Compliance Without the Chaos: AML for Crypto Builders
Building on Solana offers exciting opportunities, but navigating Anti-Money Laundering (AML) and Counter-Financing of Terrorism (CFT) regulations is crucial for long-term success and avoiding significant risks. This post, based on the “Compliance Without the Chaos: AML for Crypto Builder” presentation, provides a guide to understanding and implementing AML/CFT duties while building on Solana.
What is AML/CFT and Why Does it Matter for Crypto?
AML and CFT are designed to prevent funds from criminal activity entering the legitimate economy and stop funds from being used for terrorist activities. The core goal is to stop bad actors from misusing financial systems, including crypto networks like Solana.
Crypto has become a focus for regulators due to perceived risks associated with speed, global reach, and features like pseudo-anonymity, which are seen as potential vulnerabilities for illicit finance. As the digital economy grows, ensuring trust and security in digital assets is a priority. Regulations like the EU’s MiCA and national laws are setting clear rules for crypto activities. The ultimate goal is to create a safer, more transparent ecosystem for everyone.
It’s More Than Just a Good Idea – It’s Required
AML compliance is a legal obligation, not optional, if your service fits the definition of a Crypto-Asset Service Provider (CASP) in jurisdictions like the EU/Poland. Regulators are increasing scrutiny on crypto projects through audits, data requests, and enforcement. Rules are also tightening, with requirements evolving and often becoming stricter, including lower transaction thresholds. Staying compliant requires keeping up with these changes.
Protecting Your Project & Yourself
Compliance protects your project and team from significant consequences:
- Heavy Fines: Financial penalties can be substantial, potentially shutting down a startup.
- Ruined Reputation: Losing user and investor trust is difficult to recover from, making your project “toxic”.
- Personal Risk: Founders and senior team members can face personal liability.
- Worst Case: Serious violations can even lead to prison sentences in some jurisdictions.
Who Should Comply? It Depends on Your Service
Simply building on Solana doesn’t automatically trigger AML rules; it depends on the specific services your project provides to users. The focus is on Crypto-Asset Service Providers (CASPs) under EU/Polish law.
You are likely a CASP if you offer services such as:
- Custody: Holding crypto assets or private keys for others.
- Operating a Trading Platform: Running an exchange or marketplace.
- Exchange Services: Swapping crypto for fiat or crypto for crypto as a business.
- Executing Orders / Managing Portfolios: Handling trades or investments for users.
- Transfer Services: Sending crypto on behalf of users.
If your project is doing any of these things for third parties, you almost certainly need to comply with AML regulations. If not, you might not be a CASP under these rules, but it’s crucial to be sure.
It’s also important to be aware of transaction thresholds, which can be surprisingly low and are subject to change with new regulations. Jurisdiction also matters; while AML/CFT is global, your primary concern in the EU/Poland is compliance with EU law (like MiCA) and national implementing legislation. Regulations can vary depending on where your project operates and where your users are located.
Navigating the complexity and ambiguity of applying broad AML regulations to decentralized tech and specific Solana project architectures can be challenging. Clear guidance from regulators isn’t always available for novel DeFi or Web3 interactions. This often requires careful analysis and seeking expert legal counsel.
How Compliance Looks on the Ground
If your project is a regulated CASP, operational compliance is mandatory. The central concept is Customer Due Diligence (CDD) – knowing your user.
Key operational steps include:
- Customer Identification (KYC & KYB): For individuals (KYC), collect name, address, DoB, nationality, and ID details to confirm identity. For companies (KYB), collect company details and identify/verify beneficial owners to prevent shell companies and hidden ownership.
- Initial Verification & Proof: Confirm identity information using official documents or reliable databases/services. You must retain records of the verification process and evidence obtained, often for 5-10 years after the relationship ends, and be ready to provide this proof to regulators. Leveraging technology like automated verification APIs can help.
- Risk Scoring Your Users: Implement a risk-based approach as not all users are equal in terms of risk. Factors increasing risk include user type, geography (high-risk jurisdictions), service used (high-value, complex transactions), adverse media/sanctions hits, and complex ownership structures. Assign a risk level (Low, Medium, High) based on these factors, which determines the level of CDD and monitoring required (High Risk = Enhanced Due Diligence).
- Establishing the “Business Relationship”: This is triggered by an ongoing interaction or service provision, not just a single transaction, usually when a user signs up or begins using ongoing services. Full CDD is required before or during the establishment of this relationship. You also need to understand the purpose and intended nature of the user’s activity.
- Ongoing Monitoring: CDD is not a one-time process. Monitor transactions for unusual patterns, keep user information and risk assessments up-to-date, and monitor for changes in user behavior, location, or negative news/sanctions hits. The frequency of periodic reviews should be based on the risk level.
- Know Your Transaction (KYT): Identify transactions linked to illicit activities or high-risk sources. Look for sanctioned addresses, known illicit entities, mixers/tumblers, and sudden pattern changes. Use specialized blockchain analytics tools/services to help identify potentially suspicious transactions requiring further review or reporting.
Operationalizing Compliance
To operationalize compliance, you need:
- Internal Policies: Written AML/CFT policies and procedures tailored to your project.
- Implement Processes: Clear procedures for every step from identity collection to KYT screening.
- Documentation: Meticulous records of all CDD activities, risk assessments, monitoring alerts, and actions taken.
- Training: Ensure your team understands their role in compliance procedures.
- Leverage Technology: Utilize reliable identity verification providers, risk assessment tools, and blockchain analytics services rather than building everything from scratch.
Reporting
Beyond monitoring, a core duty is filing Suspicious Transaction Reports (STRs). You must report any transaction or activity you suspect is linked to financial crime without delay to your country’s Financial Intelligence Unit (GIIF in Poland). You don’t need proof. Crucially, never inform the user you’ve filed a report (“tipping off” is illegal and severely punished).
Essential companion to reporting is record keeping. Legally required to keep all records (CDD, transactions, risk assessments, monitoring) for 5-10 years, these records back up your reports and are vital for investigations.
Solana Challenges: Decentralization vs. AML Frameworks
Applying AML rules built for traditional centralized financial institutions to decentralized Solana dApps presents challenges. Identifying the regulated entity in decentralized protocols, smart contracts, or DAOs is complex and often unclear. Regulatory uncertainty exists as authorities are still figuring out how to supervise decentralized structures, creating compliance challenges for builders. A key question is whether your specific Solana project activity resembles a regulated CASP service enough to fall under the existing framework, regardless of its decentralized nature. Expect action from regulators.
Conclusion: Navigating Compliance for Builders
Key takeaways for builders:
- AML/CFT is serious; know if your project’s activities trigger obligations.
- Build your operational plan and implement written procedures for CDD, risk assessment, and monitoring.
- Be vigilant, report suspicious activity, and keep meticulous records.
- Acknowledge the challenges of applying these rules to Solana due to decentralization, data gaps, and evolving tech/regulation.
By understanding and implementing these AML/CFT duties, builders on Solana can navigate the regulatory landscape and build compliant and sustainable projects.