Chainalysis, the blockchain data company, operates at the intersection of cryptocurrency adopters and government agencies. The company’s software supports data-driven risk management and decision-making, which is used by financial institutions, cryptocurrency businesses, law enforcement, and regulators to improve anti-money laundering and fraud-prevention efforts.

Despite prevailing misconceptions that cryptocurrency enables anonymous and untraceable networks for criminal and fraudulent transactions – discussed in Chainalysis’ recent Crypto Myth Busting Spotlight – blockchain technology affords numerous transparency advantages to compliance teams for identifying transaction counterparties and potential illicit activity.

Harnessing these advantages and cooperating with regulators requires industry-specific technology and expertise.

To better understand how crypto-specific compliance deviates from traditional approaches, we asked RegTech executives in the industry for their insights on best practices across seven topics:

• Implementing effective risk-based compliance procedures.
• Measuring a program’s effectiveness.
• Adapting and improving policies as regulations evolve.
• Collaborating with industry peers for data sharing and risk identification.
• Strengthening relationships with regulators and banking partners.
• Adapting to geographic and cross-border discrepancies.
• Training and certifications for compliance officers.

Alongside Caitlin Barnett from Chainalysis, four additional executives from the RegTech ecosystem joined in the discussion to offer their perspectives.

• Marc Temple, Global Development Director of RiskNarrative at LexisNexis Risk Solutions, a data and analytics solution for financial crime risk management.
• Matt Van Buskirk, co-founder and CEO at Hummingbird, a platform for customer knowledge, case management, investigations, and regulatory reporting.
• Lana Schwartzman, Head of Regulatory and Compliance at Notabene, the first crypto pre-transaction decision-making platform.
• Peter Singer, Deputy CCO and BSA/AML Officer at Fireblocks, a digital asset management suite and blockchain development platform for businesses.

Note: Responses have been edited and condensed for clarity.

Blockdata: How can risk assessment criteria identify, categorize, and prioritize the specific risk profiles of transactions, customers, and counterparties?

Caitlin Barnett, Chainalysis: A risk assessment is designed to incorporate relevant metrics and create a quantitative view as to how a company assesses its BSA/AML risk exposure. Common risk factors to take into account are geographic, customer, product/service, asset, transaction, and sanctions risks. For example, if a business were to offer a new product related to cryptocurrency, the business would need to evaluate all potential associated risks and identify what controls can be put in place to mitigate them.

Marc Temple, LexisNexis: Both regulated and unregulated businesses should be utilizing technology further to review and update their risk assessment criteria and continuously reassess risk profiles amidst new information and emerging trends. A ‘single customer view’ of risk and a unified score across KYC, Fraud, and AML allows businesses to understand their exposure more holistically and adapt as needed.

Matt Van Buskirk, Hummingbird: Have a strong marriage between your systems: KYC/EDD, Crypto forensics, Transaction Monitoring, and Compliance Case Management. The goal is to build a tech stack that allows for the streamlined, real-time flow of information across software.

Regtech has evolved enormously in the last decade, and new solutions offer a level of modularity that allows you to connect all these systems via easy integrations. The capabilities inherent in cryptocurrency make risk assessment a data-science exercise with predictable and measurable results.

Lana Schwartzman, Notabene: Crypto-specific risk assessments must go further than traditional financial compliance programs by analyzing transaction patterns, conducting thorough customer diligence and continuous monitoring, and updating based on regulatory developments.

The Travel Rule – introduced by the Financial Action Task Force in 2019 – enables companies to reduce exposure to sanctions and illicit transactions. It provides virtual asset service providers (VASPs) with transaction-level counterparty and sanctions insights, allowing them to identify if clients transact with sanctioned entities, wallets, or jurisdictions before the transaction happens. Maintaining compliance requires evaluating a transaction’s associated sanctions and counterparty risks across centralized exchanges, self-hosted wallets, smart contracts, lightning networks, and DeFi platforms. Allocating resources to higher-risk areas requires a risk-scoring methodology that accounts for all these factors.

Peter Singer, Fireblocks: As a starting point, the risk assessment must identify which products are offered, where, to whom, through which channel, and using what payment method.

