Crypto compliance software solutions
Along with the blessings of decentralized technology come novel attack vectors authorities must address. While the crypto industry matures, so do the regulatory frameworks for digital assets. In jurisdictions like the US and the EU, compliance is vital to business operations. Dedicated software helps exchanges, trading platforms, and DeFi protocols keep up with legal standards to safeguard users' data and funds.
Compliance in the crypto landscape
The rapid adoption of crypto and distributed ledger technology has surprised many skeptics. On November 9, 2021, just over a decade after its emergence, Bitcoin achieved a market cap of $1.28 trillion. However, as cryptocurrency technologies and firms flourished, the share of illicit transactions also grew. Meanwhile, regulatory uncertainty impeded progress in protecting crypto users.
Today, some cryptocurrency exchanges operate as licensed financial entities, while DeFi (decentralized finance) is generally left unchecked. In the aftermath of black swans like the Terra and FTX fiascos, institutions like the Securities and Exchange Commission (SEC) call for stricter regulations. As the requirements are fluid and ever-evolving, keeping track of all developments in cryptocurrency compliance is a challenge.
Compliance risk associated with crypto transactions
Cryptocurrencies have revolutionized finance and given rise to new avenues for criminal activities. Crypto scams accounted for $680 million in 2021, with $11 billion worth of cryptocurrency held by criminals at year's end. Compliance tools not only drive regulatory awareness, but they also help in combating increasingly complex threats, including:
- Payments for illegal goods
- Financing of terrorism
- Cryptocurrency market manipulation
- Laundering of hacked tokens and stablecoins
- Using mixing services to clean dirty cryptoassets
- Laundering proceeds from ICO scams
Fraudsters are constantly devising new ways to exploit users, such as turning them into money mules. This type of scam manipulates individuals into making crypto transfers on behalf of criminals (often unwittingly).
What does compliance for crypto assets include?
Cryptocurrency compliance means meeting applicable requirements set by regulators through special tools and internal procedures, such as KYC and transaction monitoring. As the regulatory landscape is still fragmented, requirements vary, and new regulations are in the works. As a result, in-house compliance teams have to think on their feet.
Components of AML (Anti-Money Laundering)
The cornerstone of crypto compliance is combating money laundering. Entities need a strong understanding of AML and dedicated tools to detect, report, and prevent efforts to launder money. Elliptic's guide to criminal typologies lists ten types of money-laundering activities, from the use of non-compliant exchanges to illicit proceeds from privacy coins. The core components of AML are:
KYC (Know Your Customer)
This set of procedures is used to verify the identity of individuals and customers by collecting and storing their PII (Personal Identifiable Information). Like conventional financial institutions, centralized crypto platforms perform background checks to prevent financial crime.
KYB (Know Your Business)
Similarly to KYC, KYB is a mandatory due diligence process whereby financial institutions verify other entities. It focuses on data related to the legal status of a business, including its UBO (Ultimate Beneficial Ownership).
KYT (Know Your Transaction)
Compliance employees monitor transaction data to identify suspicious behavior. For example, KYT tools can trace addresses on the OFAC (Office of Foreign Assets Control) sanction list and help freeze deposits to shield them from illicit activities. KYT insights typically involve artificial intelligence and machine learning.
Solutions for financial institutions and crypto firms
Software automation and third-party expertise help firms and individuals achieve regulatory compliance and keep track of their obligations. For instance, such tools typically come with KYC and KYB features for rigorous onboarding. They also keep clients updated on changes in crypto regulations, helping them protect their reputations and reinforce trust. Here are five notable examples in 2023.
#1 ConsenSys Diligence
ConsenSys Diligence, chosen by over 100 cryptocurrency service providers, specializes in blockchain security and smart contract audits. Its comprehensive service suits the needs of businesses of any size, from startups to large enterprises, helping them launch and maintain their Ethereum-based Dapps (decentralized applications).
According to the official website, ConsenSys Diligence performs over 10,000 analyses each month, including code audits at the early stages of the development lifecycle to ensure a smooth launch. Its clients protect their Dapps from exploits and avoid other security risks and costly errors. Key features include:
- Automatic security scans of smart contract code via MythX API, which works with Ethereum and other environments based on EVM.
- Double-checking of clients' code by seasoned security auditors.
- Opportunity to seamlessly integrate compliance technology into development environments for incessant analysis.
- 24/7 verification and monitoring for vulnerabilities while writing and modifying code.
- In-depth vulnerability reports, including mitigation guidance.
- Threat modeling to detect potential entry points for cybercriminals, assess projects' attack surface, and update defenses for continuous protection.
- Open-source tools for blockchain security, extensions, and visualizers.
This company, featured in Newsweek, CoinDesk, and Forbes, has been developing solutions for decentralized identity since 2015. Its team of 25 experts pursues "a world where identity is not only defined by documents, but also personality." An integrated permissioning tool called Civic Pass helps DAOs, creators of NFTs (non-fungible tokens), and Discord servers perform all-encompassing customer due diligence.
