Cryptocurrency Transaction Monitoring: How It Works in 2023

Transaction monitoring is the dark horse of compliance. The rules surrounding it often lead to confusion, and businesses often struggle to adopt proper solutions in time and in line with shifting requirements.

When it comes to crypto, transaction monitoring gets even more difficult. In 2022, Robinhood Markets’ cryptocurrency division was fined a record $30 million by the New York State Department of Financial Services after they were accused of violating anti-money laundering (AML) and cybersecurity rules. The company had used a manual system to review transactions, which the financial watchdog called “unacceptable” for a business averaging more than 100,000 transactions a day.

The regulatory landscape for cryptocurrencies is far from established, and laws may differ country by country. So while there’s still no international consensus on how to best regulate crypto, institutions dealing with virtual assets still need to monitor their transactions and file suspicious activity reports (SARs) if unusual activity is identified.

To prevent compliance-related troubles, Sumsub’s team has compiled a guide to crypto transaction monitoring.

What is really meant by “transaction monitoring”

Transaction monitoring is technology that detects and analyzes unusual transactions in real time. It allows businesses to verify the source and destination of funds and the possible connection of those funds to money laundering.

The process is mandated by AML laws as part of the Customer Due Diligence (CDD) procedure, and applies to all fiat transactions (EUR, USD, GBP, etc.) and, in certain jurisdictions, to crypto transactions (Bitcoin, Litecoin, Ethereum, etc.).

Some confuse transaction monitoring with AML monitoring, however the latter refers specifically to adverse media, blocklist and sanctions screening processes.

Suggested read: What is AML Transaction Monitoring?

Why crypto transaction monitoring is crucial

The adoption of cryptocurrencies by both individuals and businesses has surged in recent years—as has the amount of related theft and fraud.

Through July 2022, almost $2 billion was stolen in crypto through hacks, compared to just under $1.2 billion at the same point in 2021.

Money laundering through crypto is another problem. In 2021, for example, criminals laundered $8.6bn of cryptocurrency—up by 30% from the previous year.

Regulators around the world have imposed special crypto transaction monitoring rules to ensure that companies dealing with crypto have mechanisms to detect and prevent threats. Non-compliance surely results in huge fines.

Figuring out compliant crypto monitoring

In the world of crypto, transaction monitoring is a little different and more complex. The good news is that there are international recommendations that companies dealing with crypto may stick to. In September 2020, the international AML regulating body, the Financial Action Task Force (FATF), issued guidance on money laundering schemes via virtual assets.

The regulator outlines the following red flags of cryptocurrency money laundering:

• Anonymous transactions. Use of private coins, trade on unlicensed exchanges, or trade through proxies; use of the same IP address to operate numerous cryptocurrency wallets anonymously.
• Transactional behavior. Suspicious cryptocurrency transaction patterns, such as high transaction frequency in a short period of time or quick deposits and withdrawals of funds into a newly formed account.
• Geographic risks. Cryptocurrency transactions that are carried out into or out of high-risk nations or jurisdictions, or that send currency to exchange outside of the customer’s home country. 
• Structured transactions. Multiple cryptocurrency transactions that are deliberately structured in amounts that do not trigger reporting thresholds. 
• Inadequate CDD. Cryptocurrency transactions involving accounts that have refused or avoided inquiries for identifying information.
• Money-mules. Elderly or financially vulnerable clients exploited as mules to carry out transactions for money launderers.

In October 2021, the FATF issued an updated guidance for a risk-based approach for crypto. Accordingly, companies are required to implement risk-based cryptocurrency transaction monitoring measures which detect money laundering risks that their clients present, including:

Due diligence measures. According to the 2021 FATF Updated Guidance, transactions above 1000$/€ must be approached with due diligence measures. Crypto service providers should build their risk profiles and cryptocurrency transaction monitoring measures on accurate CDD. This means acquiring valid digital credentials from customers, including such documents as passports, IDs or driving licenses, or even biometric identifiers, such as fingerprints or face recognition.

Screening, monitoring and reporting. Cryptocurrency service providers should enhance their transaction monitoring process by screening and monitoring for crucial risk data, including their customers’ PEP status, involvement in adverse media, and presence on relevant international sanctions or watch lists. 

Suspicious activity reports should be stored for future auditing purposes.

Smart technology. Crypto transaction monitoring involves the collection and analysis of large amounts of data that would be impossible to process manually. In order to manage this, companies should implement a range of automated AML tools to ensure that suspicious activity is detected and reported to the authorities in a timely manner.

When it comes to smaller transactions, businesses and their compliance teams are well equipped to handle the stress without any fancy software. Yet, mid-size and large companies will be expected to automate in order to combat a growing amount of high-risk crypto transactions. As we’ve learned, manual transaction monitoring was a serious failure for Robinhood—a business with about 100,000 transactions a day. As a result, this led to a $30M fine from the New York State Department of Financial Services.

FAQ

• What is transaction monitoring?

  Transaction monitoring is technology that detects and analyzes unusual transactions in real time or on a daily basis.

• Can cryptocurrency transactions be monitored?

  Yes.

• How is cryptocurrency monitored?

  The best way to monitor cryptocurrency transactions is through a secure, automated system, rather than doing it manually.

• What is a cryptocurrency monitoring platform?

  A cryptocurrency monitoring platform is software which detects high-risk and suspicious transactions. When it comes to picking the right software, the best choice would be a blockchain transaction monitoring platform with a legally-equipped, customer-focused AML compliance framework in line with the FATF and FinCEN requirements.

With Sumsub, you don’t just get a crypto monitoring technology, you get a legally certified methodology that fully automates crypto compliance.