be very very visible uh if we choose a very right again um angle how to speak about this there's no single person I think in the audience who have not been you know have not experienced an attempt to social engineer your any kind of you know to extort some assets from you or from your family you know you try to teach your children not to trust you know some random people starting talking to you because they may you know convince them to send money somewhere so It's like it's really it's happening like everywhere and people again lose enormous amount of money because of that and again um this system that we're talking about it has a real implication in the real life that it should uh just increase you know the return of stolen assets back and we can be very transparent and this transparency is enabled by such systems um and yeah I think people will see the benefit of that as well

you see scams on the chain as well all the time right so we saw uh J JP Morgan's tokenized deposit it uh it was announced uh on one day the within 24 hours there were 150 copycat tokens that were launched on the one base ledger. At another day there were 350 or so. It's so critical to understand what the token actually is and linking it back to some kind of verification source. Uh it's yeah scam scam central for now, right? It is a a very backbone a very tough I'm sorry just just a quick is a backbone of the relevance of regulation because uh what what you guys are saying it comes to to me that one single bad example one single fail one single scan can kill years of work can take a lot of time for us to to build things together and so when we're talking about AML about creativity and and things We're talking about almost survival of our companies because we if if if we kill the a market if if we give a give a bad impression that takes two years for us to recover two years a lot of companies will die a lot of the products will will not get out.

So uh obviously it's just something that I'm throwing in there. So

yeah but uh I don't know. Yeah. Well, I'm I'm in this space since 2015 and yes, like in the early days, I remember like how we were also like very very scared, you know, by the fact that you anything like any big hack that is happening like really threatening the whole thing and uh it was very and especially ICOs you know and u yeah we all know how it was but I think right now we are like also past this point and there's a resilience in the market and people understand that it's a good um utility aspect to that and especially in Brazil I can see this you know the what what drives people to use digital assets here is pure utilities point. Uh I looked at the statistics uh 90% of all transactions that are happening here as stable coins. So people use this as a cash management right.

So it's like not something like that you want you know to your returns or like yield or something like that. So I think it's

debatable for that. What we're seeing a lot of times is actually a lot of people are using it where

there's a lot of inflation and there's a lot of fluctuation with the inflation rate is that they're almost turning to stable coins as a way for them to actually stabilize their own personal finances. And again to your point it's not to necessarily do investments. It's actually just to stabilize my day-to-day spending. So I think we're like and that's a trend I don't think the regulators are necessarily seeing. So it will be interesting once they do catch up with that trend how they then go about reacting to it because like one of the other concerns and one thing that we quite see that we see quite often within crypto is the prevalence of scams and fraud and things like that and I think that's why solutions like travel rule are it's not a perfect piece of regulation trust me but I think it's heading in the right direction where it's trying to create the relevant barriers to stop the frauds to stop the scams or at least to introduce barriers So they're not happening as often.

So I think for the stable coin perspective, it's really interesting just to see that consumer trend developing. But then I think for the fraud and scams, it's also interesting to see that the regulators are now starting to respond and they're trying to respond. You could argue if it's proportionate or not, but they are trying to do something.

No, and it's just uh not only about scams and fraud. So for example, here in Brazil, we have a lot of issue with tax. So if we do a transaction with stable coins, does it apply this kind of tax? It does it it does not. So if we have one problem on that, it's very common that the violent adoption is become a violent uh drop on this topic.

So it's it I'm talking about being kind of careful. Yes. Not to threat the whole system. Yes, we we we are a lot of steps. uh uh we have a very a very good uh history a very good uh path that that that we took but what what I'm talking what I'm talking is is about we have a kind of responsibility with the inspir inspirational way with the new generation of of things so just to this quick topic I'm sorry J no problem

sorry we completely ran away with that question

one question for all the panel but um to avoid scams and the crimes how the tools are changing machine or adapting to the actually problems.

I can start us off on that one. Um so as I said as part of the previous conversation um one solution that we do see being more and more developed especially within the Latin American countries is compliance with travel rule. So for those who may not know, it is a financial action task force uh guideline that was introduced a couple years ago and it just requires that some of the identifiers of the individual who is going to be make sending crypto transfers from one wallet to another wallet that data needs to be shared. So if I was going to send some money to someone in the audience, it you would see that catcloud, it would have my wallet ID, it would have kind of the beneficiary, all of that information would be shared with a VASP. So that way a VASP could easily identify if that transaction was fraudulent or not.

So we are seeing tools and tools in the sense of like it's a tool that a company like sumsup can provide but also tool in the sense that it's a something that the regulators have introduced to try and address the crypto being used for frauds and scams and I think we have seen it is kind of helping to identify some of those more fraudulent transactions but the reason why I said it's not a perfect regulation is because there is quite a difference in how countries across the globe are implementing travel rules. So, it's not the perfect answer, but it is definitely going in the right direction to try and get transparency included in crypto transactions from the beginning when it's first initiated all the way until it's actually received by the beneficiaries wallet. So, it's it's one step in the right direction and it's one tool that's trying to address that.

