How to Perform Crypto Transaction Monitoring

Cryptocurrency firms are under increasing pressure to meet AML regulations. Transaction monitoring is a key part of a good compliance strategy, because so many signs of suspicious crypto activity can be found by spotting unusual patterns and other red flags in digital payment exchanges.

Let’s see how it works and how to implement it easily.

Why Is Transaction Monitoring Important for Cryptocurrency Firms?

From exchanges to wallets, cryptocurrency companies have historically been operating with relative freedom. However, this has changed in recent years, as governments cracked down on crypto companies to enforce more regulatory checks. 

In fact, new laws now target crypto firms to treat them rather like they do financial institutions, in the sense that individuals and organizations who don’t comply with crypto transaction monitoring regulations now face bigger risks of prosecutions for non-compliance.

For example, they may encounter the following penalties and other consequences:

• Heavy compliance fines: In 2020, a record $100 million in fines was issued to US cryptocurrency businesses according to Kroll’s Global AML report.
• Legal issues with regulatory bodies: Fines are one part of the problem; legal battles and business prohibitions that could lead to a loss of market share are another.
• Damaged business reputation: The loss of respect and loyalty once received from an organization’s crypto users when they hear of fines being issued for non-compliance.
• An increase in cryptocurrency fraud: Organizations that fail to implement the proper crypto transaction monitoring methods may attract cryptocurrency fraudsters who hear about the lack of precautionary methods and believe the firm can be exploited.

The increasing importance of crypto transaction monitoring, and the seriousness of being non-compliant with its demands, is also evident in the responses of governments worldwide. In June 2022, the European Parliament announced new KYC and AML checks designed to trace the transfer of crypto assets. Meanwhile, in the US, cryptocurrency exchanges now fall under the regulatory scope of the BSA (Bank Secrecy Act).

Moreover, according to Bloomberg, the investment and stock trading app Robinhood, which sees about 100,000 transactions a day, faced a $30 million fine from the New York State Department of Financial Services when the firm was found to be violating AML and cyber-security regulations.

Regardless of the jurisdiction of a crypto organization, the above consequences and more may be faced by organizations that don’t act on the need for crypto transaction monitoring.

How to Perform Cryptocurrency Transaction Monitoring

Crytocurrency transaction monitoring may be manual or automated, with a combination of both being ideal. While the former is carried out by humans looking at a list of crypto transactions, the latter involves a software system, armed with the safety and security of blockchain technology, to scan and analyze crypto transactions in real-time.

Cryptocurrency transaction monitoring is a challenge for crypto businesses, as it may cover a handful of scenarios:

• fiat deposits
• fiat <> crypto exchanges
• crypto <> crypto conversions
• crypto transfers and payments

Still, when it comes to AML compliance, there are two key stages where transaction monitoring should be implemented:

1. At the deposit/purchase stage: Most crypto firms who need transaction monitoring act as exchanges, allowing users to trade fiat for coins. That means they will effectively act as e-wallets, receiving card payments or bank deposits, which can be monitored in real-time.
   
2. At the exchange or payment stage: Once you’re dealing with crypto only, it is just as important to monitor your customer’s transactional behavior. That means keeping track of coin conversions, payments made to other wallets, and withdrawals to external wallets. 

Of course, the frequency and variety of crypto transactions tend to be much greater than for traditional fiat currencies. This adds a layer of complexity when logging deposits, exchanges, transfers, and payments. 

Still, the key is to log, monitor – and in some cases, score – each transaction to ensure your crypto business remains compliant with everchanging AML regulations. 

3 Examples of Transaction Monitoring Rules for Cryptocurrency Companies

Transaction monitoring and transactional behavior tend to go hand in hand to improve crypto AML. Let’s see how.

#1: Look Out for Sudden Increases in Transaction Volume

A key part of transaction monitoring is to understand how people buy, sell and exchange crypto on your site. You should also look out for any anomalies. 

In the example below, we’ve set up an AML rule designed to help us identify any 200% increase in transactions over a 24-hour period.

This rule will add 20 points to the transaction’s risk score. Depending on the total score, you can send the transaction for review or automatically decline it based on your risk appetite. 

#2: Monitor Unusually Large Transactions

In the US, AML regulations dictate that you should monitor transactions above $3000. In the EU, customer due diligence measures must be applied for those above €10,000. 

And while there is little consistency between thresholds worldwide, the good news is that monitoring large transactions is extremely easy with SEON.

You simply need to create a rule that flags every transaction above your desired threshold. This is what it looks like in the scoring engine dashboard:

In this scenario, we’ve decided to look at transactions above $3,000 and to send them for manual review by the risk team. You can also set your desired currency, even working with custom values depending on the token or cryptocurrency you’re monitoring. 

#3: Flag New Accounts Receiving a Lot of Deposits 

Hopefully, by the time a new user finishes their digital onboarding on your crypto platform, you should have performed all the right KYC and due diligence checks. 

But the early days of a new account are also the most important to monitor for inconsistencies. This is precisely why we recommend setting up the following risk rule, which flags accounts receiving more than 10 deposits within 24 hours of onboarding:

Of course, only you will be able to decide what counts as an average or suspicious amount of deposits.

But once you have, it is just as easy as editing one custom field in the SEON dashboard, and you can even set up multiple rules with different risk scores depending on the number of deposits you want to flag. 

How SEON Helps Crypto Firms With Transaction Monitoring 

As a full end-to-end fraud tool, SEON lets you monitor user and transaction data. Such data can be logged, scored via fraud detection risk rules, and used to decide if you should flag the account as risky and automate next steps. 

You can also use SEON’s transaction monitoring data as part of your SAR and audits. And it’s all based on real-time data that doesn’t add friction or extra verification steps for your customers.

More importantly, we provide a one-stop-shop solution to remain compliant in the face of increasing regulations, reduce fraud rates as attacks show no signs of slowing down, and understand your crypto customer’s online behavior. You can find out more by signing up for a free, no-card-required trial or booking a demo with us. 

Related Articles

• Transaction Monitoring Software: How It Works and Tips on Deploying It
• What Is AML Transaction Monitoring & How to Set It Up
• FIAT API Reduces Weekly Chargebacks From $40K to $0 with SEON

Sources

• Kroll: Global Enforcement of Anti-Money Laundering Regulation: Shift in Focus
• Europarl: Crypto assets: deal on new rules to stop illicit flows in the EU
• Bloomberg: Robinhood Crypto Unit Fined $30 Million by New York Regulator

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