Why transaction monitoring for crypto firms is imperative

As cryptocurrency continues to become a staple in mainstream financial life, the voices around its regulation are getting louder.

In a recent post by RegTech firm Sentinels, the company discussed in greater detail how alongside this discussion topic, transaction monitoring is completely necessary for these cryptocurrency firms.

Sentinels said, “There are hundreds, perhaps thousands, of these digital exchanges now; they are part of the financial ecosystem and must be made subject to regulation to combat money laundering and other financial crimes. As a result, transaction monitoring for crypto is becoming more important than ever for the industry.”

The firm cited a recent dispute between Reuters and Binance, who are currently are loggerheads due to the fact that Reuters claimed Binance aided in laundering $2.35bn of corrupt funds between 2017 and 2022. Binance countered by saying Reuters had misinterpreted the figures and the facts.

Other recent findings discovered that 0.15% of all cryptocurrency transactions were associated with illegal activity in 2021.

Cryptocurrency transactions are recorded in a ledger that is public and immutable – blockchain. This means that transaction monitoring for crypto is ‘theoretically’ simple, Sentinels claims, using an advanced AML solution, businesses can track and interpret crypto trades in the same way as it monitors traditional flows of money.  While there are some exceptions, most exchanges can successfully deploy AML software to protect themselves against fraud and comply with regulations.

Sentinels also offered examples of how regulatory watchdogs have been mostly successful in applying existing regulation to cryptocurrencies – in 2021, the FATF released updated guidance around virtual assets and providers which draws crypto exchanges and VASPs into the regulatory net of AML and CTF.

Regulatory regimes for crypto varies across the EU, with the Netherlands and Germany seen as having the most stringent regimes. For example, crypto brokers and custodians in Germany need a banking licence and the Netherlands has leveraged existing EU AML rules to introduce a registration requirement for crypto service providers.

Sentinels said, “It is in the interest of the financial sector that the rules governing virtual assets are reconciled and made explicit, but exchanges don’t need a regulatory overhaul to fight fraud – the tools are there already. Many startups in this space are anticipating any changes mandated by Brussels and implementing advanced AML solutions now and automate their compliance. In this, their logic and motivation are no different from any bank, insurer, or investment firm that wants to focus on serving its customers and not be needlessly distracted by combating financial fraud.”

However, an area of considerable challenge for regulators and law enforcement is ‘privacy coins’. These coins, Sentinels claims, can break the transaction trail because they are part of a pool of crypto assets and so cannot be screened end-to-end as part of a public ledger. This in itself, though, is not the end of the world – an exchange can still use AML solutions to assign risk scores that reflect risk appetite and assess a customers transaction against them, and criminals also greater prefer ‘unpooled’ crypto to privacy coins as the former are more readily available and liquid.

Sentinels concluded, “One of the most astonishing aspects of the crypto revolution is how readily this complex technology has been embraced by the general public. Of the legion of exchange and crypto service providers that has sprung up in the wake of this appetite for crypto, only the best will thrive – that is to say, those companies that act with probity, manage their costs well, and build trust by monitoring the financial activity of its customers.

“Transaction monitoring is an absolute necessity for crypto companies not just from a regulatory standpoint but also to build trust with customers and prove legitimacy to the rest of the financial world.”

Find the full post here.

Sentinels has been appointed by payments FinTech kevin. to handle transaction monitoring compliance for the company.

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