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From rising costs to concerns about attributing trust, blockchain analytics will face many challenges in the coming year. Now that the year is coming to an end, it’s time for predictions again. We’ve heard a lot about the bright future of blockchain, due to its promise of seamless cross-border solutions payments to the to get up of tokenized real-world assets (approximately $117.74 billion). worth of assets that are tokenized as of now) and decentralized identity solutions (this market is projected reach $2 trillion by 2030).
Year of DeFi Compliance
DeFi is already on the regulators’ radar. To name a few prominent cases: Uniswap Labs received one notification from the SEC and a sum of $175,000 fine from the CFTC; the court assigned Lido DAO as a general partnership. Furthermore, the court found that identifiable participants who actively manage the activities of the DAO cannot avoid liability simply because it is decentralized.
No matter how decentralized DeFi projects are, be prepared: 2025 will be the year of DeFi compliance. And it must be done. The total number of DeFi users has surpassed 131 million. Criminals use DeFi services to illegally transfer and launder money, exploit weaknesses in the technology behind DeFi platforms, enforcement and AML/CFT regulations.
Applying FATF standards to DeFi is challengingespecially when it comes to determining where platforms are located, operate or are registered. In the absence of KYC, P2P transactions, cross-chain protocols, privacy tools and decentralized finance also pose challenges for regulators and analytics.
Increasing compliance costs
With more regulations, compliance becomes increasingly expensive. The alternative? With the risk of high fines, reputational damage and business interruption. This is another major problem that we will have to address, and we are already looking for ways to manage this by increasing the speed of operations.
There are two main reasons for the cost growth:
- Even more challenges, including: 1) The increase in cybercrime. Losses from crypto investment fraud reported to IC3 jumped 53% in 2023. 2) Sanctions evasion. In 2023, a 114% increase in sanctions evasion cases was recorded compared to 2022. This followed a 71.5% increase in 2022 compared to the previous year. 3) Fraudsters learn quickly and become more difficult to catch, for example to use AI. Regulators, such as the CFTC, are warning about criminals using artificial intelligence to carry out more sophisticated crypto fraud. 4) Growing political instability is driving shifts in the acceptance and value of cryptocurrencies. In regions where there is political unrest, adoption of Bitcoin (BTC). is increasing as individuals seek to protect their wealth from government interference and economic instability.
- The increasing workload for compliance officers.
With increasing regulatory clarity, there are more rules to follow, resulting in an increased workload for compliance officers who must ensure compliance with these new requirements. For example, to sort through a thousand alerts per month, you’ll need about twenty compliance officers, not to mention the money spent on KYC checks. So if a company gets a customer who deposits €100 or even €1,000, it is not worth it for the officer to have to check at least one report about this customer.
It’s not the compliance department that generates profits; it spends money and the costs are shared among the customers. Furthermore, there is a risk of fines and prison sentences for non-compliance (think Binance pay over $4 billion for AML and sanctions violations and CZ gets four months in prison).
This increased workload not only puts pressure on resources, but also increases the risk of supervisory errors. The pressure to process thousands of transactions every day, each requiring detailed analysis and documentation, can lead to missed warning signals, incomplete investigations or incorrect risk assessments.
AI introduction
One possible way to reduce costs is to introduce AI to automate simple tasks that do not require decision-making by a compliance officer. For example, it can take care of sending notifications to specific compliance officers or distributing alerts to team members with the least workload, answering frequently asked questions, etc.
So far, however, AI is not ready to perform tasks that require human judgment, such as risk scoring. So the best approach for now is to carefully integrate it for routine tasks, and anyone can sign up to test AI in analytics with us.
Attribution trust
One of the reasons why AI cannot yet be used for serious things is the lack of attribution trust. It exists because two types of data can be confused with each other:
- Cases where the data is 100% verified and reliable for use in court.
- Cases where information comes from less reliable sources, for example someone on X claiming that a certain project is a scam. This type of data is not enough to confiscate money or charge a customer. Still, it may raise flags for compliance officials to investigate further.
Attribution can only be relied on data with 100% evidence – concrete enough to be used as evidence in court. Without solid evidence, the attribution may be rejected or challenged in court. This weakens enforcement efforts and damages the reputation of the entire crypto industry. If attribution is inaccurate or unverified, people lose trust in blockchain analytics providers. As that trust erodes, regulators and legitimate companies may become reluctant to get involved in crypto.
Privacy of Operations
When we talk about trust, privacy is also important. It is critical to keep all compliance activities private so that no one knows which transactions are being reviewed until the process is complete.
This level of confidentiality is essential not only for the company, but also for regulators and law enforcement agencies. For regulators and law enforcement agencies, confidentiality allows investigations to be conducted without interference, so bad actors do not receive advance warning. If it becomes known to the public that transactions are being monitored, fraudsters and money launderers can misuse information to cover their tracks, remove evidence or move illicit funds elsewhere.
Using private servers like we do is a good solution to prevent this. It ensures that the company/law enforcement agencies/regulators can handle compliance activities without worrying about leaks or unauthorized access. With such servers, sensitive data remains under strict control, so that malicious parties are not made aware of ongoing investigations.