Individuals can create versatile profiles to unlock web 3.0 services. Users own their verified human-centered identities and can express themselves through dynamic profiles accompanying wallet addresses. As profiles are managed on-chain, they maintain complete control of their private keys. Civic Pass lets one connect wallets from multiple blockchains and manage all NFTs in one place. Civic's key services include:
- Civic Pass, a tool that lets companies ensure their users meet applicable compliance criteria. It supports Solana, Ethereum, Casper, and Polygon as of December 2022.
- Seamless integration into existing Dapp interfaces.
- Customizable combination of verifiable credentials for Civic Pass, including liveness, uniqueness, ID documents, location, sanction screen, Twitter, and Discord.
- Protecting NFT mints from bots to ensure fair auctions.
- Adding user profiles without storing underlying data via the company's SDK (Civic.me).
- Wallet-to-wallet messaging for users with web3 profiles.
This UK-based company provides diverse services, including blockchain analytics, training, and certification. Elliptic's compliance options cater to crypto exchanges, regulators, and institutions – over 100 entities in 29 countries. It also boasts coverage of over 98% of the global trading volume across over 500 crypto assets and 1 billion labeled addresses.
Elliptic has been preventing financial crimes in the crypto space since 2013. It is trusted by CoinLoan, Coinbase, Revolut, and other prominent names in the industry. Actionable insights backed by its enormous data library help clients mitigate risk while ensuring all-encompassing compliance. Elliptic traces transactions across the entire blockchain technology ecosystem, offering:
- Screening of crypto wallets in real time for AML/CFT and sanctions risk.
- Monitoring of crypto transactions across blockchains and assets to combat financial crime and ensure AML and sanctions compliance.
- Screening of VASPs (virtual asset service providers), such as crypto exchanges, for faster due diligence and risk assessment.
- One-click crypto investigations with visualization and exploration of wallets and transactions over 100 billion data points.
- Actionable risk scores for transactions, customers, and wallets accessible via API and browser interface.
#4 Solidus Labs
Based in the US, Solidus Labs labels itself "the category-definer for crypto-native triple T (3T) market integrity solutions – trade surveillance, transaction monitoring, and threat intelligence." Its clients include platforms like Binance, Genesis, and Anchorage Digital. Solidus supports the unified future of risk monitoring through KYC and AML, KYT (Know Your Transaction) compliance measures, wallet screening, and bank account verification.
Solidus Labs works with a broad spectrum of use cases in DeFi and CeFi, from exchanges to remittance services to tokenized platforms. It helps financial institutions like hedge funds, venture capital firms, neo-banks, and more. Government agencies also use Solidus tools to build transparency and innovative frameworks. Solidus Labs offers:
- Trade surveillance to combat market manipulation by detecting abnormal crypto orders, visualizing market activity, and spotting deviations from the norm.
- Real-time alerts on potential breaches and suspicious behavior within an intuitive workflow management system.
- Transaction vetting to identify, investigate and report potential threats to AML, sanctions, and financial risk compliance 24/7.
- Universal Client Profile assessing risk throughout clients' investment journey, combining all indicators into a unified market integrity tab.
- Comprehensive onboarding verification system for retail and institutional clients supporting end-to-end handling of applications.
Like Elliptic, Coinfirm has a strong focus on blockchain analytics and investigations. It offers comprehensive AML solutions, entity due diligence, and services for government entities and financial institutions. Cardano Foundation uses its AML services to ensure ADA crypto compliance. The latest client cases include CoinClash, BlockEx, and Poundtoken.io.
Coinfirm actively monitors over 25,000 blockchain entities and 98% of the market, serving over 300 clients worldwide. Crypto businesses and institutions benefit from day-to-day screening with an opportunity to vet all counterparties with one request. The software also detects behavioral changes to send real-time alerts. The key selling points include:
- Blockchain analytics platform screening transactions and wallets with cluster monitoring, investigations using forensic accounting methods, and "the largest database in the industry from on and off-chain sources."
- Entity due diligence, including business registration details and KYC, AML status, with risk reports covering over 350 checks and data points.
- AML Oracle that uses smart contracts to ensure Dapp compliance with the FATF regulations.
- Free sanctions screening of addresses for compliance with OFAC restrictions.
- Institutional-grade Source of Funds tool enabling clients to prove SOF to financial institutions.
Software for crypto regulations and crime prevention
Crypto service providers must meet ever-growing requirements to combat crime, protect users, and ensure compliance with local laws. Through KYC, KYT, and other procedures, a crypto firm can verify clients and partners and thwart illicit uses of tokens and coins. Compliance software detects suspicious entities and transactions and tracks regulatory changes to keep clients' defenses up-to-date. As the industry moves forward and the legal frameworks grow increasingly complex, these tools are vitally important for all crypto businesses.