The world of crypto regulation is in a constant state of evolution. For Virtual Asset Service Providers (VASPs) and financial institutions (FIs), staying abreast of compliance demands is table stakes, while going the extra mile is a way to mitigate risks and grow trust on the marketplace.
To get a clearer picture of the current landscape, I had a chat with Benjamin Zemmour (BZ), Head of Sales at Scorechain – a leader in blockchain analytics – to discuss the key challenges and future of Know-Your-Transfer (KYT) compliance.
Our conversation highlighted three critical areas: the evergreen data race, the unique challenges facing traditional finance, and the prospect of stablecoins.
The Core Challenge: A Never-Ending Race for Data
UP: “Crypto is evolving fast in terms of technology, regulations and market entrants. How do blockchain analytics providers keep up with all the new layers and players?“
BZ: “The fundamental challenges here are data and interoperability. For blockchain analytics providers, the work is never done.”
Benjamin went on to explain the primary hurdles:
- Comprehensive Coverage: The crypto ecosystem is in flux. This requires constant technological and data integration to cover new blockchains, Layer-2 solutions, and different EVMs.
- Accurate Screening: The real art is not just finding and labeling new wallets but doing so with high accuracy to avoid false positives, which can otherwise disrupt business and harm the customer experience.
- Evolving Assets: Compliance is no longer just about BTC or ETH. Analytics must now effectively track cross-chain payments and non-currency assets like NFTs and Real-World Assets (RWAs) to provide a complete risk picture.
Bridging the Gap: Bringing Traditional Finance into the Fold
While crypto-native firms are familiar with these challenges, traditional financial institutions (TradFi) are navigating a much steeper learning curve. Benjamin noted that their needs go far beyond a simple risk report.
“Compliance officers at banks need a lot of support,” he shared. “Their exposure to the crypto space is very limited… we have to start with the basics.”
This educational gap creates two significant problems:
- Policy from Scratch: Many TradFi institutions lack established policies for crypto risk assessment. They are building their compliance frameworks from the ground up and require significant guidance.
- The Grey Area of Risk: There is no universal consensus on risk tolerance. Benjamin posed a critical question: “What if the wallet is generally clean, but there are a couple of darkweb transfers? Does that merit blocking the customer’s account?” Regulators across different jurisdictions have varying perspectives, creating a pressing need for industry-wide standards and clear guidelines.
Stablecoins: The Catalyst for Adoption and Compliance
So, where do stablecoins fit into this picture?
From a technical standpoint, Benjamin explained that analyzing a stablecoin transaction is “fundamentally the same thing” as analyzing any other cryptocurrency. The same principles apply.
However, from a strategic perspective, stablecoins are a powerful catalyst driving crypto adoption within TradFi. As banks and large fintechs begin to service digital currency payments to meet client demand, they are compelled to adopt the necessary compliance infrastructure.
This is where the compliance loop closes. Effective transaction monitoring must now include thresholds and rules for all types of digital currencies, including stablecoins. Financial institutions are quickly realizing that a robust compliance framework requires a two-pronged approach: best-in-class blockchain analytics, like those from Scorechain, to understand the history of funds, and a seamless Travel Rule solution, like ours at CryptoSwift, to ensure transactions that are both compliant and fast.
The Path Forward
Benjamin emphasized that a holistic and adaptive approach is the way forward in crypto transactions. The challenges—from data coverage to policy creation—are significant, but they are not insurmountable.
As the digital asset landscape matures, the collaboration between specialized service providers will be the key to building a safer, more transparent, and more accessible financial future for everyone.