What do cryptocurrency transaction monitoring tools do, how do they work, and how they might support an organization to mitigate the financial crime risk from cryptocurrencies effectively.
Suppose someone goes to a cryptocurrency exchange and says they would like to withdraw a couple of Bitcoins to a random wallet with a pseudonymous address. That exchange might screen that address and determines that the wallet looks fine. Potentially, the wallet’s address has never been used before in any transaction, which is one of the things a wallet screening software solution would do in a nutshell.
Cryptocurrency Transaction Monitoring Tools: What Do Innovative Cryptocurrency Transaction Monitoring Tools Do?
With a transaction screening solution, that activity would continue to be monitored. The funds might, for example, pass through another wallet and then through another one. Moving funds from one wallet to another are called hops.
So, the transaction monitoring system follows these funds and tries to identify some things, including funds hopping from one wallet to another, being split into numerous other funds, the processes being stretched throughout a couple of days, and many others. One portion of the funds may have been transferred to a regulated cryptocurrency exchange that deals in Bitcoin, and the software determined that this is fine. Another fund, however, might have been transferred to an individual sanctioned by the Office of Foreign Asset Control, or OFAC, as part of the United States Treasury.
In that case, you want to understand this transaction better. Potentially, even reporting on it. The critical thing to understand is that these transactions can be quite sophisticated. They can become quite complex and risky from a financial crime perspective.
It is vital to understand the full process of the transaction trail to identify the risk involved. So these transaction monitoring solutions work to collect information about an individual transaction and assign risk scorings to them. Usually, these software solutions allow setting and configuring monitoring parameters or risk rules and what types of entities should be considered riskier than others. For example, you would want to assign the highest level of risk to a sanctioned entity or individual.
For other circumstances, you might perceive less risk when other types of entities are involved. A mixer, for example, might also not be seen as extremely high-risk in every instance and by default, but it should be differentiated.
The available tools are great, but as with many tools, you have to ensure you’re using them correctly. There are a few important things to remember when you calibrate your monitoring, whether this is for crypto or regular fit currency. The key is to make sure you are getting the most out of the tool risk-wise and making sure that you are using it correctly.
You’ll also need to know your regulatory requirements and prevent breaches. Essentially, that’s probably the biggest reason for an organization to even purchase a software solution like this in the first place. Another point that should be obvious is making sure that the rules, configurations, and calibrations are well documented and understood.
From a bird’s perspective, the rules and thresholds defined for the cryptocurrency transactions monitoring systems should fit into the wider anti-financial crime framework and the defined risk appetite statement. By these means, the cryptocurrency transactions monitoring systems that an organization uses, including major configurations, should be reflected in the risk assessment.
Last but not least, any potential alerts the system might generate should result in certain actions, similar to what you would for fiat transactions. It should be clear and well-document how the analyst that works on the alerts processes them and what should be looked for. Again, these actions might change as your risk appetite changes. You may offboard a customer for a certain type of activity at one point. Further down the line, you may have decided that another set of transactions is within your risk appetite.
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.