Transaction Monitoring and its Relation to Cryptocurrency

Transaction monitoring in cryptocurrency is the monitoring of real time transactions to identify abnormal transactions or those cryptocurrency transactions on the block chain that trigger a red flag, albeit for a variety of reasons against a rule set. This practice is legally required for CASPs (cryptocurrency serviceproviders) and plays part of a larger CDD-procedure. Transaction monitoring (TM) ensures the integrity of the global financial system. With emerging technologies and advances on cryptocurrency front daily, its important for CASPs to be proactive when it comes to safeguarding their organization against money laundering threats.

Why is TM important in regards to cryptocurrency transactions?

• Protection against money laundering or terrorist financing: cryptocurrency can be used for money laundering and fraud. Therefore, acting as a safeguard against these illicit activity, TM plays an important role to identify potentially suspicious or out of pattern activity, securing these digital transactions.
• Regulatory compliance: European and worldwide regulation, such as AMLDs, EBA and MiCAR among others, implores financial institutions to monitor crypto-related transactions. Failure to do so could impose large fines on part of the institution.
• Increase trust and transparency of cryptocurrency: Due to the implied legislation, companies can facilitate trade with more confidence that they are not at risk of harming the financial sector and contributing to illicit activities.

Cryptocurrency transactions can be monitored by special tools that track transactions on the blockchain where much information is available to the financial institution to monitor, analyze and take appropriate action, if needed. Emerging technologies further enhance these rule sets and have been important advances during the popularity spike of cryptocurrency.

How are these transactions monitored?

A digital trail is created when a party sets up a crypto wallet, often requiring Know-Your-Customer (KYC) onboarding for regulated exchanges, which helps tie illicit payments to individuals. Transactions are permanently stored on the blockchain, generating vast amounts of data. Blockchain analytics aggregate this data and use machine learning to link suspicious activity to tagged wallets, assigning risk scores while keeping user information cryptographically anonymous. Regulators and regulated entities can track illicit activity by following the end-to-end transaction trail. When suspicious activity is detected, a Suspicious Activity Report (SAR) must be filed, linking wallet IDs to individuals based on KYC data.

There is a general introduction to our topic. Be sure to stay tuned next week when we dive deeper into the challenges and myths where Transaction Monitoring intersects with cryptocurrency.