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Blockchain analytics solutions have been a key part of enabling the crypto industry to fight financial crime since Elliptic produced the first such capabilities in 2014.
Today, hundreds of crypto-asset companies around the world use our solutions to protect their businesses from fraud, money laundering, sanctions evasion and other risks. However, the industry has sometimes lacked regulatory clarity on how to operationalize the use of blockchain analytics within compliance programs.
Guidance released today by Adrienne Harris – Superintendent of Financial Services at the New York Department of Financial Services (NYDFS) – clarifies how the use of such tools can be a key part of an effective cryptoasset compliance program.
Specifically, Superintendent Harris stated that: “[T]The department emphasizes the importance of blockchain analytics in addressing […] anti-money laundering requirements […] and OFAC-related compliance controls, including but not limited to:
- increasing know-your-customer (KYC) controls;
- tracking activity transactions on the chain; and
- conducting sanctions screening of activities on the chain.”
Let’s consider them in more detail.
Expanding Know Your Customer (KYC) controls.
The NYDFS guidance emphasizes the need to leverage “on-chain” information from KYC blockchain analysis with the many “off-chain” data points—such as corporate data—that compliance teams already collect during customer due diligence. This shows a clear use case for wallet viewing solutions like Elliptic Lens.
By identifying the entity associated with a given address cluster, blockchain compliance teams can better understand the financial crime and regulatory risk of interacting with high-risk wallets, which can help reduce the likelihood of interacting with a bad actor. This risk mitigation strategy can range from identifying non-compliant crypto exchanges to preventing interactions with sanctioned individuals and dark web markets.
Conduct transaction tracking activity on the chain
The guidelines also make it clear that transaction monitoring is a major component of a best-in-class virtual currency compliance program. Particularly noteworthy was the statement highlighting some of the key financial crimes typologies which virtual currency companies should be on the lookout for. Businesses should assess whether any virtual currency they deal with:
(1) has significant exposure to high-risk or sanctioned jurisdictions;
(2) is processed in a mixer or bowl;
(3) is sent to or from a darknet marketplace;
(4) is associated with scams/ransomware; and
(5) is related to other illegal activities relevant to the business model of the VC entity.
Using a real-time transaction tracking solution such as Navigator from Elliptic, those parties engaged in virtual currency transactions can identify instances of problematic activity, report it appropriately, and prevent it from happening again. This proactive approach creates a safer and healthier crypto ecosystem and provides peace of mind to both retail and institutional customers, reducing the risk of unwittingly benefiting criminal actors.
The NYDFS guidance paints a clear picture of the benefits of blockchain analytics solutions for tracking transactions and emphasizes that compliance teams must configure these systems to match their specific risk profile. It is imperative that such solutions are specifically configured to meet the needs of each compliance. At Elliptic, our solutions enable you to use custom risk rules so that all transactional activity flowing through your pipes and plumbing falls within your risk appetite.
Conducting sanctions screening of activities on the chain
Perhaps most importantly, the guidelines also specifically highlighted the risk of sanctioned individuals engaging in blockchain transactions. While verifying wallet addresses and implementing strong transaction monitoring controls go a long way in identifying those sanctioned parties who wish to engage directly “on-chain”, it is also vital to understand the risks posed by centralized intermediaries (such as crypto exchanges) in helping to avoid sanctions .
In Elliptic, our Discovery the solution is a database of more than 1,000 crypto-asset exchange services, including a list of over 400 entities operating or serving the Russian market that pose high risks of sanctions evasion. Elliptic’s clients can use this information to identify potential sanctions evasion risks and take appropriate steps to mitigate the risks
The NYDFS guidance provides the crypto asset industry with important clarity on how to leverage blockchain analytics to the satisfaction of regulators. At Elliptic, we already work with many firms that are regulated by the New York BitLicense framework and look forward to continuing to support the industry there.
Contact us to learn more about how Elliptic can help your businesses meet NYDFS expectations.
Sanctions Compliance Regulation
