Transaction monitoring

What is transaction monitoring?

Transaction monitoring is the process of tracking and analyzing financial transactions in real-time — or after the fact — to identify suspicious activities, ensure compliance with regulatory standards, and mitigate financial crimes.

In the context of cryptocurrency, transaction monitoring involves leveraging blockchain intelligence tools to scrutinize cryptocurrency transactions on blockchain networks to detect illicit activities such as money laundering, fraud, and terrorism financing.

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How does transaction monitoring work in cryptocurrency?

Unlike traditional financial systems, cryptocurrency transactions are recorded on decentralized blockchain networks. These transactions are pseudonymous, meaning they are linked to wallet addresses rather than personal identities. Transaction monitoring tools analyze blockchain data to identify patterns and flag potentially suspicious activities. The key steps in this process include:

1. Data collection:Transaction monitoring tools aggregate data from blockchain ledgers, cryptocurrency exchanges, and other sources.
2. Risk assessment:Transactions are evaluated based on risk factors such as wallet history, geographic location, and transaction size.
3. Flagging suspicious activities:High-risk transactions, such as those involving known illicit wallets, are flagged for further investigation.
4. Reporting:The system generates reports on flagged activities, which can be used by businesses and regulators for compliance and enforcement.
5. Integration with KYC data:When linked with Know Your Customer (KYC) data, transaction monitoring can provide additional insights by associating wallet addresses with verified identities.

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What is the role of transaction monitoring in mitigating illicit crypto activity?

Cryptocurrencies’ pseudonymous and borderless nature makes them appealing for both legitimate uses and attractive to criminals. Transaction monitoring addresses these risks by:

• Preventing financial crimes: Identifying and disrupting money laundering, ransomware payments, and fraud.
• Ensuring compliance: Helping businesses adhere to anti-money laundering (AML) and counter-terrorism financing (CTF) regulations.
• Building trust: Enhancing the credibility of cryptocurrency platforms by promoting transparency and accountability.
• Supporting law enforcement: Providing actionable insights that aid investigations into illicit activities.

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What is the role of blockchain intelligence in transaction monitoring?

Blockchain intelligence plays a pivotal role in transaction monitoring within the cryptocurrency ecosystem. By leveraging the transparency and immutability of blockchain technology, blockchain intelligence tools provide the insights and capabilities needed to analyze, track, and assess cryptocurrency transactions.

Providing real-time insights

Blockchain intelligence tools monitor transactions on blockchain networks in real-time, enabling proactive identification of suspicious activities. TRM provides users with highly flexible alerting: customize risk categories, severity levels, and create precise rules for monitoring behavioral and transactional patterns, including amount, blockchain, and counterparty risk indicators.

Enhancing traceability

Blockchain intelligence ensures that the flow of funds can be traced across blockchain networks — which is essential for transaction monitoring — through tactics like wallet clustering and cross-chain tracking. TRM uniquely offers automated one-click tracing across blockchains, powered by a database of over 74 million cross-chain swaps.

Identifying illicit activity

Blockchain intelligence helps uncover illicit activities by analyzing blockchain data and identifying suspicious patterns. TRM's proprietary Signatures® technology uses machine learning to automatically uncover suspicious patterns across multiple transactions that might otherwise go unnoticed. Additionally, TRM maintains the largest and fastest growing database of illicit activity.

Supporting regulatory compliance

Blockchain intelligence aids cryptocurrency businesses in adhering to anti-money laundering (AML) and counter-terrorism financing (CTF) regulations by linking blockchain data with Know Your Customer (KYC) information to identify users behind transactions, automating the generation of suspicious activity reports (SARs), and helping to ensure Travel Rule compliance.

