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From rising costs to concerns about trustworthiness of attribution, blockchain analytics will face many challenges in the coming year. As the year draws to a close, it’s prediction time again. From the promise of seamless cross-border payments to tokenized real-world assets (approximately $117.74 billion worth of assets have been tokenized to date) and decentralized identity solutions (this market is projected to reach $2 trillion by 2030).
Year of DeFi Compliance
DeFi has already attracted the attention of regulators. To name a few high-profile cases, Uniswap Labs received a notice from the SEC and a $175,000 fine from the CFTC. The court designated Lido DAO as a general partnership. Additionally, the court held that identifiable participants who actively control the operation of a DAO cannot avoid liability simply because it is decentralized.
No matter how decentralized your DeFi project is, be prepared. 2025 will be the year of DeFi compliance. And it must be done. The total number of DeFi users exceeded 131 million. Criminals use DeFi services to transfer and launder illicit funds, exploiting weaknesses in the technology behind DeFi platforms, enforcement, and AML/CFT regulations.
Applying FATF standards to DeFi is difficult, especially when determining where platforms are based, operated, and registered. Decentralized finance also poses challenges for regulators and analysts due to the lack of KYC, P2P transactions, cross-chain protocols, and privacy tools.
Increased compliance costs
As regulations increase, compliance becomes more expensive. What are the alternatives? Risks include hefty fines, reputational damage, and business interruption. This is another big challenge we have to address, and we are already looking at ways to address this by increasing the speed of our operations.
There are two main reasons for the increased costs.
Further challenges include: 1) Rapid increase in cybercrime. For example, losses from crypto investment fraud reported to IC3 increased by 53% in 2023. 2) Sanction evasion. In 2023, a 114% increase in sanctions evasion cases was recorded compared to 2022. This also increased by 71.5% year-on-year in 2022. 3) Fraudsters are learning faster and becoming harder to catch, using things like AI. Regulators such as the CFTC have warned that criminals are using artificial intelligence to carry out more sophisticated cryptocurrency fraud. 4) Increasing political instability is driving the adoption and change in value of cryptocurrencies. Bitcoin (BTC) adoption is increasing in regions experiencing political instability as individuals seek to protect their wealth from government intervention and economic instability. Increased workload for compliance personnel.
As regulatory clarity increases, there are more regulations to follow, which increases the burden on compliance personnel who must ensure compliance with these new requirements. For example, sorting 1,000 alerts each month would require around 20 compliance officers, not to mention the money spent on KYC checks. So if a business acquires a customer who deposits $100 or even $1,000, and an executive needs to see at least one alert about this customer, there is no benefit.
The compliance department is not a profit-making department. You spend money and that cost is spread across your clients. Additionally, there is the risk of fines and jail time for violations (recall that Binance paid over $4 billion for AML and sanctions violations, and CZ received 4 months in prison).
This increased workload not only strains resources, but also increases the risk of oversight. The pressure of processing thousands of transactions every day, each requiring detailed analysis and documentation, can quickly lead to missed red flags, incomplete investigations, or inaccurate risk assessments. There is.
Introduction of AI
One potential way to reduce costs is by deploying AI to automate simple tasks that do not require decision-making by compliance officers. For example, you can send notifications to specific compliance personnel, distribute alerts among team members, answer FAQs, and more with minimal workload.
But for now, AI is not ready to handle tasks that require human judgment, such as risk scoring. Therefore, the best approach for now is to carefully integrate it into everyday tasks and allow anyone to sign up and test AI in their analytics.
attribution trust
One of the reasons that AI cannot yet be used for serious problems is the lack of attribution trust. This exists because two types of data can be confused:
A reliable instance where the data is 100% verified and can be used in court. Cases where information was obtained from unreliable sources. For example, someone on X claims that a project is a scam. This type of data is not enough to seize funds or prosecute the customer. Still, your compliance officer may need to investigate further.
When it comes to attribution, you can only rely on data that is 100% proven and specific enough to be used as evidence in a court of law. Without solid evidence, attribution can be rejected or challenged in court. This weakens law enforcement efforts and damages the reputation of the cryptocurrency industry as a whole. When attribution is inaccurate or unverified, people lose trust in blockchain analytics providers. As that trust erodes, regulators and legitimate businesses may become hesitant to engage with cryptocurrencies.
Management privacy
When we talk about trust, privacy is also important. It is important to keep all compliance activities private so that no one can know which transactions are being reviewed until the process is complete.
This level of confidentiality is essential not only to businesses but also to regulators and law enforcement. For regulators and law enforcement, confidentiality ensures that fraudsters receive no prior warning and can conduct investigations without interference. Once it becomes public that a transaction is under review, fraudsters and money launderers can use the information to cover their tracks, delete evidence, or move illicit funds elsewhere. There is a possibility that it may cause
Using a private server like we do is a good solution to prevent this. This allows businesses/law enforcement/regulators to undertake compliance activities without worrying about leaks or unauthorized access. With such servers, sensitive data is kept under strict control so that malicious parties cannot learn about ongoing investigations.