Blockdata: How can organizations use technology solutions to streamline real-time monitoring and suspicious activity reporting?

Caitlin Barnett, Chainalysis: One of the unique features of Chainalysis is that our solutions enable our customers to conduct real-time monitoring. This allows compliance officers to quickly identify potential suspicious activity and promptly file suspicious activity reports.

Marc Temple, LexisNexis: Utilizing technology such as ‘risk orchestration’ provides a 360° view of risk across the customer lifecycle – onboarding, ongoing screening, on and off-ramp transaction monitoring, through to offboarding – helps optimize financial crime and fraud prevention efforts. Consolidating all information in one platform – where suspicious transactions and entities can be identified, reported, and mitigated – negates the swivel-chair approach to investigations across multiple systems. The RiskNarrative platform from LexisNexis Risk Solutions is an effective and cost-efficient solution. It’s provided via a single API and has all the tools for risk detection and mitigation. A platform of this nature can enable crypto firms to act quickly and effectively when there are any macroeconomic, market, or specific regulatory changes.

Matt Van Buskirk, Hummingbird: Crypto provides much more – and more trackable – information than traditional financial systems. It’s the opposite of a haven for crime and fraud: AML professionals dealing with crypto transactions have more tools at their disposal. Blockchain forensics tools, coupled with strong transaction monitoring and CRM data, can be plugged into a modern compliance platform to show everything required for investigating AML, fraud, and more. Investigators can see financial transaction data, associated geographical and relationship information, wallet addresses, and other key factors. Crypto offers the ability to assess risk beyond the direct customer interaction with your company. The Blockchain allows you to see activity at a far deeper level.

Lana Schwartzman, Notabene: Technology solutions like Notabene’s SafeTransact can streamline real-time pre-transaction monitoring and suspicious activity reporting. With the implementation of the Travel Rule, companies can proactively investigate customers and counterparties before a transaction reaches their exchange.

Peter Singer, Fireblocks: Real-time monitoring can stop and prevent fraud or suspicious activity before it happens. Dozens of solutions are available for everything from liveness checks for identity verification, geofencing, proxy controls that prevent VPN connections, and suspicious device checks.

Blockdata: How can organizations ensure risk assessment and management practices align with industry best practices and regulatory expectations?

 

Caitlin Barnett, Chainalysis: Regulated financial institutions undergo annual AML audits which are conducted either by internal audit teams or third-party consulting firms. Audit teams will review all relevant policies and procedures, including Risk Assessments, to identify potential gaps. In addition, there are a number of industry groups that share best practices and have thoughtful discussions on this exact topic.

Marc Temple, LexisNexis: Firms must ensure they can adapt quickly to remain compliant with constantly evolving regulations and differing jurisdictional obligations. There is no ‘one size fits all’ approach that truly suffices, hence why we partner with other industry-standard 3rd party vendors to supplement our proprietary toolkit for fraud and financial crime compliance. Technical agility and industry collaboration are key to ensuring best practices.

Matt Van Buskirk, Hummingbird: Utilizing the robust ecosystem of partner vendors available (and their associated practice area expertise) will support your creation of modern, tech-forward compliance practices. This works best when companies are committed to providing compliance and risk teams with dedicated data science and engineering resources so that vendor capabilities can be leveraged to maximum effect without exceeding budgetary or resource constraints.

Lana Schwartzman, Notabene: Embedding the Travel Rule within risk assessment processes strengthens sanctions programs, AML, and counter-terrorism financing frameworks by considering inherent risks and mitigation controls based on national regulators and industry practices. Importantly, consolidating all compliance vendors (EDD, CDD, KYC, KYB, Travel Rule) under one provider can create a single point of failure. Diversifying compliance stack vendors is recommended. The operational intricacies of Travel Rule compliance require working with dedicated specialists; it shouldn’t be treated as an add-on program.

Peter Singer, Fireblocks: Independent, third-party BSA/AML program audits from firms specializing in those areas. Ensure the chosen firm is appropriate for the size of the organization and transaction volume. Don’t be afraid to reach out to colleagues for recommendations.