Enhancing investigations

For law enforcement and compliance teams, blockchain intelligence is a critical investigative tool:

• De-anonymization: Links pseudonymous wallet addresses to real-world identities using blockchain data and external information.
• Evidence gathering: Provides an immutable trail of transactions that can be used in criminal prosecutions.
• Network analysis: Maps out networks of associated wallets to uncover criminal networks and broader illicit ecosystems.
• Collaborative case management: The TRM platform includes built-in case management functionality that allows teams to assign owners, record notes, view transaction details, and follow workflows through to closure.
• Reliable evidence in court: Unlike competitors' "black box" approaches, TRM shows the attribution source and confidence score for every attribution, enabling parallel reconstruction of investigations for use as evidence in court.

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What are common use cases for transaction monitoring for law enforcement agencies, crypto businesses, and regulators?

Law enforcement

Law enforcement agencies use transaction monitoring to:

• Trace illicit funds: Following the flow of cryptocurrency linked to crimes such as ransomware attacks and drug trafficking.
• Uncover criminal networks: Identifying connections between wallets and entities involved in organized crime.
• Seize assets: Locating and recovering stolen or laundered funds.

Crypto businesses

Cryptocurrency exchanges, wallet providers, and other crypto-related businesses rely on transaction monitoring to:

• Ensure compliance: Adhering to anti-money laundering (AML) and Know Your Customer (KYC) regulations to avoid penalties.
• Protect customers: Detecting and preventing fraud, such as account takeovers or phishing schemes.
• Mitigate risks: Identifying high-risk transactions to minimize exposure to illicit activities.

Regulators

Regulators use transaction monitoring to:

• Enforce compliance: Auditing businesses to ensure adherence to financial regulations.
• Monitor market integrity: Identifying systemic risks and ensuring a fair marketplace.
• Support policy development: Using insights from transaction data to inform regulations and guidelines.

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What challenges do law enforcement, crypto businesses, and regulators face when conducting cryptocurrency transaction monitoring?

Challenges for law enforcement

Anonymity and pseudonymity

Cryptocurrency transactions are tied to wallet addresses, not personal identities, making it difficult to link transactions to real-world individuals without additional data. Additionally, privacy-focused cryptocurrencies, like Monero and Zcash, enhance anonymity, complicating tracking efforts.

Cross-border transactions

Cryptocurrencies enable seamless global transfers, creating jurisdictional challenges when tracking funds across international borders. But cooperation between countries with differing regulatory frameworks can be slow or insufficient.

Obfuscation techniques

Criminals sometimes use mixers, tumblers, and chain-hopping (transferring funds across multiple blockchains) to obscure transaction trails. Decentralized exchanges (DEXs) and peer-to-peer platforms also lack centralized oversight, making it harder for investigators to gather evidence.

Challenges for crypto businesses

Balancing privacy and compliance

Users often value privacy in cryptocurrency transactions, but businesses must collect personal data to comply with Know Your Customer (KYC) and anti-money laundering (AML) regulations. Striking a balance between privacy rights and regulatory requirements can be challenging for crypto businesses.

Evolving criminal tactics

Criminals continuously develop sophisticated methods to exploit gaps in monitoring systems, requiring businesses to constantly update their tools and processes — for example, the use of non-custodial wallets and decentralized finance (DeFi) platforms to bypass traditional KYC and AML processes.

Fragmented regulatory landscape

Different jurisdictions have varying regulations for cryptocurrency, making it difficult for businesses operating internationally to establish a unified compliance strategy.

Challenges for regulators

Decentralization

Cryptocurrencies operate on decentralized networks with no central authority, making it harder for regulators to enforce compliance. Decentralized platforms — such as DeFi protocols — often operate without intermediaries, complicating oversight.

Rapid technological innovation

The cryptocurrency industry evolves quickly, with new assets, technologies, and platforms emerging regularly. This makes it challenging for regulators to keep pace, creating gaps in enforcement.

Cross-border transactions

Cryptocurrencies operate across borders, but regulatory approaches differ significantly between countries. These inconsistent frameworks make it challenging to enforce uniform monitoring standards or prosecute cross-border crimes.