Cryptocurrency exchanges and companies are gaining popularity, and many countries are working to establish regulatory frameworks for them. While the regulatory environment for cryptocurrency remains imprecise or uncertain in the US, institutions that transact in cryptocurrency are required to monitor these transactions and file Suspicious Activity Reports (SARs) if they detect any suspicious activity.
Businesses can minimize the risks associated with cryptocurrency transactions through compliance programs prepared with powerful Transaction Monitoring Software. Although cryptocurrencies pose unique compatibility challenges, innovative regtech solutions can meet these challenges. The biggest risk in the crypto industry is not being able to control and constrain how blockchains move.
Cryptocurrency businesses must fully understand and implement existing transaction monitoring regulations specific to cryptocurrencies and be alert to proposed new regulations to ensure compliance.
Cryptocurrency Transaction Monitoring Regulations
A transaction monitoring system should be able to instantly identify suspicious transactions, create alarms for these transactions, and forward the alarms to the compliance team instantly. After checking these alarms, the compliance team should report any transactions it deems truly suspicious and report them to a regulatory agency. With a powerful process monitoring system application, you can:
- Get customized payment fraud intelligence
- Be instantly notified of suspicious transactions and automatically stop transactions
- Receive instant alarms according to risk levels, without waiting for the end of the day for alarms
- Help the compliance team save time
- Reduce costs and false positives with automated risk scoring
- Maintain a full audit trail
- Get accurate and actionable SARs
- Share information easily
- Monitor transactions instantly
- Test and simulate rules in an advanced sandbox environment
- Analyze accounts that trade with each other
With cryptocurrency becoming a viable transaction option for individuals, cryptocurrency-related businesses should invest in new transaction monitoring systems to help monitor these new types of transactions.
As the institutionalization and use of cryptocurrencies increase, the Financial Crimes Enforcement Network (FinCEN) updated its guidance for fiat currency only. The Travel Rule, introduced in 1996, requires financial institutions to forward certain information to the next financial institution during money transfers. In 2013, FinCEN published guidance for individuals who manage, exchange, or use virtual currencies, stating that administrators and virtual currency exchanges would be considered money transmitters and subject to the Bank Secrecy Act if they agreed to (1) accept and transmit a convertible virtual currency (CVC) and (2) buy or sell CVC.
Despite initially promoting cryptocurrency as completely anonymous, FinCEN has forced cryptocurrency exchanges to comply with record-keeping requirements and the Travel Rule by sharing information about the creators and beneficiaries of cryptocurrency transactions.
Factors That Cryptocurrency Businesses Need To Consider
To mitigate the unique risks of trading in cryptocurrency, cryptocurrency-related businesses must use the best cryptocurrency-focused AML software tools that meet the needs of their institutions. The value and benefit of such software increase with technological development. Failure to use this software and be late in creating the AML compliance program may result in penalties.
For example, in late 2020, BitMEX, a P2P crypto products trading platform, received criminal and civil charges from the US Department of Justice for allegedly failing to maintain a proper AML compliance program under CFTC rules. The CFTC seeks payment of unfair advantage, monetary fines, and compensation. Additionally, in October 2020, FinCEN fined a New Jersey-based business $60 million for violating reporting and registration requirements under the Bank Secrecy Act. The person owned two bitcoin businesses and was able to launder more than $300 million in cryptocurrencies by exchanging bitcoins on behalf of customers hundreds of times, running an unlicensed money transfer business, and transferring money without a license.
Cryptocurrency businesses can mitigate the risks of trading in cryptocurrency by implementing several measures. Firstly, it is imperative to stay up-to-date with the constantly evolving policies, procedures, and laws on cryptocurrency and anti-money laundering. These regulations are dynamic, and institutions dealing with cryptocurrencies must remain vigilant to comply with them. By being aware of new laws and regulations, businesses can take prompt actions for compliance.
Also, providing training to employees is crucial. Proper educational guidance and workshops should be conducted to enable employees to effectively review cryptocurrency transactions and identify illegal activities such as money laundering. Cryptocurrency transactions are different from regular cash transactions, and the information presented to a multi-transaction viewer is unique. Therefore, employees monitoring cryptocurrency transactions need to be trained to read and decipher available information such as "TX Hash" and "Exit Address", identify illegal activities, and write and include Suspicious Activity Reports. Many regulations also emphasize the importance and necessity of such training.
Businesses should update their transaction monitoring tools regularly. Transaction Monitoring Software should be equipped to process and identify illegal cryptocurrency transactions that criminals may attempt to commit. Whether updating existing transaction monitoring tools or implementing a new system, it is imperative that the tool/system can effectively identify and report suspicious transactions to avoid regulatory scrutiny and mitigate the risks associated with cryptocurrency transactions.
Cryptocurrency Transaction Monitoring Best Practices
- Implement a robust risk assessment framework
The first step in effective cryptocurrency transaction monitoring is to implement a robust risk assessment framework. This involves assessing the risks associated with different types of cryptocurrency transactions and the customers who are involved in these transactions. Businesses should use a risk-based approach to identify high-risk transactions and customers, and allocate resources accordingly. A robust risk assessment framework will help businesses to prioritize their transaction monitoring efforts and focus on the most significant risks.
- Utilize advanced analytics and machine learning
Cryptocurrency transaction monitoring involves processing large amounts of data in real-time. This can be a challenge for businesses that rely solely on manual processes. Utilizing advanced analytics and machine learning can help to automate the process of transaction monitoring and improve the accuracy of risk detection. Machine learning algorithms can analyze transaction data to identify patterns and anomalies that may indicate fraudulent activity. Businesses can then use this information to generate alerts and investigate suspicious transactions.
- Monitor cryptocurrency exchanges
Cryptocurrency exchanges are a common point of entry for illicit funds into the financial system. Monitoring cryptocurrency exchanges is therefore an essential part of effective transaction monitoring. Businesses should keep up to date with the latest developments in the cryptocurrency industry and identify new exchanges as they emerge. They should also monitor exchanges for suspicious activity, such as large transactions, transactions to high-risk jurisdictions, or transactions involving known criminal entities.
- Implement transaction monitoring tools
Implementing transaction monitoring tools can help businesses to automate the process of monitoring cryptocurrency transactions. These tools can analyze transaction data in real-time and generate alerts when suspicious activity is detected. Businesses should look for transaction monitoring tools that offer advanced analytics and machine learning capabilities, as well as real-time monitoring and reporting features.
- Train staff on cryptocurrency transaction monitoring
Transaction monitoring is a complex process that requires specialist knowledge and expertise. Businesses should provide regular training to staff on cryptocurrency transaction monitoring best practices. This should include training on how to identify suspicious activity, how to use transaction monitoring tools, and how to escalate suspicious transactions for further investigation.
- Implement a risk-based approach to customer due diligence
Effective customer due diligence is a critical part of transaction monitoring. Businesses should implement a risk-based approach to customer due diligence, which involves assessing the risks associated with different types of customers and tailoring the due diligence process accordingly. This may involve gathering additional information from high-risk customers, such as source of funds and business activities.
- Collaborate with other businesses and law enforcement agencies
Collaboration with other businesses and law enforcement agencies is essential for effective transaction monitoring. Businesses should share information on suspicious activity and collaborate with other businesses to identify and prevent financial crimes. They should also work closely with law enforcement agencies to report suspicious activity and assist with investigations.