The rise of cryptocurrency has brought forth a new set of risks in the financial ecosystem. Compared to the traditional financial services industry, using crypto as a form of payment is still in its nascent stage. Crypto introduces new forms of digital assets, decentralised finance platforms, non-fungible tokens, and innovative blockchain projects. Businesses such as crypto exchanges and digital wallets face perpetual challenges to stay ahead of these developments and align their compliance practices.
Crypto enables users to transact pseudonymously, posing a challenge in identifying real user identities. Criminals can exploit this anonymity to engage in money laundering, fraud, or other illicit activities without easily traceable identities. Regulations in the crypto industry are also in their infancy, which may lead users to trade without undergoing proper identity verification checks.
On the other hand, more retailers are starting to accept crypto as payments for purchases. The world’s increasing use of crypto for payment is spurring the need for comprehensive financial crime compliance measures.
Crypto regulation lacks a universal standard and regulations vary widely from one jurisdiction to another. This lack of standardisation creates compliance challenges for exchanges that operate internationally or serve customers from multiple regions. With emerging coins, tokens, and blockchain projects, regulators are attempting to align crypto operations with new laws and regulations, but this also adds extra challenges for compliance professionals to keep up.
Diverse crypto and blockchain networks demonstrate distinct levels of transparency, complicating transaction tracking across various blockchains. This complexity poses a challenge for exchanges and regulators to effectively monitor and identify suspicious activities that involve multiple crypto or blockchain networks.
Even with skilled professionals and specialised technology, navigating an always-changing financial crime compliance landscape is a challenge. Introducing crypto into the mix complicates compliance even more and drives increased expenses. Labour costs, for example, have become a substantial component of rising expenses, with more than 50% of global compliance expenditure allocated to labour-related expenses.
The rise of blockchain analytics
Financial institutions are mandated to conduct transaction monitoring as a regulatory requirement, as it plays a crucial role in preventing money laundering. However, crypto transactions occur outside of these institutions, compelling enterprises and businesses to adopt new approaches or adjust monitoring efforts.
Some have suggested that digital assets have contributed to financial crime, including fraud, bribery, terrorist funding, and other illicit transactions. Regulators around the world have been stepping up efforts to combat money laundering and tighten anti-money laundering (AML) controls in recent years.
In response to the complexities presented by AML regulations, we observe the adoption of blockchain analytics and analysis, which track the flow of cryptocurrencies and identify individuals or entities involved in suspicious transactions. By analysing blockchain data, crypto exchanges and regulatory bodies can uncover noteworthy patterns indicative of illicit activities. These patterns include the transfer of large sums of money, recurring transactions with the same address, and engagements with entities previously linked to criminal behaviour.
A fresh approach
Many crypto exchanges are employing multiple systems and solutions to address these challenges. However, relying on multiple systems and siloed data could lead to higher compliance costs and workloads if companies fail to take a holistic view to assess risks while meeting evolving compliance requirements and customer expectations.
Traditional methods of risk management tend to impede the pace of decision-making and the agility required to accommodate shifting regulatory requirements and evolving customer expectations.
Additionally, the combined efforts of multiple teams to onboard customers and monitor transactions consume a significant amount of time and resources, potentially prolonging processes.
To effectively address these challenges, many crypto exchanges are adopting a risk-based approach with risk orchestration technology. Risk orchestration is rapidly gaining traction as a progressive alternative to siloed risk management products. From customer onboarding to due diligence, exchanges can capture a more complete view of their customers and make informed business decisions.
Leveraging risk orchestration
In recent years, industry analyst firms such as Datos Insights and Gartner have defined risk orchestration as a way to manage risk and compliance obligations. Risk orchestration aims to support transaction screening and regulatory risk management, while considering the customer experience.
Orchestration seeks to help companies, including crypto exchanges, in managing risk and combating fraudulent activities by connecting various tools, technologies, and data and enabling them to work together across compliance and fraud workflows.
Companies employing orchestration endeavour to improve decision-making efficiency and customer experiences, potentially reducing costs and striving for higher productivity through quicker risk assessment processes.
A program that meets regulatory requirements while aligning with business-specific objectives has the potential to offer long-term benefits to exchanges. Proponents of risk orchestration assert that it will have a substantial role in helping organisations navigate ever-evolving global regulatory expectations and the rapid digitalisation of transactions.