4 minute read 20 Sep 2023
Blocks connected by chains.

The power of blockchain data analysis to safeguard FIs in Switzerland

Madhumita Jha
By Madhumita Jha

Senior Manager, Forensics in Financial Services | EY Switzerland

Expert in supporting clients during business-not-as-usual situations like fraud and financial crime. Nature lover.

4 minute read 20 Sep 2023
Related topics Blockchain Forensics Risk Financial Services
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As digital assets grow in importance, financial institutions are embracing blockchain data analysis to mitigate risk – and remain compliant.

In brief 

  • Growing exposure to financial crime using crypto warrants immediate action.
  • Blockchain data analysis empowers institutions to detect and prevent illicit activities.
  • The rising interest in CBDCs requires robust data analysis to manage risks and compliance effectively.

In this era of rapid technological evolution, the financial landscape is gearing up for the adoption of digital assets and blockchain technology. With new technologies come new challenges, particularly in the realm of financial crime and compliance. For financial institutions in Switzerland, staying ahead of the curve is of utmost importance, especially given the changes in global political atmosphere. How can they navigate the complexities of digital assets, ensuring compliance with recent regulatory measures while effectively combating growing exposure to money laundering, illicit activities and terrorist financing? The answer lies in harnessing the power of data analysis on the blockchain.

The increasing adoption of digital assets has exposed the financial industry to growing risks. Criminals exploit the pseudonymous nature of blockchain transactions, making traditional detection methods insufficient. As financial institutions in Switzerland face these evolving threats, data analysis on the blockchain is emerging as a powerful tool to protect their interests and maintain regulatory compliance.

A look at the regulatory landscape

Globally, financial authorities have been quick to respond to the emergence of digital assets. The European Union (EU), China, the US and Switzerland have all implemented measures to mitigate risks and safeguard financial systems. The EU’s 5th Anti-Money Laundering Directive (5AMLD) now includes provisions on digital assets and wallet service providers, mandating financial institutions to carry out stringent customer due diligence when dealing with digital assets. Similarly, the United States’ Financial Crimes Enforcement Network (FinCEN) has clarified the obligations of digital assets businesses under the Bank Secrecy Act (BSA), emphasizing the importance of adherence to AML and KYC regulations.

In Switzerland, the Financial Market Supervisory Authority (FINMA) has been proactive in providing guidelines for the digital asset industry, fostering a conducive environment for innovation while upholding the integrity of the financial sector. However, these measures are only as effective as the means by which financial institutions analyze blockchain data to detect and prevent financial crime.

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The power of data analysis on blockchain

Blockchain technology presents a unique opportunity for financial institutions to fortify their defenses against financial crime in the realm of digital assets. The decentralized and immutable nature of the blockchain offers a transparent and auditable ledger of all transactions, making it a valuable resource for data analysis. Some key benefits include:

  • Enhancing KYC and AML procedures

    The pseudonymous nature of blockchain transactions, which poses challenges for the verification of customer identities, can to a considerable extent be resolved when blockchain addresses are linked to real-world identities, thus turning the tide in strengthening KYC procedures.

  • Unraveling complex transaction networks

    Blockchain data can be used to unravel intricate transaction networks that would be nearly impossible to trace using traditional methods. By leveraging sophisticated algorithms, the flow of funds across the blockchain can be visualized and analyzed, identifying potential money laundering schemes or other illicit activities.

  • Flagging exposure to sanctioned entities and darknet activities

    Sanctioned entities and darknet marketplaces continue to increase their use of digital assets and are a concern for risk management, including law enforcement. Traditional investigations are rendered inefficacious. However, blockchain data analysis enables the identification and tracking of suspicious transactions, transaction patterns and wallet addresses related to these activities, ensuring direct or indirect exposures to such events or entities can be identified.

Growing interest in CBDCs

Central bank digital currencies (CBDCs) have garnered significant interest worldwide as central banks explore the possibilities of digitalizing fiat currencies. CBDCs promise to improve financial inclusion, reduce transaction costs and enhance cross-border payments. However, their implementation comes with challenges, including privacy, security and regulatory compliance. Data analysis on the blockchain becomes indispensable in navigating the complexities of CBDCs while managing associated risks.

Summary

As financial institutions navigate the evolving landscape of digital assets and distributed ledger technology, the power of data analysis on the blockchain emerges as a decisive advantage. By embracing advanced analytics, financial institutions can protect themselves against growing exposure to financial crime through digital assets, ensuring compliance with recent regulatory measures. Furthermore, when CBDCs become a focal point for the financial industry, data analysis will prove invaluable in advanced risk management and in securing a seamless integration of digital currencies.

Acknowledgement

We kindly thank Joby Jose for his valuable contribution.

About this article

Madhumita Jha
By Madhumita Jha

Senior Manager, Forensics in Financial Services | EY Switzerland

Expert in supporting clients during business-not-as-usual situations like fraud and financial crime. Nature lover.

Related topics Blockchain Forensics Risk Financial Services
Upvote