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5 Compliance Risks To Avoid If You Are Holding On To Virtual Assets

Five common risks you might come across when engaging in virtual asset exchange & simple tips to address the regulatory risks.

Virtual assets are one of the most interesting inventions of the 21st century. With cryptocurrency trends on the rise, virtual asset service providers perceive this decade to be a ripe time to reap their efforts. 

However, virtual asset service providers and their customers have new things to worry about as the U.S. government tightens its hold on virtual exchange activities. Due to the security violations and regulatory risks, virtual asset service providers, cryptocurrency, crypto exchanges, and virtual asset acquisition activities will be monitored with a hawk eye.

Factoring in money laundering and terror-financing regimes, the risks are only going to increase as new technological advancements are witnessed. 

Today, however, the emerging virtual market’s common focal theme is a risk. There are a variety of risks on the horizon, and the following will discuss some of the most common risks that virtual asset entities and enthusiasts have to pay attention to. 

So, let’s get to it.

AML Risk

According to UNODC, the approximate amount of cash that is laundered in one year is around $800 billion, which is 5% of the world’s GDP. This stat shows you that the neo banking sector (which is an emerging market in itself), virtual asset distribution networks, and fin-tech markets are at the higher end of the risk.

There is no denying that virtual asset platforms are hotspots for terror-funding regimes. The inherent secure nature of the transactions allows organized terrorism funders and money launderers to leverage crypto channels and pump millions of dollars for organized crimes. 

There were many instances in the past where virtual asset acquisition and virtual exchange activities were flagged for creating a safe haven for terror funders. This led to severe escalations by law enforcement, forcing the blockchain technology to be streamlined. Despite the efforts, the risk is still pretty high even today.

KYC Risk

Virtual asset providers do not have streamlined vendor/customer onboarding processes in place. Sometimes, there are third-party payment settlement companies involved within asset acquisitions and exchange transactions, which complicates the verification process when the distributor/seller wants to validate the sources of funds.

Proactive profiling effort to weed out high-risk profiles, establishing robust KYC and CIP processes, and organizing a legal framework for flagging suspicious activities would allow virtual asset providers to validate every incoming client and reduce risk. 

KYC risks could lead to something as simple as identity theft or as severe as money laundering. Either of which put the radar on the virtual asset service providers. 

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Sanctions Risks

Many fraudulent organizations in the garb of virtual asset service providers are misusing the regulatory gaps within the virtual exchange framework. This is why when a virtual asset service provider is monitored for suspicious activity by federal security enforcement, there is no going back. The inspections will get severe as the transaction volume increases and the funds flowing through the virtual funnels will be monitored closely. 

In such a scenario, the citations made by the federal organizations must be addressed. If not, the virtual asset service providers could potentially lose their operational powers and incur reputational and monetary losses.  

In extreme cases, some virtual asset providers can also be banned or can be issued a sanction to prohibit their activities in certain geographies.

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Tax Risks 

Virtual asset providers, virtual asset exchanges, cryptocurrencies, and crypto exchanges are not exempted from tax laws. With the escalated regulatory and financial risks that virtual transactions could bring, the laws are not going to simmer down anytime soon. 

Virtual asset acquisitions are treated as “properties” by the IRS. This means the same tax regimes that taxpayers follow for a physical property (example; home, land, etc) must be followed for virtual assets as well. Further, any capital gains made on a virtual asset must be reported on appropriate business tax returns. 

When virtual asset investors hide their assets, cryptocurrencies, and gains made through a virtual exchange, they are inviting more tax trouble for themselves. 

The IRS may exercise monetary and civil penalties on taxpayers that disregard the tax laws and evade tax payments by hiding their incomes and assets (even virtual ones).

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Civil Risks 

It is a known fact that all virtual asset providers are regulated and monitored by the federal authorities per their legal status. 

When the business compliance protocols are not followed by the virtual asset service providers and when the transactional transparency is compromised, the federal authorities are free to impose civil liabilities on the virtual asset service provider. 

It is essential to understand that the virtual asset providers are responsible for integrating a sound customer identification program within reason and as appropriate for their operations. This program must identify the user, their tax details, location, and their government records. FATF recommends incorporating a risk-based approach, which allows the VASPs to vet all incoming profiles prior to approving accounts and allowing transactional enablement. 

The IRS and The Financial Action Task Force further advise virtual asset providers to not transact with anonymous investors and buyers as these transactions could bring more risk.


A well-researched customer identification process will boost the KYC and regulatory operations for your virtual asset service entity, reducing risk and boosting your operational focus. Further, following the security exercises directed by the federal AML institutions allows you to maintain compliance. 

What are some other risks that come to your mind when approaching virtual asset service providers? Comment below.

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