Alessa whitepaper outlines key crypto know-how for financial institutions

Alessa by Tier1 Financial Solutions has published a whitepaper detailing how financial institutions (FIs) can deal with the cryptocurrency market and manage its associated risks.

The whitepaper looked at the range of different types of cryptocurrencies in the market as well as some of the major cryptocurrency businesses or virtual asset service providers (VASPs) that FIs should know about. It also looked deeper into what market regulators were currently doing and what FIs should do in order to take a risk-based approach to cryptocurrency.

The cryptocurrency market is currently going through a massive growth hike. As Alessa by Tier1 Financial Solutions highlights, adoption of cryptocurrency has grown to an overall market capitalisation of over $1.5trn in less than a decade. By the end of 2020, cryptocurrency payments were exceeding $4.3trn.

The company outlined in the whitepaper, “With a growing use of cryptocurrency, it is imperative that financial institutions update their anti-money laundering programs to implement appropriate controls to identify customers that may be transacting with cryptocurrencies, flag any unregistered crypto money services businesses (MSBs) that may be attempting to evade supervision and detect the one percent (or so) of crypto transactions that are associated with illicit activities.”

The firm highlighted that from a regulatory compliance perspective, cryptocurrency – just like digital and virtual currencies – can be treated as one-and-the-same, as many people and some regulators use the term interchangeably and they all require similar due diligence when evaluating the risks associated with each.

Cryptocurrency markets and exchanges

Alessa by Tier1 Financial Solutions emphasised that along with the creation of cryptocurrencies, the industry has seen the creation of new types of companies that financial markets have never seen before. These include cryptocurrency exchanges, custodial services, digital wallets and bitcoin ATMs – collectively known as VASPs.

According to the Financial Action Task Force, VASPs are classified as any natural or legal person who is now covered elsewhere under the recommendations, and, as a business, conducts one or more of the following activities or operations for or on behalf of another natural or legal person.

Crypto-to-Crypto Exchanges, for example, are not covered by anti-money laundering regulations in certain jurisdictions – such as in the EU – and will commonly have weaker know-your-customer practices that a fiat-to-crypto exchange. Alessa by Tier 1 Financial Solutions added that these exchanges can also be used to obfuscate the flow of funds from blockchain analytics. This creates further risks, as law enforcement is then required to subpoena the exchange for further transactional information.

Other VAPs included Cryptocurrency Kiosks – or bitcoin ATMs – that enable users to purchase cryptos with cash or bank cards. The whitepaper highlighted that the number of new BATMs has grown exponentially over the past few years, with 16,529 as of March this year.

Alessa by Tier1 Solutions also used the whitepaper to discuss decentralised exchanges (DEX) – also known as peer-to-peer exchanges. These systems may possibly pose a risk, however, as most DEXs do not currently provide for any registration, KYC or anti-money laundering compliance. However, the company mentioned that it ‘appears regulators are beginning to pay closer attention to DEXs and their compliance requirements while serving customers in their jurisdictions’.

On the topic of industry regulation, the firm added, “While many traditional banks and other financial services businesses have taken a wait-and-see approach, the explosive growth of this industry coupled with regulatory push is requiring these institutions to take a more active role in identifying the risks associated with cryptocurrency transactions and businesses.

“For those financial institutions looking to monetize on the opportunities presented, there is the challenge on how best to enter the cryptocurrency market while still maintaining a risk-based approach towards regulatory compliance.

“While the extent of regulation for certain cryptocurrency transactions and crypto-to-crypto exchanges differs by jurisdiction, one thing is clear—most countries seem to agree that the commercial exchange of cryptocurrency for fiat currency should be subject to KYC, AML, and securities obligations.”

Another key challenge that the whitepaper highlights is that financial institutions should risk profile each VASP. This is due to, historically, financial institutions treating all cryptocurrencies as one-and-the same, the company claims.

However, the firm continued by saying that this ‘does not reflect the reality’ of cryptocurrency, as each cryptocurrency poses a unique risk. Considering this, Alessa by Tier1 Financial Solutions calls for companies to risk profile each VASP – with questions such as what the level of privacy of the cryptocurrency is and what is the potential hacking risk of the cryptocurrency.


The whitepaper summarises by discussing the current trends and popularity of cryptocurrency, citing the fact that one third of all cryptocurrency exchanges have opened since the start of 2018 and this is ‘unlikely to slow’.

As the adoption of these new financial vehicles grows, the whitepaper makes clear that financial institutions ‘need to engage in this new industry while managing the associated risk’.

The company highlighted that as regulations across jurisdictions continue to evolve, further attention must be paid on what exactly regulators require for compliance. Furthermore, alongside traditional transaction monitoring, FIs should monitor the transactions of their customers and other third parties on the blockchain.

Alessa by Tier1 Financial Solutions also referenced that FIs should ensure all cryptocurrency businesses that they transact with meet industry standards for KYC and AML.

The full whitepaper can be viewed here.

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