With MiCA going live in 2025, the cryptocurrency industry is rapidly pushed into traditional compliance frameworks. Traditional players, in turn, are asked to welcome the Virtual Assets Service Providers (VASPs) as equals. With this comes the urgent need for more sophisticated tools to monitor and manage risks associated with digital assets. Selecting one requires careful consideration.
Anticipating Challenges
Banks, VASPs, EMIs, and similar financial units receive constant proposals from various compliance software vendors. More recently, the market has been brimming with blockchain analysis firms’ offerings. This abundance often makes it challenging to differentiate between solutions that appear identical on the surface.
Navigating this saturated market with around 30 providers is hard as it demands a clear vision of the needs. These are not evident for traditional financial institutions entering the space or simply preparing to co-exist with VASPs.
Bridging the Tooling Gap
Roughly, we can define three different scenarios depending on the role an institution will play in the post-MiCA mixed financial system and their relationship with blockchain or/and VASPs:
Type 1: Entities Without Blockchain Interaction and no incoming off-ramps from VASPs
For entities such as card transaction acquirers and other payment method providers, there is no direct engagement with blockchain, nor is there a need to check the source of funds present. Therefore, the primary tool they require is...
...the VASP risk assessment tool.
These tools should be enough for the purpose of the B2B KYC/KYI process. In most cases, there is no need to buy blockchain forensic tools.
VASP risk assessment tools, such as Ciphertrace Armada for example, help payment providers, identify and mitigate risks associated with onboarding or keeping a business relationship with a VASP.
These types of tools assess crypto transactions in and out of VASPs to provide an overview of their blockchain activity but also provide other detailed VASP information: their anti-money laundering risk score, KYC process grade, legal compliance of the business model, etc. The accuracy and the refreshment period of this assessment varies from provider to provider.
Type 2: Entities with no direct blockchain interaction, but receiving incoming off-ramping transfers from VASPs
Entities in this category would be Banks, EMIs and E-wallets. They may not interact directly with blockchain but do face incoming off-ramps from VASPs. The needed toolset expands to include:
VASP Risk Assessment Tools
Essential for most dealings.
Blockchain Forensic Tools
Required for Enhanced Due Diligence (EDD) procedures.
The big question here is how deep and how automated the EDD by the banks and EMIs needs to be in a post-MiCA world with thousands of VASPs and millions of retail clients transacting daily. Manual investigations taking a day of work for AML officers will not cut anymore. Solutions like ChainComply are perfect for handling mass retail processes EDDs.
More on the new generation EDD process here: More on the automated EDD
However, any EDD process works best with blockchain forensic tools. Pay-as-you-go access to blockchain analysis could be a good starting point, but with volumes built up, full access to a blockchain forensic tool could be a cheaper option.
Type 3: Entities with direct blockchain interaction
Entities in this category would be mostly VASPs. Crypto-exchanges and crypto payment processors that directly receive or process crypto payments require a robust toolkit:
Comprehensive Tools
This includes VASP risk assessment tools, blockchain forensic tools, and real-time blockchain transaction monitoring to manage the higher risks associated with direct crypto transactions.
Let’s sum it up in the table below:
Table 1: Compliance Tool Requirements for Different Financial Entities in Preparation for the Markets in Crypto-Assets (MiCA) Regulation.
Did you find yourself in the table above? The decision-making process does not stop here. Once you have determined which type of toolset bucket your institution is in, you can start narrowing down your choices of blockchain analysis tools.
Choosing a blockchain forensic tool
It is important to note that there is no one-size-fits-all solution. The best tool for you will depend on your specific needs and requirements. However, comparison of the blockchain analysis tools is almost impossible for a non-expert and even for experts used to only one tool. They all look the same and seem to be doing the same thing.
I was part of a selection process once in a traditional finance institution, and it was not an easy task. Trying to pick one standout from a crowd of 15 similar solutions is daunting. Four months of investigations demo with providers and comparisons without much conclusion. Standard procurement purchase methods do not work, as the main question is to understand the importance of different decision-making factors and how they compare across different providers.
At the same time, the price ranges from several thousand EUR per year for second-tier tools, to over 100 K EUR per year for the prime platforms. There are also pay-as-you-go options.
The big question here is how precise the forensic tools need to be. Clarity from the regulator on minimum standards would greatly help traditional financial institutions in their choices.
Conclusion
Lines between the traditional financial world and the nascent crypto world were blurred by MiCA regulation and the accompanying compliance package. This coexistence of new worlds spawns a need for a new generation of compliance tools, new processes and skills to be acquired by traditional finance institutions and CASPs.
Onboarding of partners, monitoring processes, and enhanced due diligence investigation processes will all need to be updated in the second half of 2024. That means that the time to start shopping around for the right tools is now.
If you are unsure which blockchain analysis tool is right for you, it is a good idea to consult with an expert.
Σχόλια