The Shanghai upgrade: unlocking staking withdrawals

The most recent Ethereum update, on April 12th, 2023, was another critical step in the proof-of-stake transition. The update — a hard-fork dubbed ” Shanghai” — enabled withdrawals of staked Ethereum. Until then, withdrawals had not been allowed in order to ease the transition to proof-of-stake.

In March of 2023, just ahead of the Shanghai Fork, Index Coop invited Blockdata to a roundtable-style webinar, “Index Coop’s dsETH and LiquidStakingPanel.” The group discussed Ethereum liquid staking and the new dsETH token.

Executives from three leading liquid-staking protocols — all of which are included in the dsETH Index — joined Index Coop in the discussion:

• Lido Finance: “Izzy,” head of node-operator management at Lido, a DAO.
• Rocket Pool: Darren Langley, or “Langers,” general manager at Rocket Pool.
• StakeWise: Jordan Sutclifee, or “JStar,” business development lead at StakeWise.
• Index Coop: Crews Enoch of Index Coop, or “Crews,” moderated the conversation.

The panel covered top-of-mind questions and implications of the Shanghai Upgrade, compared the validator network models for liquid-staking protocols and their associated risks, and the outlook for upcoming innovation around liquid-staking and peripheral technologies.

Editor’s Note: quotes from the discussion below may be edited for clarity and brevity.

How liquid staking works

The move to staked ETH gave a boost to organizations including DAOs that began offering protocols enabling liquid ETH staking.

In a liquid staking model, a protocol coordinates or oversees the operator nodes that validate the blockchain through staked ETH. In order to collect the needed collateral, the protocol uses a tokenized incentives system. In exchange for depositing into a protocol’s liquid ETH staking pool, depositors receive staked ETH tokens , which have value that is representative of the underlying collateral. These tokens can then be used to generate additional yield and participate in other DeFi projects.

This enables ETH enthusiasts and HODLers to earn staking yield without necessarily having to self operate nodes and validators, or deposit the full 32 ETH that is currently required to operate a node (at one time it required 1,000 ETH to become a node operator).

Leading protocols

Lido Finance, a DAO and one of the first liquid-staking protocols, has now grown to be the largest by market share.

“The initial idea revolved around creating a new type of digital asset that would represent a claim on an underlying asset, such as a loan or an investment, and allow holders to transfer and trade the digital version freely over the internet,” says Izzy, head of node-operator management at Lido.

Lido and other liquid staking protocols are focused on creating optionality for users in two vectors: liquidity and composability.

• Liquidity meaning that stakers can access assets — or a representation of them — while they are staked on the consensus layer.
• Composability meaning that these accessible assets could be used simultaneously within the decentralized finance ecosystem for transfers, collateral, cold vault storage, or in other yield bearing projects.

Another leading protocol, Rocket Pool, was founded with a goal of providing capital pooling options, and also to provide kits that help “solostakers” get started more easily.

“With liquid staking you’re essentially contributing to a pool and your tokens can be generated based on the amount — however small — that you stake,” says Darren Langley , general manager at Rocket Pool.

The DAO protocol Stakewise also offers a turnkey UI and node operator software designed to be as simple as possible and democratize access to staking and liquid staking.

An indexed approach to liquid staking

Index Coop is a DAO that offers index-style vehicles and structured products, including the DeFi Pulse basket of top DeFi tokens.

With liquid staking emerging as a widely discussed DeFi theme and use-case post-merge, Index Coop launched its Diversified Staked ETH Index($dsETH) in January 2023.

The strategy token gives users turnkey access to leading Ethereum liquid-staking protocols in one place. Rocket Pool ETH, Wrapped stETH, sETH2, and Staked Frax ETH.

Since launch, the Index has been expanded and rebalanced. It now includes Rocket Pool ETH, Wrapped stETH, sETH2, and Staked Frax ETH.

Above: The dsETH was launched as an index token of three leading Ethereum liquid-staking tokens, which met Index Coop’s criteria favoring decentralization and efficiency. The rebalance added Frax LST. Its composition was 37.32% rETH, 24.00% wstETH, 22.02% sETH2, and 16.66% sfrxETH, as of July 28th, 2023.

“The composability of liquid staking highlights the best of DeFi. It’s something that at Index Coop we try to embody in all of our products,” says Crews from Index Coop. “For example, all of our structured products can be self-custodied, and can be used as collateral throughout the ecosystem.”

