A guide to avoiding common crypto compliance pitfalls

by Marina Khaustova

Jul 06, 2021

Cryptocurrency industry regulations continue to evolve at a rapid pace. Crypto service providers must ensure that they are taking the right steps to safeguard their interests. Businesses must be able to track blockchain transactions, identify dubious entities, and fight against scams. This article discusses five common mistakes to avoided to ensure compliance.

MISTAKE #1: Inadequate training about the blockchain sector

Perhaps one of the biggest mistakes that a business make is to have an incomplete understanding of the crypto world. A lack of awareness regarding terminologies could have far-reaching consequences for your business. Here are a few key definitions to get you started:

WHAT IS BITCOIN? Bitcoin is one of the most popular cryptocurrencies in the world. Bitcoins can be sent from one user to another using a decentralized network. Every bitcoin transaction is verified using a technology known as cryptography and is recorded in a public ledger called a blockchain. There are currently more than 18.7m bitcoins in circulation, with another 2.3m yet to be mined. The value of bitcoin has significantly risen from $0.75 in 2011 to $34k in 2021.

WHAT IS BLOCKCHAIN? Blockchain is a digital ledger that records transactions across computers. The process of maintaining the blockchain is called mining. Miners are people who use computers for transaction verification and receive cryptocurrency as a reward. To complete a crypto transaction, computer networks are required to verify them through solving cryptographic math problems. After the message is decrypted, the transaction is complete.

WHAT ARE WALLETS? Wallets are an essential part of the blockchain process because they are used for sending and receiving operations. They also function as a crypto storage mechanism. There are two major types of wallets: hot wallets and cold wallets. The key difference is that hot wallets are connected to the internet, while cold wallets also work offline.

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MISTAKE #2: Not updating policies on time

It is critical for businesses to update their policies regularly. Outdated policies expose you to compliance risks as well as operational risks. To ensure that your policies are fully aligned with regulatory requirements, you must keep up-to-date about the rules and regulations governing crypto transactions. Here are a couple of regulatory authorities that you should know about:

FINANCIAL ACTION TASK FORCE (FATF): The increasing popularity of the crypto industry means regulatory guidance has become more important to prevent scams, money laundering, and other illegal activities. The FATF is an inter-governmental agency that determines standards for anti-money laundering (AML) and know-your-customer (KYC) requirements. As the FATF publishes its global recommendations, they are steadily adopted by countries and territories on a local level.

FINANCIAL CRIMES ENFORCEMENT NETWORK (FinCEN): FinCEN is an agency of the US Treasury Department tasked with preventing and punishing money laundering and other financial crimes. Cybercrime involving cryptocurrencies is currently a priority for the agency. A proposed rule that would require crypto exchanges to identify personal wallets making large transactions is currently being debated and developed by FinCEN and the crypto industry.

6AMLD (6th EU Anti-Money Laundering Directive): Another important directive to note is the European Union’s 6AMLD for June 2021. 6AMLD refers to all obliged entities in the EU. All obliged entities include financial institutions, banks, lawyers, accountants, real estate agents, virtual asset service providers eg. digital wallets and virtual assets eg. cryptocurrencies.

FINANCIAL CONDUCT AUTHORITY (FCA): The FCA governs financial activities within the United Kingdom (UK). Although the FCA does not regulate cryptocurrencies independently, it does require exchanges to register with them. In addition, the authority also creates guidelines about crypto-asset derivatives. The FCA updates its guidelines consistently, and businesses must keep track of their latest decisions. Businesses should also update their policies on time. Many countries that permit cryptocurrency markets to operate have enacted laws subjecting organizations that participate in these markets to rules designed to prevent money-laundering, terrorism financing, and organized crime.

Crystal Blockchain provides consultations in matters relating to the applicability of anti-money laundering, anti-organized crime, and anti-terrorism-financing laws for blockchain and crypto.

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MISTAKE #3: Lack of customization related to monitoring activities

Another mistake often made by businesses is they fail to customize their monitoring mechanisms. This could prove to be a major mistake since customization is the key to identifying the specific risks faced by your business. It is important to create customized alerts that help your business prevent activities like terrorism, tax evasion, or money laundering.

There are several transaction monitoring tools available in the market. These tools help businesses in monitoring risk scores, creating custom alerts, and searching about dubious entities. Crystal Blockchain provides one such monitoring solution. Our all-in-one customizable analytics system allows users to track the movement of any customers’ deposited or withdrawn amounts. It also enables users to estimate the risk associated with each transaction.

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MISTAKE #4: Not conducting a thorough risk assessment

Crypto businesses continue to make the mistake of not assessing the risks associated with transactions. Merely tracking crypto transactions is not enough - you must also look to conduct a thorough risk assessment exercise every time a withdrawal or deposit is made. Industry specialists like Crysta help your business identify and tackle risky transactions early on.

The Crystal platform offers FATF Red Flag Indicator alerts that highlight any connections with ML and other illegal activities. The focus of monitoring potential ML is on the patterns of deposits and withdrawals and the use of IP and other data to assess risk. Using Crystal’s automated service, firms can monitor potentially risky transactions, identify and highlight any possible risky sender or recipient information, while also assessing sources of funds or wealth.

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MISTAKE #5: Not paying enough attention to historical data

Modern-day businesses often make a major mistake by only focusing on current transaction data. Instead, they must also focus on utilizing historical data to identify suspicious trends. This is because knowing current data only might not be enough to have the whole picture. Therefore, it’s necessary to look into transaction patterns and establish potential connections.

Increasing crypto-asset regulations and compliance requirements encourage more law-abiding firms to use AML and blockchain analysis tools like Crystal Blockchain. Additionally, this development has also resulted in a change of tactics from crypto-criminals, making them work even harder to entangle and hide stolen fund transaction flows much more precisely.

While these schemes by crypto-criminals will inevitably become more complex, analytics firms like Crystal continue to develop their solutions too. This is helping companies in meeting and combating these illicit activities as quickly as possible. Further refined blockchain analytics products are also continuing the fight against fraudulent activities and working towards making the blockchain and cryptocurrency space as secure as possible for all transactors involved.

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How do Crystal’s features work for analyzing more sophisticated ML techniques? The connections tool, for example, can be used for viewing addresses/entities. A diagram of all tracked address/entity interactions and users may switch between direct connections and all connections, including both direct and indirect relationships. This feature analyzes both incoming and outgoing transactions and tracks them until the funds reach another known entity. It’s helpful when checking the origin of funds of a user during AML compliance procedures. All these transactions can be mapped out on our user-friendly visualization tool.

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Digital money laundering schemes are becoming extremely common around the world. This development makes it extremely important for firms to tighten their compliance mechanisms. Such businesses must also ensure that they avoid these common pitfalls in crypto compliance so that they are able to meet the regulatory requirements.

Crystal has developed solutions that define illicit activities on blockchains and promote the safety of transactions. However, in addition to deploying such solutions, it’s highly recommended that businesses in the crypto sphere follow recommendations and adhere to regulations to protect themselves from being involved in illegal activities. Awareness of the risks that exist with crypto and what you can do to prevent them will help you feel more secure.

Crystal Blockchain follows a risk-based approach to cryptocurrencies recommended by global regulators including the FATF, FinCEN, the EU 6AMLD, and the UK FCA. We can provide you with demo access to all of Crystal’s features for two weeks. We can also schedule an online product demo session and answer all your questions about Crystal’s analytics solution.

Contact Crystal Blockchain today to find out about our risk-based approach to virtual assets.

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