How can blockchain help you tackle financial crime?

In this video, we’re going to explain how distributed ledger technology can help you fight financial crime.
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As a payments expert, you’ll be familiar with rules on KYC - or Know Your Customer.

A KYC programme includes things like:
-  verifying your customer’s identity, and carrying out due diligence

But over the years, criminals have become better at hiding: by using stolen and fake identities…..or more recently, AI-generated images, video and speech.

So verifying customers is still important, but it’s not enough on its own anymore to prevent financial crime. The financial sector has to adapt and look more closely at transactional behaviour. This is sometimes called Know Your Transaction or KYT. And it’s here that blockchain technology can give us incredible insights.

I’ve invited along a friend of BVNK, Amila from blockchain data firm Chainalysis, to tell us more. So, Amila: what is blockchain analytics and how can it help fight financial crime?

Thanks Heather. Blockchain analytics is the practice of combining publicly available transactional data stored on the blockchain with analytical techniques.

By doing this, we are able to determine which addresses are controlled by the same entities, and identify those entities too. So, rather than looking at transactions between pseudonymous cryptocurrency addresses, we can look at interactions between identified entities.

As Heather said, the insight this gives us is incredible. It means we can follow funds across the blockchain, through intermediary wallets until they reach an identified entity so we are not restricted to only seeing direct counterparties.

We can aggregate that information to give high level views of sending and receiving activity for an entity or group of addresses controlled by the same wallet. Overall you have a lot more information to work with when trying to spot financial crime than you do when transactions are conducted in a fiat currency.

Putting this into a payments context, we can use this view of the blockchain to conduct enhanced due diligence, payment screening and transaction monitoring. Blockchain analytics tools can show interactions that constitute predicate offences, such as terror financing or ransomware, in addition to traditional indicators of money laundering, such as crypto kiosks.

This is why blockchain analytics tools are often mentioned by regulators when describing an effective anti-financial crime framework.

Thanks Amila. Now if you’re working with a DLT payments provider, they should be using these sorts of tools to screen blockchain transactions for you.

Some providers, like BVNK, also provide additional support by applying machine learning models. They allow us to be even smarter in preventing financial crime.

So, instead of putting blanket limits on transactions, which could affect legitimate customers, we can take a more targeted approach….

For example, by using blockchain transaction history, to discover hidden networks of users that 'layer' transactions, and to block addresses that have been used to move the proceeds of crime.

So, distributed ledger technology can be really effective as a tool to fight financial crime – if you work with the right partners and combine it with the right technology
and AML practices.