Additionally, Index Coop’s Interest Compounding ETH Index, (icETH) offers enhanced ETH yields through a leverage liquid staking strategy built on Set Protocol. The superior yield is accomplished through recursive cycle – icETH deposits stETH (Lido’s staked ETH token) as collateral to borrow ETH which then again procures more stETH, and then the cycle begins again of this automated leverage strategy.

The growth of liquid staking’s popularity.

Long before the 2022 Ethereum Merge and the Shanghai Fork this year, white papers and DeFi pioneers saw the possibility of enabling an asset that can be put to work in multiple ways simultaneously.

“The roots of liquid staking can be traced back to the notion of ‘internet bonds,’ theorized in a paper published some time ago that remains influential in crypto circles,” says Izzy. “This idea began to take added shape on some Cosmos chains as a proof-of-concept, but the use-case really came to life on Ethereum.”

Langers believes that staking’s attractive yields — and recent changes to the network as a whole — are driving the surging popularity.

“Essentially, since the counterparty for staking is Ethereum, as long as you believe in Ethereum, it’s kind of like a no-brainer,” says Langer. “The Merge was quite worrying for many. But since its success, we’ve seen a massive uptick in liquid staking deposits. With withdrawals coming up now, that’s another massive de-risking event. I’m honestly surprised at how much has been staked [already], considering you could not withdraw for a time.”

How withdrawals will affect staking

“Some fear that many depositors are going to unstake because they want to get their rewards,” says Langers. “In actual fact, Shanghai’s affordances are encouraging partial withdrawals. In other words, anything above 32 ETH now gets withdrawn automatically. So, in many cases people will have access to their rewards, even as they maintain their original staked amount and continue staking. People don’t necessarily have to draw from their staked ETH to get those rewards.”

Even in the long-term, protocol executives see improved stability in the cards.

“A lot of people in the industry, including financial institutions, are signing contracts with node operators,” says Jordan. “This space is front-and-center with institutions now. The Shanghai fork is the final stage to opening the floodgates. It’s going to be a massive catalyst not just for liquid staking, but for staking in general.”

As the stability is proven out, withdrawals will become more fluid. Value will move more smoothly and at greater scale in and out of staked and liquid-staked ETH. Protocols will be able to offer near-immediate access to unstaked ETH.

“We will eventually have “immediate liquidity” from a withdrawal’s perspective. It may not be immediate in the sense that you can unstake and get your ETH back the next day, but you will probably get it back within a couple of days at the most,” says Izzy.

How Slashing Impacts Operator Networks and Stakers

Slashing events and other penalties that operators face due to network-destructive behavior are one of the primary risks that protocols must plan for and protect against to protect their customers and their own integrity.

“Slashing is a bit of a misnomer in the sense that there are penalties that you can receive in Ethereum staking, but those commonly received are for downtime — or not keeping your node online,” says Langers.

“The penalty for downtime is not severe, you can earn rewards back quickly. So downtime is actually not a huge deal — but that’s not slashing,” he adds. “Slashing is essentially when you break the consensus rewards.” The most common way this happens, he says, is when operators run a validator in two places at once, which results in a “double-vote” on the blockchain.

The operator incurs penalties for doing this, which in Rocket Pool’s case is 1 ETH and a ban from the network. However, security such as so-called doppelganger protections are increasingly being put in place to ensure that validators aren’t doing this and working with identical keys across two instances.

Working towards liquidity, efficiency and stability

Penalties and slashing are worth mentioning because part of a liquid-staking protocol’s function is to organize staking and collateral to protect the integrity of tokens for staked ETH. Now that withdrawals are in play, that calculus is more complex.

“With withdrawals, one of the key risks affecting the stability of your liquid-staking token is the amount of ETH backing a token has, and what can happen to the value of that token with slashing and penalties — if the collateral is eroded,” says Jordan. “Post-Shanghai, stability is defined by the amount of ETH backing the token, and preventing any drops from slashing and penalties.”

Capital buffers are key for reducing slashing risks now that staking withdrawals are enabled, but more liquidity overall will also help to that end. That’s because liquidity strengthens market participants’ ability to spot arbitrage opportunities that help balance the overall market and improve general price stability.