Yeah. And I think the key point is uh the problem is inconsistency across the world. You know, some countries are doing better and uh some countries are not. Some exchanges are laughing at us when we suggest that you know you could in include um an automated notification to your customer when he tries to withdraw funds to the uh scams the fraudster. Um some some exchanges I saw them implementing that and then they were just blown away by the amount of requests to their support system like how dare you decide like who I like am I sending money to.

I am the owner of my money. If I want to send my money to Fster I will. Right. Um so um yeah um I can see the solution like it's not immediate of course uh but uh it's uh a lot of transparency again about what's going on and a lot of tools that enable you know these transparent reporting um I can see the problem you know still in the fact that in many countries you come to police uh station and you tell them that you have been scammed and these guys laugh at you and they tell you how dumb you are like to fail for that um to fall for that and um yeah I think we need more like focus on start sharing this data instead of start earning on this data and a lot of companies try to like make money because they are sitting on some you know pile of very unique information about some fraudsters I think that's real that's really doomed um if we want to change this uh we need to make this information available to as many people as possible within the territory including the regulators and let people population of course to you know also fill in fill in this base and it's our mission to make sure this data is correct. Of course, uh you know, he said, she said, that must be out and this is where our analytics must be, you know, focused on to figure out where it's true and where it's not to only, you know, stay true to the facts.

So, that's my view.

I I just think in terms of um uh preventing scams, obviously, our solution as well that we run is the global standard for token identification. So, it's very easy if someone has or they don't have a digital token identifier, it's very easy to distinguish between those outliers that are scams versus those that are from a reputable company that do have entity identification as well. So it's uh yeah going back to data standards again

just a quick point that I that that was it was crossing my mind while while you guys were were talking is that I noticed that it the the reputable uh the the reputation comes when the big players come to to to the to the room. So for example having uh what something that I was thinking uh earlier. So having having BTG a big bank uh big Brazilian bank here having people from Ital speaking in this panel on a crypto event is very relevant for for the population in general to see hey it BTG the Brazilian government the big people big players are are dealing with this this topic. So it it uses it uses to work this way at least here in in Latin America in we faced a very complex discussion on that regarding open finance if it was obligatory or not and the decision it was hey EU got to do it. So people saw cash economica the biggest public bank in Brazil it new bank providing information and saying hey I have open finance.

So it it opens a very a lot of leeway for new companies for new ideas to to to born to to be to be cultivated by the this new context. So just this condition

I have a final question and closing question. Do you think that the regulators becoming more sophisticated in what they expect? I can go firstand absolutely absolutely uh regulators are becoming much more focused on the data that they actually want to receive so they can make more informed decisions. uh it's clear-cut. For example, in Mika, some people might like it, some people might not, but there are thousands of pages of what you do and don't need to do.

It's complex, but it's also certainty at the same time. So, they regulators are definitely asking for for a lot more in this space.

I would definitely echo that. I think any conversation that I have with a regulator, I feel and compare this to 5 years ago. There's definitely a deeper level of understanding from the regulator, which I think is absolutely brilliant. We should be welcoming that. But it's also not just a deeper understanding, but also a genuine request from them.

Tell us how people are using your platform. Tell us how your clients are complying with the rules because they also want to understand. I feel like there's this old saying, at least in Europe, that the regulators are in an ivory tower. I feel like it's slightly changing. At least in the conversations I'm having, I can sense that they're genuinely trying to grasp what exactly is going on in the crypto market because they don't want to create regulation that isn't fit for purpose.

They don't want to introduce these unnecessary burdens. So, I'd say they're definitely going in the right direction. The attitude from the regulators has changed. And I think it's definitely a space for all of us to continue to watch and continue to also be proactive when they have consultations when they have these industry reports. Take the time to actually respond to this.

I very much agree with both with both of you and um I want to say that there is one additional marker that I see on the on on in this space is that you know before uh it was usual that you know some bright um person some bright talent emerges in the regulation and then he works sometime there and then he leaves for some private company um right this was a like usual flow that we saw and right now in the last like maybe a couple of years I see it vice versa you know I see a lot of like bright talent in compliance leaving actually private firms and going regulation to contribute even more um to this understanding to this education and to the adoption of tools and I'm very much welcoming this it's a great great marker um that I seriously

no I totally agree and we've been down that road we have a lot of track records a lot of cases the the good and the bad and the regulator now has something to work uh it's not a not a black uh white canvas anymore and that's it I agree

okay time is up and thank you for joining us And we will see later.

Thank you everyone.