Using Crystal Analytics for Ethereum AML Compliance
How Crystal analytics’ real-time risk scoring can support AML compliance for companies using the Ethereum public blockchain
There are currently more than 80 million unique wallets transacting on the Ethereum blockchain, with about 100,000 more wallets being created every day. According to KPMG Insights, half of companies with more than $5 billion in revenue are currently using blockchain technology, and many of those companies are exploring Ethereum for their projects.
An Ethereum Business Model
Ethereum was one of the earliest blockchains to be developed in the industry and continues to be one of the most popular public blockchains for businesses due to its smart contracts, new fundraising mechanisms and services layer. These features, however, do bring new risks for companies exposed to crypto transactions. Crystal analytics assists enterprises in managing these risks by providing tools to review Ethereum wallet activities, risk scores, and transactions.
About the Ethereum blockchain: Smart contracts on the Ethereum blockchain enable businesses to execute deals, automate contracts, conduct transactions, and conduct Initial Coin Offerings (ICOs). ICOs are a relatively new form of capital fundraising which are often executed on the Ethereum blockchain. Ethereum also has a robust developer community, with more than 500 “distributed apps” (or dapps) being added in the first quarter of 2019 alone.
Until recently, the need for regulation of blockchain technology was not widely understood. But as the crypto space matures, industry professionals recognize the importance of having thorough compliance procedures. Adoption of digital assets as financial instruments will not happen without legislation, and if Ethereum wishes to remain the top choice for enterprises moving toward decentralization, the businesses built on it need to be auditable from day one.
Immediate Auditability of Blockchain-Based Businesses
All businesses that are being built on blockchains need to be immediately auditable. For instance, a well-known trading platform’s application for a BitLicense was recently declined by the New York State Department of Financial Services (NYFDS) on the grounds that the platform had a lack of customer due diligence and transaction monitoring and a need for more compliance staff. In other words, this indicates that the platform was rejected mainly due to the lack of adequate auditing procedures or tools in place.
In this blog, we will discuss how to use Crystal analytics tools to analyze and audit the Ethereum blockchain and how we compute risk scores for Ethereum entities.
Analyzing the Ethereum Blockchain versus the Bitcoin Blockchain
Unlike the Bitcoin Blockchain, the Ethereum blockchain does have internal transactions along with regular transactions. This can impede analysis and obscure accurate visualizations of the transactions.
Additionally, there are two different types of addresses in Ethereum (user accounts & contract accounts), with various types of transactions they can execute (regular, calls, uncle, etc.). And unlike bitcoin, these transactions only have one input and one output. As such, analysis of the Ethereum blockchain requires more specialized algorithms.
After significant research and testing, the Crystal team rolled out full Ethereum analytics in March 2019, using our own proprietary algorithms for analyzing the Ethereum blockchain.
Crystal’s Proprietary Risk Scoring Features
Crystal analytics offers risk scoring for Bitcoin, Bitcoin Cash, and Ethereum blockchain transactions, addresses, and entities. A user can check the risk score of any entity by entering its identifying information (a hash or an Entity’s name) in the Search bar. Users can also filter by percentage distribution of the funds received or sent, along with other parameters. For a more detailed investigation, users can manually explore transactions with the Visualization Tool.
Defining Crystal’s Risk Scoring Algorithm
Machine learning powers our risk scoring algorithm. Some of the factors considered when computing a risk score are:
❖ Level of regulatory compliance of the entity itself (includes a manual assessment)
❖ Type of counterparty (such as compliant exchanges, gambling services, or other businesses)
❖ Transfer amounts (notably to high-risk entities such as darknet markets)
From this collected information, the algorithm can then rate the risk of an address.
About risk scoring: We take compliance seriously and aim to provide our customers with the most accurate information available about an Entity’s record. For example, the risk score will indicate that financial institutions without strict KYC/ AML procedures pose greater risks than a transparent, compliant institution. We also want to be fully transparent with our users about the risk of darknet markets. If we discover a particular service is using darknet markets/mixers, Crystal recommends assigning a high-risk score. Risk scoring also depends on regulation in different jurisdictions and so, along with our view on the level of risk of certain entities, we provide our customers with comprehensive information on the criteria that contribute to this parameter.
However, the final decision on the level of risk can be done by the company that runs the check.
AML and Fraud Prevention
The Crystal software platform provides transactional and cluster labeling for new tokens (like ERC20 tokens), a type of auditing that is vital for customer safety and transactional transparency, especially as businesses work to counteract potential money-laundering schemes. As the digital asset industry continues to expand and interact with the traditional financial sector, crypto compliance solutions will be needed for both crypto businesses and traditional financial institutions.
In the interim, to effectively achieve these goals, we envision a dual verification process that uses the best of traditional KYC tools alongside a strong crypto analytics platform like Crystal. In the future, we expect platforms like Crystal to be part of a suite of digital identity protection and verification tools built on blockchain technology.
Transparency and security are our priority, and we are constantly building for this new future. We will have many more exciting features to announce very soon for the Ethereum, Bitcoin Cash, and Bitcoin blockchains investigative analysis.
Crystal analytics platform is available now, and we are accepting requests for custom cryptocurrency investigations. You can find further details and contact information on our website.