Cryptocurrency and software solutions. There are different approaches to how software solutions might monitor cryptocurrency activity. Essentially, four predominant approaches are used regarding risk-based monitoring in the crypto space. These approaches include wallet monitoring, transaction monitoring, forensic services as a broader approach, and data set analysis.
Cryptocurrency And Software Solutions
The first approach to identify illicit cryptocurrency activity involves wallet screening.
These wallet tools use pre-transaction checks to prevent funds from going to known illicit actors. For example, the software solution might perform screenings before a customer transaction that comes from a cryptocurrency exchange is executed.
The wallet screening software solution will screen the wallet address of that customer to determine whether it belongs to a dark web market or has been used for fraudulent or criminal activity in the past. Subsequently, the wallet screening software solution will decide if the transaction may pass or if it gets blocked. By these means, wallet screening is a preventative tool.
By using wallet screening solutions, a crypto asset exchange, for example, can know that they should prohibit their customer from withdrawing funds to a wallet address, which might be subject to economic sanctions, such as OFAC sanctions. They could do this by identifying addresses that might belong to dark web marketplaces, Bitcoin and cryptocurrency mixers, or other types of services that might present a high risk. Using wallet screening software solutions is a fundamental pillar of how crypto businesses can comply, ensuring they aren’t exposed to illicit activity.
The second approach to identify illicit cryptocurrency activity is transaction monitoring or transaction screening.
Transaction screening in cryptocurrency usually happens after transactions have been executed. The software solution that performs these ex-post checks will try to identify the ultimate source or destination of funds before they arrive at your exchange. The software solution will also try to understand where the cryptocurrency funds awaiting you originated from or where they may go before or after a transaction is conducted. Using the transparency of the Bitcoin blockchain, these tools can extract insights into the ultimate source of destination of funds so businesses can make decisions about the risk involved in certain transactions.
Wallet screening and transaction screening are typically used together, especially by organizations offering crypto-asset services directly. This technique might include exchanges and financial institutions that provide custodial services for their customers in the cryptocurrency sphere.
The third approach, which is not a software solution itself, but where software solutions are used as part of the technology-assisted review, is forensic services.
These solutions that form part of forensic services enable deep-dive investigations into the flow of funds. They allow you to go through the entire transaction trail to understand the flow of activity over time and give you a holistic picture of how various counterparties interact. Network visualization tools are one of the solutions that are being used in forensic services and are capable of displaying such information.
Last but not least, there are software solutions that collect, aggregate, and leverage all sorts of cryptocurrency-related data.
In particular, these solutions collect data from as many parties that handle and engage in cryptocurrencies as possible. Analyzing these data subsequently provides a holistic view of how certain organizations, businesses, and financial institutions that engage in cryptocurrency operate and interact with other parties. These observations might be used by a bank that wants to understand whether they should open an account for a certain crypto asset business which is ideal if they want to get a quick and holistic picture of whether that business is facilitating activity on behalf of illicit actors.
All these software solutions can be used across all kinds of organizations that are engaging or want to engage in the crypto asset businesses.
Businesses can reduce the risks associated with cryptocurrency transactions by wallet monitoring, transaction monitoring, forensic services as a broader approach, and data set analysis. While cryptocurrencies present unique compatibility issues, innovative solutions can address these issues. The biggest risk in the crypto industry is the inability to control and constrain the movement of blockchains.
Cryptocurrency businesses should fully understand and implement existing transaction monitoring regulations specific to cryptocurrencies, as well as be on the lookout for proposed new regulations, in order to make compliance as painless as possible.