Arbitrageurs will help keep the prices of staked tokens — relative to their underlying collateral — more stable.

For example, “dsETH are permissionlessly redeemable for their underlying assets,” says Crews. “The index can maintain its spot price on decentralized exchanges relative to the net-asset value of the tokens underneath it, because arbitrageurs can mint and redeem if there’s a premium or discount on the spread.”

“Now that withdrawals are enabled, essentially everyone can do that with liquid staked ETH tokens and the underlying collateral,” he adds.

Node-operator sets: permissioned vs. permissionless

Protocols manage their sourcing of node operators in one of two fashions: permissionless or permissioned operator sets.

Permissionless sets, such as RocketPool’s, have few-to-no restrictions for joining anonymously. One benefit of this is the ability to recruit operators at scale to share, absorb, or dilute risk. “With permissionless node operators, who you don’t really vet actively, you instead require them to be over-collateralized,” says Langers. “If there are any issues — including if the node operator is slashed — any penalty comes out of their collateral rather than the collateral provided by liquid stakers.”

Expansive permissionless networks can also improve diversification and resilience to operating risks and censorship. “The more decentralized your validator set, the more resilient it is. We’ve got over 2,000 node operators spread out over 100 different geographic locations,” says Langers.

In contrast, permissioned sets, such as Lido’s, require operators to apply through the DAO and undergo an evaluation and onboarding process. Instead of requiring overcollateralization, a smaller set of professional node-operators maintain the set under stricter supervision.

“We currently have 29 node operators on ETH,” says Izzy. “It allows us to encourage certain behaviors and dynamics, and track results. But, we plan to start introducing infrastructure that will allow permissionless entry into our node-operator set as we introduce the next protocol upgrade.”

This professional, experienced bode operator set allows Lido to ensure that validators are following best practices, strict security guidelines are followed, and that guarantees are in place for robustness and fallbacks. Izzy notes that their operator set has not yet had a single slashing event.

Looking ahead: healthy competition from innovative new technologies, products, and platforms

Liquid staking creates a “lego building block” type of asset that theoretically can be used for an infinite amount of applications, even as it attracts value.

“Liquid staking ETH is limitless in the sense that what you can build on top is limitless, and the assets themselves are permissionless,” says Izzy. “They can be used as ‘legos’ to build things like diversified staked ETH.”

“ETH drives the underlying security of the protocol writ large, but it’s also how things move on the network, because ETH is what drives transactions,” he adds. “So in a sense it’s the circulatory system and the blood that flows within it as well. The idea that you can have an asset that works in all these different ways is immensely powerful. It’s a new kind of financial primitive that doesn’t exist in traditional markets. I think this will allow us to allocate capital in totally new ways.”

“Infrastructure wise, distributed validator technology (DVT) — which splits a validator’s private security key across many computers and nodes — will reduce the risks of a single point of failure or attacks. This allows protocols to reduce the surface area of risk for staking, especially with permissionless participation. By reducing collateral requirements as nodes are split across multiple entities, they will change what operator and validator sets look like in one to two years.”

Jordan at Stakewise takes a similar stance. “DVT’s are the next major tech hurdle, and it’s a very exciting next step, especially on the permissionless side,” he says. He also believes that the portion of staked Ethereum will continue to grow — from around ~40% of total supply in March 2023, towards north of 50%

“Everyone’s trying to point fingers and blame something for what happened, and why it happened,” she adds, “but what happened recently is not a crypto problem,” says Caitlin Barnett early in our conversation.

New York-based Chainalysis, where she leads regulation and compliance, specializes in providing businesses with data and tools to navigate crypto markets safely. As such, the company has spent plenty of time explaining how allegations of fraud, not regulatory loopholes, was the root cause of the recent FTX collapse.

In fact, Barnett believes that when analysts or journalists paint a picture of crypto markets as a Wild West of finance, they miss important points about the more complicated reality.

And, they also miss an underlying market opportunity.

Regulation, whether crypto-specific or broadly applicable to financial markets, is hardly absent from the space. And, meanwhile, new regulatory frameworks and policies around crypto markets are emerging quickly around the world.

So, what is the way to restore trust in crypto markets?

