Understanding and managing cryptocurrency and blockchain-related compliance risks.

Crypto-Specific Risks

Organizations dealing with cryptocurrency, blockchain, or digital assets face unique compliance risks. PartnerAlly includes specialized risk categories and analysis for the crypto industry.

Why Crypto Risks Are Different

Cryptocurrency businesses face:

Evolving regulations - Rules change frequently
Global scope - Multiple jurisdictions apply
Technical complexity - Blockchain-specific issues
High scrutiny - Regulators closely watching the industry
Novel risks - No historical precedent for some issues

PartnerAlly's crypto risk features are designed for exchanges, custodians, DeFi platforms, and any business touching digital assets.

Crypto Risk Categories

AML/CFT Risks

Anti-Money Laundering and Counter-Terrorist Financing:

Risk	Description
Transaction monitoring gaps	Incomplete monitoring of on-chain activity
Sanctioned address exposure	Transactions with OFAC-listed wallets
Travel Rule non-compliance	Missing originator/beneficiary info
High-risk geography transactions	Exposure to high-risk jurisdictions
Suspicious activity detection	Failure to identify red flags

Custody Risks

For organizations holding crypto assets:

Risk	Description
Private key compromise	Unauthorized access to signing keys
Multi-sig configuration	Improper threshold or key management
Hot wallet exposure	Excessive funds in online wallets
Cold storage procedures	Inadequate physical security
Key person dependency	Single points of failure

Smart Contract Risks

For DeFi and protocol operations:

Risk	Description
Code vulnerability	Bugs enabling exploits
Oracle manipulation	Price feed attacks
Governance attacks	Malicious proposals
Upgrade risks	Migration vulnerabilities
Dependency risks	Third-party contract issues

Regulatory Risks

Compliance with crypto regulations:

Risk	Description
License violations	Operating without proper licensing
Registration failures	Missing MSB or similar registration
Reporting gaps	Missing SARs, CTRs, or other filings
Consumer protection	Inadequate disclosures
Securities law exposure	Token classification issues

Travel Rule Compliance

What Is the Travel Rule?

The Travel Rule requires Virtual Asset Service Providers (VASPs) to:

Collect and transmit originator information
Verify beneficiary information
Share data with counterparty VASPs
Maintain records of transfers

Travel Rule Risks

Risk	Impact
Missing originator data	Regulatory penalty
No counterparty verification	AML violation
Data transmission failure	Compliance breach
Record-keeping gaps	Audit failure

Managing Travel Rule Risk

Assess Coverage

Identify which transactions require Travel Rule compliance.

Implement Solutions

Deploy Travel Rule protocol (TRISA, Sygna, etc.).

Document Procedures

Create policies for Travel Rule handling.

Monitor Compliance

Track compliance rates and exceptions.

Wallet Screening

What Is Wallet Screening?

Analyzing blockchain addresses to identify:

Sanctioned entities
Known illicit actors
High-risk patterns
Mixing/privacy services
Darknet market exposure

Screening Risks

Risk	Description
Inadequate screening	Missing sanctioned addresses
False positives	Blocking legitimate transactions
Delayed screening	Processing before checking
Historical exposure	Past transactions with bad actors

Best Practices

Screen all addresses before transactions
Use multiple data sources
Document screening decisions
Maintain appeal process for false positives
Regular vendor assessment

Stablecoin Risks

For organizations using or issuing stablecoins:

Risk	Description
Reserve adequacy	Backing below 1:1
Redemption risk	Inability to honor redemptions
Regulatory action	Sudden enforcement
Counterparty risk	Issuer insolvency
Technical risk	Smart contract failure

DeFi-Specific Risks

Protocol Risks

Risk	Description
Liquidity risks	Slippage, impermanent loss
Governance risks	DAO manipulation
Composability risks	Cascading failures
Bridge risks	Cross-chain vulnerabilities

Compliance in DeFi

Challenge	Approach
Pseudonymous users	On-chain analytics, KYC where possible
Global access	Geo-blocking, terms of service
Automated protocols	Compliance-by-design

DeFi compliance is rapidly evolving. Stay current with regulatory guidance and be prepared to adapt quickly.

Adding Crypto Risks

When adding crypto-specific risks:

Use Appropriate Categories

AML/CFT
Custody
Smart Contract
Regulatory
Operational (crypto-specific)

Consider Unique Factors

Factor	Crypto Consideration
Likelihood	Crypto risks often higher than traditional
Impact	Can be catastrophic (e.g., key loss = total loss)
Velocity	Issues can escalate very quickly
Recovery	Often irreversible

Link to Frameworks

Connect risks to relevant frameworks:

AML/BSA requirements
State money transmitter rules
SEC/CFTC guidance
International standards (FATF)

Crypto Risk Scoring

Severity Adjustments

Crypto risks may warrant higher severity due to:

Irreversibility of many actions
Speed of potential exploits
Regulatory scrutiny intensity
Reputational sensitivity

Example Scoring

Risk	Traditional Score	Crypto Adjustment	Final
Data breach	High	No change	High
Key compromise	High	+1 (irreversible)	Critical
AML violation	High	+1 (scrutiny)	Critical
System downtime	Medium	No change	Medium

Monitoring Crypto Risks

Ongoing Monitoring

Area	Monitor For
Wallet screening	New sanctions, exposure updates
Transaction patterns	Unusual activity, red flags
Regulatory updates	New rules, enforcement actions
Technical security	Vulnerabilities, exploits
Market conditions	Volatility, liquidity issues

Automated Alerts

Configure alerts for:

Sanctioned address detection
High-risk transaction patterns
Regulatory announcement mentions
Security incident reports

Crypto Compliance Frameworks

PartnerAlly supports crypto-specific frameworks:

Framework	Focus
FATF Guidance	Virtual asset AML standards
BSA/AML	US money transmission
Travel Rule	VASP data sharing
State Licenses	US state requirements
MiCA (EU)	EU crypto regulation