David Britton and Louise Lane explain why accountants should be cautious when taking on clients engaged in cryptoasset activities and the steps they can take to balance the opportunities this presents with managing the risks to their practice.
Cryptoassets are increasing in popularity with individuals and businesses. The latest research from the Financial Conduct Authority suggests that approximately seven million UK adults owned cryptoassets in 2024, up from five million UK adults just two years earlier.
As a result, accounting and tax professionals are increasingly engaging with clients with digital asset portfolios. While this presents new business opportunities, it also introduces significant compliance and reputational risks. The lack of transparency in cryptoasset transactions, combined with evolving regulatory expectations, means that traditional onboarding procedures may no longer be sufficient. This begs the question: how can you successfully onboard a cryptoasset client while protecting yourself, and your firm, from compliance and reputational risks?
Risks posed by cryptoassets
When onboarding clients from the cryptoasset sector, it’s essential to approach the process cautiously, just as with any prospective client. This is because, unlike traditional financial assets, cryptoassets operate with pseudonymity, which often limits transparency. This makes it difficult to verify the origin of funds, assess counterparty risk, and ensure compliance with the necessary anti-money laundering (AML) and know-your-customer (KYC) regulations.
Cryptoasset wallets can be linked to a wide range of activities, some legitimate, others illicit. The Financial Action Task Force (FATF) brought cryptoassets under the AML umbrella through the 5th Money Laundering Directive (MLD5). FATF has identified several red flag indicators for virtual assets, including:
- sudden unexplained wealth;
- use of anonymity-enhancing technologies; and
- transactions with high-risk counterparties.
These risks are particularly relevant for accountants, who are increasingly expected to perform due diligence on crypto clients.
The importance of ‘wallet screening’
How can businesses perform due diligence on cryptoassets when their lack of transparency is well known? One thing that can help is by examining the blockchain. This is an immutable record that can provide anyone with knowledge of the history of transactions linked to a wallet. A wallet can be broadly analogised to a bank account. By knowing which wallets your client controls, and by using the appropriate tools, it is possible to review interactions with other wallets easily.
This is known as ‘wallet screening’ and it allows you to trace back transactions, termed ‘hops’, on the blockchain to identify any interaction with other wallets known to be involved in illicit financial or organised crime. Some tools even inform you if there has been interaction with known illicit wallets. Indeed, using such screening could actually make risk assessing those holding cryptoassets easier than other clients.
By examining the client’s background, financial history, business practices and affiliations it can be possible to spot any red flags
Without proper screening, firms risk onboarding clients whose funds may originate from:
- sanctioned entities or jurisdictions;
- darknet marketplaces;
- mixing services designed to obscure transaction origins; or
- hacks, scams, or ransomware operations.
By examining the client’s background, financial history, business practices and affiliations it can be possible to spot any red flags that might suggest suspicious behaviour or legal issues. This increases your understanding of the source of funds, and the background of any client, which is essential for establishing where the funds originated. It is likely that more mature businesses have more legitimate alternative funding sources, such as crowdfunding through initial coin offerings (ICOs). In short, it helps you get comfortable with your client and their operations.
Get to know your client
The blockchain is not the only source of information and more conventional methods should also be employed. For example, by reviewing the management team’s background and track record. Entities may enhance their market presence by appointing reputable individuals to advisory roles, board positions, or as brand ambassadors.
As always, it is necessary to identify the beneficial and ultimate ownership details, including group companies and their jurisdiction, and wallet screening can help validate whether the information provided appears plausible. This also helps to determine if any owners or shareholders are linked to politically exposed persons or individuals with a history of misconduct.
Given the complexity and rapid evolution of crypto sector models, understanding the sector will aid any decision-making
When onboarding, you must ask the necessary questions to understand the entity’s business model. Given the complexity and rapid evolution of crypto sector models, which can range from wallet and payment providers to exchanges and firms dealing with digital assets, understanding the sector will aid any decision-making. This will include understanding the company’s internal compliance and client onboarding policies. Assess the level of client due diligence and the presence of internal controls to ensure compliance with KYC, AML, combating the financing of terrorism (CFT), and sanctions regulations in the operating jurisdictions. Sometimes there can be no shortcuts.
Using wallet screening can help identify revenue sources to uncover potential vulnerabilities or dependencies on specific markets or products. If the business accepts cryptoassets, consider whether they are only held, or actively converted into fiat currency. Regular conversion could indicate a higher risk of fraud or money laundering. The regulated status of the entity and its affiliates may also provide reassurance to mitigate AML risks. If the entities with which they engage tend to be regulated, and operate within well-regulated jurisdictions, this may suggest less risk.
Cryptoasset hygiene
Better record hygiene should result from greater understanding and utilisation of tools. Aside from the onboarding matters, it is important to ensure clients keep adequate records to determine their tax liability. Software exists that can help track and calculate the resulting tax implications from buying and selling cryptoassets. When the transactions can run into the hundreds, if not thousands, ensuring that the right tax has been declared can be no simple task.
With the changes to the income tax self assessment (ITSA) tax return from 2024/25 onwards and the introduction of the cryptoasset reporting framework in the UK, greater HMRC scrutiny should be expected for cryptoasset owners. This means that not only will HMRC be able to identify where clients are using exchanges in other jurisdictions, but they will also be able to better risk assess ITSA returns.
While this doesn’t make cryptoasset clients higher risk, it does mean that relevant systems and procedures should be in place to minimise errors and mistakes when carrying out and reviewing tax compliance work on those clients.
Learning to love cryptoassets
In summary, can crypto clients be compliant? Yes! Can you take steps to ensure that you can demonstrate that you took necessary steps to establish risk and make appropriate decisions? Yes! With careful consideration, you can treat crypto clients in a similar way to the more traditional client. In some ways, as the blockchain never forgets, perhaps cryptoasset clients could be even less risky.
About the authors
David Britton, Head of UK Corporate Tax Compliance, BDO LLP
Louise Lane, Tax Director & Head of Crypto, Wright Vigar