Barnett sees the answers in broader awareness of this fast-moving regulatory landscape, and adoption of compliance tooling that is in sync with these shifts.

We recently sat down with Barnett to discuss the regulation debate and the landscape of crypto risk management, compliance, and monitoring tools.

Alongside Barnett from Chainalysis, a few other executives in the ecosystem participated in the discussion to offer further perspective.

• Charley Ma, general manager of fintech at Alloy, an identity technology company that helps more than 350 banks and other clients make credit, fraud, and compliance solutions
• Pelle Braendgaard, CEO of Notabene, software that helps companies comply with the multinational FATF (Financial Action Task Force) Travel Rule guidelines
• Alma Angotti and Gregory Schwarz are with Guidehouse, a consultancy. Angotti is a partner in the Financial Services Segment, and lead of the Global Legislative and Regulatory Risk practice. Schwarz is associate director of the Global Investigations and Compliance practice, based in New York.

One hurdle for companies like Chainalysis, Alloy, Notabene, and Guidehouse is keeping pace with innovation in crypto, which is continually throwing up new products and adoption trends, whether it be NFTs or decentralized finance (DeFi).

And, certainly, these emerging categories also challenge regulators.

But within the quickly-evolving regulatory picture, resolving itself by the day, there are opportunities as well.

In fact, far from stifling the crypto economy, regulation could create the groundwork for the ecosystem’s next boom.

Note: This conversation has been edited and condensed for clarity.

Blockdata: Broadly speaking, is regulation helping to grow the market for crypto compliance tools?

Caitlin Barnett, Chainalysis: I think so, yes. For example, if regulators come out and say that blockchain analytics are required for anyone who’s interacting with cryptocurrency, similar to how you are mandated to have a fiat transaction-monitoring system, that means that you need Chainalysis or a similar service to work with cryptocurrencies. The opportunity is huge, and the more regulatory clarity that comes, the bigger the opportunity will be for us.

Charley Ma, Alloy: I think so as well. Also consider that building compliantly sends a clear message that says, “Hey, we’re regulator-approved and this protocol, product, or company that we’re building is designed without fraudulent intent.”

Pelle Braendgaard, Notabene: Yes, we think there will be a clear shift from a negative view towards regulation to a more positive one. It will become more evident that regulation actually allows crypto to grow and enables businesses to use compliance as a business asset. The companies investing in compliance now will be the ones set up for success as they grow.

Alma Angotti, Guidehouse: It’s a form of future-proofing that is very valuable. We tell our clients, implement a good risk-management program, notwithstanding the specific regulatory requirements. Your business will be more successful over the long term and whatever the final regulatory decision is, you will be ready.

Blockdata: Along with regulation, bottom-up trends are always changing the crypto ecosystem. Can you give an example of how industry trends are changing your product offerings?

Caitlin Barnett, Chainalysis: DeFi is a hot topic everyone is talking about right now. We have two new products that I think are worth mentioning in this regard. One is address-screening. It is an automated solution that allows you to customize risk rules to prevent high-risk users from connecting to a platform. DeFi protocols often don’t have compliance departments like a centralized exchange or a traditional financial institution, but at a minimum are likely required to screen users to avoid transacting with parties under sanctions. Our product allows them to automate that process. The second product we call “Storyline.” This is an investigative tool that allows you to investigate the complex world of smart contracts, NFTs, chain-hopping, and sophisticated protocols. Instead of having to bounce back and forth between these things, our product gives you the holistic picture.

Charley Ma, Alloy: We now offer a case-management system that lets you investigate suspicious activity and complete regulatory filings from one central interface. Separately, wallet screening is a persistent challenge. Wallet screening against a sanctions list isn’t always enough since new wallet addresses can be created in a matter of minutes. A holistic approach towards onboarding is necessary to understand the full risk profile of a user onboarding into your ecosystem.

Gregory Schwarz, Guidehouse: An essential step in offering new crypto and DeFi products is for institutions to establish robust AML (anti money-laundering) risk assessments to show that their programs and product controls are risk-based, effective, and reasonably designed. An ill-considered product expansion strategy could create an opportunity for criminals to exploit the new product and put a company uncomfortably near the regulatory crosshairs. Guidehouse has numerous clients that it advises on how to conduct such evaluations and helps them ensure their controls are tailored to their business and operations.

