NYDFS’ guidance on the use of blockchain analytics

Last Thursday, the New York State Department of Financial Services (NYDFS) published guidance on the use of blockchain analytics for all crypto-asset companies “that are either licensed under 23 NYCRR  Part 200 or chartered as a limited purpose trust company under the New York Banking Law”.

NYDFS’ blockchain analytics guidance for enhanced crypto compliance

The guidance stresses the importance of blockchain analytics for crypto-asset companies in terms of effective policies and processes including customer due diligence (CDD), transaction monitoring, and sanction screening.

It explains that blockchain analytics is necessary to ensure that crypto companies’ compliance policies take into account the pseudonymity and decentralized characteristics of crypto-assets. Indeed, crypto compliance policies should meet the requirements set forth in the New York Banking Law, the New York Financial Services Law, and the Bank Secrecy Act (BSA) as well as requirements set by the Office of Foreign Asset Control (OFAC).

However, it also states that the immutability of blockchain transactions facilitates the monitoring process as every transaction is accessible by everyone.

Lastly, NYDFS’ guidance stresses that blockchain analytics can help crypto-asset companies address BSA, anti-money laundering (AML), and OFAC requirements including:

• Augmenting Know Your Customer (or KYC)-related controls;
• Conducting transaction monitoring of on-chain activity; and
• Conducting sanctions screening of on-chain activity.

Developing KYC controls with blockchain analytics

First, NYDFS states that blockchain analytics can help crypto-asset companies further strengthen their KYC policies to “understand and effectively address the risks presented by, their customers and potential customers”.

More specifically, compliance teams should obtain identifying information tied to pseudonymous on-chain data. They should equally perform risk analysis on their counterparties based on on-chain transactions and the strength of their AML policies.

Scorechain Blockchain Analytics can help compliance teams enhance their KYC controls. Customers have access to identifying information on the blockchain. Scorechain gathers information on legal entities like exchanges, services, and illegal entities like dark web markets, scams, etc. Our risk scoring system allows compliance teams to add another level to their risk analysis. On one hand, the software gives a risk-AML score to entities, transactions, and addresses. This allows customers to assess the risk level of their customers and their counterparties.

On the other hand, Scorechain also provides risk scoring for exchange platforms. The scoring takes into account different criteria such as compliance policies, level of regulation, and jurisdiction for example. All the risk assessment information is available in the Entity Directory for 700+ exchange platforms. It allows users to simply identify the level of risk associated with these platforms. The scoring is also customizable so it can fit internal processes and local requirements.

On-chain transaction monitoring

Then, the guidance also stresses the importance of blockchain analytics tools for crypto transaction monitoring and suspicious activity detection. Moreover, crypto-asset companies should use blockchain analytics tools for every crypto-asset that the company supports.

Therefore, crypto-asset companies should be able to demonstrate effective transaction monitoring processes for red flags and unusual behavior identification. Crypto companies should thus be able to identify if the funds they are processing:

• Have exposure to high-risk or sanctioned jurisdiction;
• Went through a mixer or tumblers;
• Are sent to or from dark web markets;
• Have links with scams and ransomware; or
• Are associated with any illicit activity.

Scorechain Analytics provides the Risk Indicator feature allowing compliance teams to easily detect specific types of activity. Customers can set up Risk Indicators depending on their internal policies. For example, Risk Indicators allow customers to spot activity with specific countries, and illegal activities like mixers, dark web, scams, hacks, etc.

In case of complex activity, customers can use the Exploration Tool for in-depth investigations. The tool can uncover links with specific activities and display how wallets are connected to each other. Below, we can see that the tool detected a link between a wallet and a dark web marketplace through a peel chain.

On-chain sanctions screening

Lastly, the NYDFS explains the importance of proper identification of transactions involving crypto addresses and entities listed on OFAC’s Specially Designated Nationals List (SDN List) or from a sanctioned jurisdiction. This is equally important as OFAC added several crypto entities and addresses to its SDN list. Indeed, in April OFAC sanctioned Hydra dark web market, Garantex exchange, and Lazarus cybercrime group.

Scorechain is automatically updating its database with the latest crypto addresses and entities added to the sanction list. Therefore, our customers can set up the Risk Indicator “OFAC sanction list” to be notified if an address, a transaction, or an entity has any links with sanctioned-related funds. In the case of detected links with a sanctioned entity or address, customers can analyze the incoming and outgoing funds charts and use the Exploration tool for deeper checks for instance.

As regulators are increasingly taking into account crypto assets, companies need to have proper policies in terms of crypto compliance. Blockchain analytics tools can help companies step up their policies and processes to satisfy rapidly-evolving requirements and ensure compliance. Are you a crypto-asset company looking to leverage blockchain analytics for enhanced compliance? Don’t hesitate to request a free demo of our tools.

About Scorechain

Scorechain is a Risk-AML software provider for cryptocurrencies and digital assets. As a leader in crypto compliance, the Luxembourgish company has helped more than 200 customers in 45 countries since 2015, ranging from cryptocurrency businesses to financial institutions with crypto trading, custody branch, digital assets, customers onboarding, audit and law firms, and some LEAs.

Scorechain solution supports Bitcoin analytics with Lightning Network detection, Ethereum analytics with all ERC20 tokens and stablecoins, Litecoin, Bitcoin Cash, Dash, XRP Ledger, Tezos, Tron with TRC10 and TRC20 tokens, and BSC with BEP20 tokens. The software can de-anonymize the Blockchain data and connect with sanction lists to provide risk scoring on digital assets, transactions, addresses, and entities. The risk assessment methodology applied by Scorechain has been verified and can be fully customizable to fit all jurisdictions. 300+ risk-AML scenarios are provided to its customers with a wide range of risk indicators so businesses under the scope of the crypto regulation can report suspicious activity to authorities with enhanced due diligence.