Compliant crypto firms realize or know what it takes to keep their platforms safe: They have to carry out KYC checks on clients, monitor transactions for counterparty risk, and submit suspicious activity reports or SARs when they see suspicious activity, Chainalysis notes in a blog post.
But these can’t just be “one-time” jobs or tasks that only take place when a new customer registers or when a transaction occurs, Chainalysis writes in a blog post.
The blockchain analysis firm explains that if new information comes out and raises a customer or counterparty’s risk factor — for example, news of potential involvement in criminal activity, or an OFAC designation — then “previous transactions involving that person or entity retroactively become risky even if they initially appeared safe.”
Chainalysis further noted that those old transactions “may therefore warrant a SAR or other action by the compliance team.” That’s why your crypto compliance software requires that you include continuous monitoring for transactions.
As noted by the company, it is the only way for compliance teams “to ensure they know to take action when historic transactions become risky in the light of new information.”
In an update, Chainalysis has explained why continuous monitoring is important and “show you how Chainalysis KYT (Know Your Transaction) makes it easy.”
As mentioned by the blockchain firm, sanctioned individuals and entities “represent some of the biggest compliance risks for both cryptocurrency businesses and mainstream financial institutions.”
Since 2018, the US Treasury’s Office of Foreign Assets Control (OFAC) has included crypto addresses in the Specially Designated Nationals (SDN) list entries for several sanctioned entities, such as the developers of “destructive” ransomware strains and individuals found to have “laundered funds on behalf of cybercriminals associated with the North Korean government.”
Chainalysis also noted that blockchain analysis reveals that virtual currency compliance teams have been “effective in helping enforce these sanctions.”
The update from Chainalysis also noted that every sanctioned entity with an OFAC-identified crypto address has received “little to no cryptocurrency payments since being added to the SDN list.” But that does not mean compliance teams’ work is finished. Along with preventing future payments, crypto compliance teams have to “review past transaction activity when a new entity is sanctioned to see if their platform previously processed transactions with that entity, even if the compliance team would have had no way of knowing about upcoming sanctions when those transactions occurred.”
As noted by the blockchain analysis firm, if reviews showed their platform did transact with that now-sanctioned entity, the compliance team would “need to report those transactions through the appropriate channels.”
Chainalysis reminds us that this does not only apply to sanctioned entities, but to any entity whose digital currency transaction activity “becomes suspicious in hindsight due to new information being uncovered.”
For example, if a virtual currency wallet was identified as belonging to a ransomware operator, crypto exchange compliance teams would need “to identify any old transactions occurring between that ransomware wallet and addresses hosted by their platform.”
Chainalysis further noted that compliance teams who do not continuously monitor for newly identified risk in old transactions “could find themselves in trouble with regulators, who are themselves adopting the same blockchain analysis platforms the compliance teams themselves rely on, and can therefore spot historic suspicious activity compliance teams fail to report.”
Chainalysis also noted that it would be quite time-consuming and also infeasible for compliance teams “to manually screen old transactions on a consistent basis as they learn about new risk factors.”
But that’s not required, Chainalysis explains, while noting that with the appropriate architecture in place, “once a blockchain data platform has attributed new risk designations for old wallets, it can scan the blockchain to spot any transactions between those wallets and a cryptocurrency platform, and notify the platform’s compliance team via real-time transaction monitoring alerts.”
As noted by the blockchain firm:
“Some transactions with risky entities aren’t large enough to create real risk or warrant a follow-up from compliance, and these standards change from one organization to another based on differing policies and priorities.”
If your continuous monitoring tool does not account for that, your compliance team will be “inundated with non-critical alerts,” Chainalysis noted while adding that a good continuous monitoring tool will “let compliance teams set customized alert thresholds for risky transactions, with different thresholds for different risk categories, so that they only receive alerts for historic transactions that require a follow-up.”
Chainalysis added:
“Some cryptocurrency compliance solutions support continuous monitoring, but require compliance teams to pay for the ‘re-screening’ of old transactions. This is especially common with softwares that don’t provide automatic alerts and instead require manual re-screening. Not only do these unpredictable costs put a dent in compliance teams’ budgets, but it also makes the cryptocurrency ecosystem less safe by disincentivizing compliance teams from undertaking continuous monitoring in the first place.”
At Chainalysis, they don’t believe in “imposing extra costs on workflows necessary for cryptocurrency platforms to meet the compliance requirements mandated by regulators,” the firm wrote in its blog post.
According to the firm, Chainalysis KYT’s continuous monitoring “checks all the boxes.” They explained that it is a continuous monitoring tool that lets compliance teams “rest easy, knowing that they’ll automatically learn when an old transaction becomes suspicious due to new information.”
In addition to monitoring new transactions for risks as they take place, its continuous monitoring tool has “everything compliance teams need to get peace of mind when it comes to historic transactions.”
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