Complying with Crypto Sanctions, Regulations Complex


Compliance has been a major issue in the crypto industry for several years, as commercial companies and those who use digital currencies to make and receive payments have come under increasing scrutiny as a potential channel for money laundering and repression of sanctions. .

That scrutiny, both in the United States and in the world, became much more intense in February after Russia’s invasion of Ukraine and the intense focus on the sanctions that followed.

While that’s certainly enough to keep businesses from having to deal with encryption, it doesn’t have to be, said Andrew Fierman, head of sanctions strategy at Chainalysis, a blockchain data platform with deep experience in detecting and deterring illicit transactions.

“What a lot of people don’t really understand is that cryptocurrency is really incredibly transparent,” said Fierman, who led sanctions on Barclays Bank after working with other big banking names, including Société Générale, BNP Paribas and JPMorgan Chase. Co.

Cryptocurrencies operate in immutable and publicly accessible blockchain account books, which means that once information about a transaction is recorded in one, it cannot be changed or deleted, he said.

“This means anyone can search their entire transaction history at any time using a public block explorer,” Fierman added.

As a result, compliance professionals familiar with cryptography have some advantages over those working in traditional institutions, as they may investigate transactions that could have an exposure to sanctions or other compliance issues even several leaps and bounds.

“This is not so clear in traditional fiat, where a financial institution can only have access to a single transaction” that could have been sent through a fictitious company and before another financial institution, he said. “They may not have a full lifecycle line of sight for that transaction, whereas in the blockchain, we can do that.”

Harder than it sounds

Of course, like almost anything that involves blockchain technology, it’s not as simple as it sounds. In many ways, browsers are blockchain search engines, and while they are easy to use, the information they provide is quite complex.

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“The problem is, it’s really hard for scouts to read,” Fierman said. “It looks like a lot of random numbers and letters, that transactions are made with other random numbers and letters. And that doesn’t really mean much to most people,” who aren’t very familiar with how blockchains work.

What Chainalysis does, he said, “is map these random numbers and letters, which are cryptocurrency addresses, to their real-world services. That data set supports research and compliance tools for financial institutions, cryptocurrency companies, and agencies. governmental.

This, in turn, allows investigative and compliance staff to “go ahead and mark suspicious activities in real time and do more in-depth research into the flow of funds in the blockchain, especially those where they are exposed to potentially illicit or risky activities. “.

Doing so starts with a simple enough six-step process, he said, starting with collecting data from the know-it-your-customer (KYC) and analyzing it against sanctions lists and blocking IP addresses sanctioned by agencies such as the Foreign Assets Office. United States Department of the Treasury. Control (OFAC).

This can be made robust with more sophisticated tools, such as IP address detection that are known to be associated with VPN services used to mask user location.

“Of course, continuously monitoring your transactions, keeping an eye on the activity flowing through your business is really important,” Fierman said. “It is also possible to perform that due diligence of the counterparty, to understand with whom their customers are transacting.” Then there is a selection of travel rules violations and of course the correct reporting of suspicious transactions to the competent authorities.

Chainalysis has released two free tools, including a portfolio detection application programming interface and a blockchain “oracle” to provide data that provides basic OFAC-sanctioned address tracking capabilities.

Over the next few years, the requirements will be more robust and complex, Fierman said, noting that regulatory and compliance frameworks are under construction in the United States, the EU and elsewhere.

“This is something I’m already seeing in a lot of companies in this space,” Fierman said, adding that they’re starting to “have programs that look a lot more like what you see in traditional financial institutions.” That includes having things like a KYC team, an anti-money laundering (AML) team, and sanctions teams to handle their various regulatory expectations from departments like OFAC and the Treasury Department’s Financial Crime Control Network, also known as FinCEN. , said. .

See also: Blockchain, digital currencies that meet the need for financial innovation

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