Blockdata: How can companies get ahead of regulation, and proactively move toward confident and compliant participation in crypto markets?

Caitlin Barnett, Chainalysis: The answer has to be education. Education is a big part of what we do at Chainalysis. You find someone at one of these larger financial institutions who believes in crypto, understands the technology and its nuances, and working with them you can offer education and explain the current regulations around crypto. It’s not that scary.

Is crypto associated with darknet markets? Sure. But so is cash. Cash is used to buy drugs all the time — you just can’t see it. You can see it with blockchain analytics and crypto, that’s the difference. We try to demystify crypto and explain that there is regulation in place. There are compliant ways to interact with crypto, and using our tooling is one of those compliant options.

Charley Ma, Alloy: Crypto companies need to lead with their actions and stay away from regulatory shortcuts that offer a short-term solution, and instead build a compliance program that can pass muster with banks and regulators. Avoiding regulations and cutting corners can seem like a shortcut, but as we’ve seen recently, has resulted in much larger negative outcomes in crypto.

Pelle Braendgaard, Notabene: It is vital that the industry focus on the safety of customer funds and transactions. When crypto is regulated and deemed safe, then and only then will we see crypto take its rightful position in the everyday economy. In getting there, we have to take advantage of blockchain’s key advantages.Virtual assets are quickly coming under the same checks and balances as those in traditional finance, but luckily blockchain tech has many benefits that make it easier to set up the vital compliance programs. Ultimately, virtual asset service providers, or “VASPs,” that put compliance — with standards like the FATF Travel Rule — and blockchain analytics at the helm of their operations can provide a better customer experience than traditional providers working in fiat currencies.

It’s also essential for the global industry to collaborate, which is why we hold jurisdiction-specific workshops for compliance officers and legal professionals. These events aim to ensure that VASPs in the same jurisdiction meet the same deadlines and requirements, and provide a forum to share challenges and solutions. Then, we are also fostering cross-jurisdictional collaboration, we hope to encourage the exchange of innovative ideas.

Blockdata: We’d like to give the audience an idea of how fast the regulatory landscape is evolving. Are there any major regulatory changes, such as in AML or KYC policy, that you’re having to adapt to internally?

Caitlin Barnett, Chainalysis: Sanctions have been the hot topic in compliance over the past few months. In the US, OFAC (Office for Foreign Asset Control) has continued to make designations that impact the crypto ecosystem. We’ve seen the first decentralized protocol get sanctioned, which raised a host of questions for the industry, so much so that OFAC actually provided some clarification after the designation, which doesn’t happen too often. In general, we’ve been hearing more and more questions about sanction compliance.

Charley Ma, Alloy: US regulation is almost certainly incoming in the next 6-24 months. We predict that the Digital Asset Money Laundering Act is the first of what will be many regulations around KYC and AML compliance in crypto. To prepare for the future, we advise companies to proactively integrate identity verification and fraud prevention into their platforms to avoid being caught unawares by new laws.

Pelle Braendgaard, Notabene: Some in the industry have been surprised at recent fines due to sanctions violations. These fines indicate that address-checking on its own is not enough for an effective sanctions-screening program as it does not really help you check names. In the context of Travel Rule compliance, it is essential to properly screen not only a company’s own customers around sanctions, but also the ultimate counterparty or customer of a transaction regardless of whether the context is custodial or self-hosted. As we advance, regulators will require VASPs to allocate more resources toward maintaining strong sanctions-compliance controls.

Alma Angotti, Guidehouse: Cryptocurrency players are currently regulated by US states as money-services businesses but regulations like the Digital Asset Anti-Money Laundering Act, which Charley mentioned, and agency responses to Executive Order 14067, signal potentially more federal oversight given to the federal agencies such as the US Commodity Futures Trading Commission (CFTC) and the US Securities and Exchange Commission (SEC). As such, it is important that cryptocurrency players consider scaling their compliance programs in a manner consistent with the expectations of these federal regulators. We’ve seen more mature exchanges voluntarily implement some of the controls and risk-management frameworks before they are specifically required.