Setting up a transaction screening and monitoring program for cryptocurrency transactions require a combination of blockchain analytics tools, risk management frameworks, and compliance protocols.
1 - Define objectives and the relevant Compliance Requirements
Before implementing monitoring solutions, determine:
- Compliance with regulations (e.g. in the UAE the following will apply based on the regulator - FATF Travel Rule, Federal AML regulations, SCA regulations, CBUAE regulations, VARA regulations (Dubai based), DIFC / DFSA regulations (DIFC based entities), ADGM / FSRA regulations (ADGM based entities).
- Compliance with Sanction programs - UN and UAE (applicable as per UAE regulations), however, other sanction programs such as OFAC, HMT, EU may apply wherever applicable.
- Risk appetite and thresholds for suspicious activities. This should be approved by the Board or the relevant authority.
- Understanding the Scope - specific blockchains, cryptocurrencies, and transaction types to monitor (e.g., mixing, tumbling, DeFi transactions).
2 - Onchain Transaction Monitoring
A. Use Blockchain Analytics Tools
Employ tools that analyze on-chain transactions and address behaviors:
- Chainalysis – Tracks illicit transactions, identifies high-risk wallets.
- Elliptic – Provides wallet screening, risk scoring, and entity tracing.
- TRM Labs – Monitors transactions for fraud, money laundering, and sanctions violations.
- CipherTrace – Offers risk scoring for wallets and blockchain addresses.
B. Implement Real-Time Address Screening
- Screen wallets before processing transactions.
- Flag addresses linked to illicit activities (e.g., dark web, ransomware, stolen funds).
- Check against OFAC, UN, EU, and other sanction lists.
C. Set Up Behavior & Pattern Analytics
- Transaction Volume Analysis: Identify spikes or anomalies.
- Wallet Behavior Tracking: Monitor high-risk behaviors like frequent small transfers (structuring).
3 - Off-chain Transaction Monitoring
A. Monitor Centralized Exchange Transactions
- Integrate with exchange APIs for direct transaction tracking.
- Use KYT (Know Your Transaction) to flag high-risk activity.
B. Assess P2P & OTC Transactions
- Implement off-chain monitoring tools like TRM Labs.
- Track fiat-to-crypto and crypto-to-fiat movements.
- Identify patterns like high-value, rapid transactions between unrelated entities.
C. Implement AI & Machine Learning Models
- Use AI-based tools to detect money laundering patterns, wherever possible.
- Combine blockchain data with off-chain financial records for risk scoring.
- The more transaction data is available the better assessments can be carried out; thereby enhanced rules can be applied (to reduce false positives).
4. Multi-Crypto Transaction Assessment
A. Cross-Chain Analytics
- Use interoperability tracking tools (e.g., Chainalysis Investigations Solution, CipherTrace Traveler).
- Monitor token swaps across chains (e.g., Ethereum to Solana, Avalanche).
- Flag cross-chain bridge transactions, as they are often used in laundering.
B. Token Risk Analysis
- Monitor high-risk tokens like privacy coins (Monero, Zcash).
C. Smart Contract Audits
- Ensure smart contracts interacting with your system are audited for compliance.
- Track interactions with high-risk contracts (e.g., Tornado Cash was sanctioned by OFAC in 2022).
5. Reporting & Automated Risk Management
- Set Up Risk Scoring: Assign risk levels to transactions and wallets.
- Automate SAR (Suspicious Activity Reports): File reports with regulators (FIU in UAE allows XML uploads via GoAML) as necessary.
- Alert & Block Transactions: Establish automated alerts for high-risk transfers.
Depending on factors such as size, product offerings, and the number of tokens involved, the entity must utilize the appropriate tools to ensure effective monitoring and compliance.
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