For businesses engaged in cryptocurrency, transaction monitoring is an important part of their compliance programs. Businesses such as Bitcoin ATM (BTM) operators should monitor transactions on an ongoing basis for suspicious activity such as money laundering and for connections to sanctioned parties. These businesses should also know that there are effective tools they can use to to help them identify bad actors using their services, or when their customers have connections to bad actors. Perhaps the most important tool available to these businesses is blockchain forensics. Here’s some background:
Bitcoin, the first and most common cryptocurrency, utilizes what is called a “blockchain”, or a “ public ledger of all transactions . . . that have been executed among participating parties.” Blockchain forensics, then, is a tool available to businesses transacting in Bitcoin to monitor the activity of its customers wherein such businesses can use the blockchain to look into their customer’s history for suspicious activity or connections to sanctioned parties. This is actually an advantage Bitcoin has over cash: In Bitcoin, publicly available customer data on the blockchain can potentially identify each individual involved in any transaction. Blockchain forensics basically uses this publicly available data and gives cryptocurrency businesses insight into whether Bitcoin they deal with or may deal with is connected to criminal activity or a sanctioned party or jurisdiction. In short, blockchain forensics is crucial for any business engaged in cryptocurrency seeking to monitor transactions and be compliant with anti-money laundering and sanctions requirements. And the commercially available blockchain forensics analysis software on the market makes this easy.
To emphasize the importance of blockchain forensics to businesses engaged in cryptocurrency, let’s have a look at some of what is required of these businesses. Back in 2016, FinCEN issued a rule creating a “fifth pillar” of anti-money laundering compliance requiring financial institutions to maintain ongoing transaction monitoring and update customer information on a risk basis (See this post from AML Rightsource). For cryptocurrency businesses, blockchain forensics advances the achievement of this “fifth pillar” of anti-money laundering compliance to a new level.
Violation of sanctions requirements promulgated by OFAC is also something of which businesses engaged in cryptocurrency transactions need to be aware. Sanctions are increasingly a tool used by governments to achieve their foreign policy goals, and companies transacting with individuals designated by OFAC, or even transacting with parties who transacted with a party designated by OFAC, can face severe penalties. It is important, then, for businesses engaged in cryptocurrencies like Bitcoin to know something about their customer, and also who their customers have been transacting with. Again, blockchain forensics is essential for seeing if your customer is associated with sanctioned parties or countries (or is sanctioned themselves), and thereby staying compliant with OFAC’s sanctions requirements.
In short, any business transacting with cryptocurrencies needs to ask itself whether they are willing to take the risk of ignorance as to the source of Bitcoin flowing through their business, potentially running afoul of anti-money laundering and sanctions requirements, and facing stiff penalties as a result. A sound compliance program incorporating blockchain forensics is entirely compatible with a profitable business model. From the blockchain forensics work I have done at CoinStructive, Inc., I can tell you the commercial blockchain forensics software that is available makes this a very user-friendly process. No need to be intimidated.