PARSIQ's Answer to Crypto-Crime and Crypto Exchange Compliance

Since 2013, the global market capitalization of all cryptocurrencies has exploded from $1B to reaching a high of just over $2T at the start of April 2021. Meanwhile, the number of available exchanges where crypto can be traded has followed suit – reaching at least 306 exchanges.

This rapid growth has been exciting – not just for believers of the blockchain and cryptocurrency, but also for early holders of Bitcoin, and other alt-coins which have experienced exponential growth during this time. However, through all of this excitement, a darker aspect of the industry has also been growing alongside the progressive acceptance of crypto–crime.

Crime? What Crime?

The statistics are plentiful:

• Hackers stole almost $4B worth of cryptocurrency in 2020 alone.
• Criminals laundered $2.8B in 2019 using crypto exchanges
• An estimated 2.5B USD worth of Bitcoin has been laundered since the inception of Bitcoin
• $3.5B worth of crypto was sent from criminal BTC addresses in 2020
• One US exchange sent more than $36M directly to criminals in 2020

And more…

It is then no surprise that the various regulators worldwide have since begun to establish and/or update existing regulations to better prevent financial crimes through the use of crypto and crypto exchanges.

What do Crypto Exchanges Need to be Compliant?

While the management team of each exchange should spend time going through the regulations set forth by the European Commission and the Financial Action Task Force (FATF), a general summarization of what needs to be done by the exchanges can be summarized by the acronyms KYC (Know Your Customer), AML (Anti-Money Laundering) and CFT (Combating the Financing of Terrorism).

Within these three key areas:

🔹 Know Your Customer refers to processes and procedures performed by a company to verify the identity of its customers

🔹 Anti-Money Laundering measures are a set of procedures, laws, and regulations designed to prevent the movement of funds that were generated illicitly, and

🔹 Combating the Financing of Terrorism refers to the set of procedures aimed at preventing and limiting the use of monies to fund terrorist acts and/or organizations

Crypto exchanges must be compliant in all of these three areas to ensure general overall compliance to the guidelines put forth by the EC and the FATF.

The Cost of Compliance

While data on the costs of compliance related to crypto exchanges is limited, the costs of financial compliance, in general, are not. In fact, respondents to a Risk Management Association survey said that 6-10% of their revenues are spent on compliance costs, while large firms are reporting compliance costs of $10k per employee. However, the cost of non-compliance is far greater – with global regulators levying nearly $10B in fines against banks alone during 2018 and 2019, and through the first half of 2020, issuing over $5B in fines against financial institutions.

Further, the crypto exchange industry may be much less compliant than initially thought, due to not only the costs of compliance, but also the complexities of compliance (technical and otherwise), and also, "out of the box" solutions which can be leveraged by the Companies. With all of the available players not having the size, scale, and necessary financing needed to stay ahead of this topic, how can those in the industry best protect themselves, remain in compliance, stay within budget, and continue to focus on the business?

Hello PARSIQ!

PARSIQ is one of the first crypto-centric available solutions out there, providing compliance and risk management solutions for any company that is involved with cryptocurrency transactions. PARSIQ understands that most small to medium-sized businesses do not need extremely complex capabilities when it comes to compliance. What these companies need is a "real-time", affordable (starting at $49 per month), and simple to use tool that allows the Company to remain in compliance but also to focus on running the business.

PARSIQ allows you to protect a company's customers (by monitoring wallets), and also set up workflow automation (triggers that provide alerts for when an event happens). The software analyzes transactions as they happen, cross-references transactions based on data that is sourced off-chain, and then produces a risk score based on this analysis. Depending on the score assigned, Company personnel may be flagged to take further action.

Because of this, not only can the Company be alerted in real-time of a potential adverse event, but PARSIQ is also equipped with tools to then limit any further suspicious activity based on an identified transaction, and may even be able to help recover funds that may have been stolen.

Real use-cases have been noted, including with the CoinMetro exchange. In October 2020, CoinMetro was alerted to suspicious activities thanks to PARSIQ's trigger system. Because the activity triggered the alert and subsequent workflow, both PARSIQ and CoinMetro were able to work hand in hand to prevent further widespread of the attack.

Stolen funds were recovered as PARSIQ was able to take a snapshot of the funds prior to the hack, and hard fork the smart contract to return stolen funds to their owners – and thus making the actual stolen funds worthless.

The Future of Compliance

If the history of finance has taught us anything, it's that over time, regulatory oversight across all areas of finance is bound to increase. From the issuance of the first credit cards to the first online payments made, cryptocurrency and the use and exchange of virtual assets will only face more and more scrutiny and regulatory oversight with the passage of time. Companies of all sizes should get started as early as possible to ensure a proper compliance foundation – to best protect their customers, their reputation, and their assets.

PARSIQ’s platform is only limited by your business logic. Sign up on PARSIQ Portal to make your personal monitoring solution for free.