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From rising costs to attribution trust issues, blockchain analytics will face many challenges in the coming year. As the year draws to a close, it’s time for predictions again. We’ve heard a lot about the bright future of blockchain, from the promise of seamless cross-border payments to the rise of real-world tokenized assets (worth approximately $117.74 billion in tokenized assets at the moment). (currently) and decentralized identity solutions (this market is expected to reach $2 trillion by 2030).
Year of DeFi Compliance
DeFi is already on the radar of regulators. To name just a few notable cases, Uniswap Labs received a notice from the SEC and a $175,000 penalty from the CFTC; the court appointed Lido DAO as a general partnership. Additionally, the court determined that identifiable participants actively managing the operations of the DAO cannot escape 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 exceeded 131 million. Criminals use DeFi services to transfer and launder illegal funds, exploiting weaknesses in the technology behind DeFi platforms, enforcement, and AML/CFT regulations.
Applying FATF standards to DeFi is challenging, particularly when determining where platforms are based, operate or are registered. Without KYC, without P2P transactions, without cross-chain protocols, without privacy tools, decentralized finance also challenges regulators and analytics.
Increased compliance costs
With more regulations, compliance becomes more and more costly. The alternative? Risking hefty fines, tarnished reputation and business interruptions. This is another major issue we will need to address, and we are already looking at ways to handle it by increasing the speed of operations.
Two main reasons explain the growth in costs:
- Other challenges, including: 1) The rise of cybercrime. For example, crypto investment fraud losses reported to IC3 jumped 53% in 2023. 2) Sanctions Evasion. In 2023, a 114% increase in sanctions evasion incidents was recorded compared to 2022. This follows a 71.5% increase in 2022 compared to the previous year. 3) Fraudsters learn quickly and become harder to catch, for example thanks to AI. Regulators, such as the CFTC, are warning about criminals leveraging artificial intelligence to run more sophisticated crypto scams. 4) Growing political instability is driving changes in the adoption and value of cryptocurrencies. In regions experiencing political unrest, Bitcoin (BTC) adoption is increasing as individuals seek to protect their wealth from government interference and economic instability.
- The increasing workload of compliance officers.
With increasing regulatory clarity, there are more regulations to follow, leading to a heavier workload for compliance officers who must ensure compliance with these new requirements. To sort through, say, 1,000 alerts per month, you need around 20 compliance officers, not to mention the money spent on KYC checks. So if a business receives a customer who deposits $100, or even $1,000, it doesn’t make any money if the agent has to check at least one alert about that customer.
The compliance department is not the one that generates profits: it spends money and its costs are distributed among clients. Additionally, there is a risk of fines and imprisonment for non-compliance (remember Binance paid over $4 billion for AML violations and sanctions and CZ was sentenced to four months in prison).
This increased workload not only puts a strain on resources, but also increases the risk of monitoring errors. The pressure of processing thousands of transactions daily, each requiring detailed analysis and documentation, can quickly lead to missed red flags, incomplete investigations or incorrect risk assessments.
Introduction to AI
One potential way to reduce costs is to introduce AI to automate simple tasks that do not require decision-making from a compliance officer. For example, it can manage sending notifications to specific compliance officers or distributing alerts among team members with the least workload, answering FAQs, etc.
However, so far, AI is not ready to handle tasks that require human judgment, such as risk scoring. So the best approach for now is to carefully integrate it into routine tasks, and anyone can sign up to test AI in analytics with us.
Attribution confidence
One of the reasons why AI cannot yet be used for serious problems is the lack of confidence in attribution. It exists because two types of data can be confused:
- Cases where the data is 100% verified and reliable for use in court.
- Cases where information comes from less reliable sources, for example, someone out of X claiming a project is a scam. This type of data is not sufficient to seize funds or accuse a customer. Still, it may prompt compliance officers to investigate further.
For attribution, only data with 100% proof can be trusted – concrete enough to be used as evidence in court. Without solid proof, the award 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 this trust fades, regulators and legitimate businesses may be hesitant to engage with crypto.
Confidentiality of operations
When we talk about trust, privacy is also important. It is crucial to keep all compliance activities private so that no one knows what 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. For regulators and law enforcement, confidentiality allows investigations to be conducted without interference so that bad actors do not receive advance warnings. If it becomes public that transactions are under review, fraudsters and money launderers could exploit the information to cover their tracks, delete evidence, or move illicit funds elsewhere.
Using private servers like we do is a good solution to avoid this. This ensures that the business, law enforcement, and regulators can manage compliance activities without worrying about leaks or unauthorized access. With such servers, sensitive data remains under tight control, so that malicious actors are not informed of ongoing investigations.
