Blockchain Data in AML: Why It Matters and What Regulators Look For
Blockchain data has become a standard practice within modern Anti-Money Laundering (AML) systems, especially for firms exposed to digital assets. Regulators are starting to see blockchain data as a key part of operational control that needs to work well for daily compliance tasks and supervisory review.
Many firms still fail supervisory reviews not because tools are missing, but because blockchain data is not embedded into real operating workflows, escalation decisions, and documented investigative outcomes.
Why Blockchain data Is Essential for Modern AML Programs
Blockchain data enables businesses to:
- Track transactions involving digital assets across public ledgers
- Identify any involvement with high-risk or illegal parties
- Use established risk guidelines to analyze wallet-level risk.
- Encourage law enforcement collaboration, regulatory reporting, and investigations.
Regulators are assessing these characteristics more frequently during:
- Licensing and registration reviews (see our MSB Registration in Canada blog)
- Desk reviews and supervisory inspections
- Banking and correspondent onboarding assessments
AMLI Analysis: Supervisors assess whether blockchain tools are present solely in written documentation or are actively integrated into operational workflows, escalation procedures, and reporting practices.
What Regulators Expect From Reporting Entities
Regulators examine blockchain data as part of the broader AML control environment, emphasizing:
- Risk Management: Clear supervision of cryptocurrency activities
- Evidence of Investigations: Decisions need to be supported by documentation.
- Standardized Practices: Analytics that are regularly used in monitoring, onboarding, and research
- Policy-Practice Match: Real business operations should be reflected in AML policies.
- Regulatory Guidelines: FATF Guidance on Virtual Assets (2019), FINTRAC (Canada), and FCA (UK) emphasize effective, operational crypto AML programs
For global firms, FCA expectations are often treated as a reference model that banks and counterparties use when considering non-UK crypto exposure, cross-border onboarding risk, and operational credibility.
AMLI Analysis: Supervisory reviews often find that documented AML policies fail to keep up with how things are done in practice, especially when there is a lot of crypto activity or activity across borders.
Common Misconceptions: Tools Alone Don’t Equal Compliance
Many companies think that blockchain analytics alone are enough to meet regulatory requirements. AML Incubator experience shows deficiencies often arise from:
- Insufficient investigator training and lack of decision-making guidance
- Lack of clear escalation thresholds and ownership
- Inconsistent documentation of investigation outcomes
- Weak linkage between analytics results and SAR/STR filings
AMLI Analysis: Most compliance findings relate to process execution, governance, and documentation quality rather than deficiencies in analytics tooling.
Where Crypto AML Programs Often Fail
Common pitfalls include:
- Nominal Oversight: Tools exisbut lack an accountable owner or clear authority.
- Template-Based Policies: Generic crypto AML language does not match real workflows.
- Policy-Operation Mismatch: Documented controls are not effectively implemented
- Unclear Risk Policy: No clear thresholds for acceptable vs. escalated exposure
AMLI Recommendation: Addressing these issues before regulatory reviews reduces remediation timelines and improves supervisory outcomes.
Examples of operations (anonymised):
Example 1: A wallet investigation reveals constant exposure to a high-risk service; however, the company lacks a documented escalation threshold, which causes investigators to make illogical decisions.
Example 2: Alerts are closed with little explanation (such as "false positive") and no documentation of the reason behind the closure, the evidence that was examined, or the reasons that SAR/STR escalation was not necessary.
Governance and Compliance Leadership
For blockchain data programs to be effective, the compliance function must have:
- Clear ownership and accountability.
- Decisions about investigations and escalation have clear authority.
- Integration with more general AML reporting, monitoring, and governance
- Regular reviews to conform to changing regulatory guidelines and typologies
During supervisory review, regulators assess compliance leadership's ability to defend investigative choices and escalation outcomes.
Banking and Market Access Implications
Strong blockchain data programs impact more than regulatory reviews:
- Banking Onboarding: Financial organisations evaluate crypto AML controls on their own.
- Counterparty Trust: Verifiable investigative skills are sought after by partners.
- Operational Stability: Inadequate controls may lead to account limitations or termination.
During bank onboarding, supervisory findings are frequently regarded as risk indicators. This means that problems found in regulatory examinations may lead to increased due diligence, restricted access, or delays in onboarding.
AMLI Analysis: Many banking restrictions arise from insufficiently documented crypto AML processes rather than the underlying business model. (see AMLI Banking Expectations for MSBs).
Practical Steps to Strengthen Blockchain data Controls
- Monitor actual transaction activity and match analytics to real-world operations.
- Standardise the procedures for investigating and resolving alerts.
- Make compliance authority and escalation responsibility clear.
- Consistently record the decisions and results of investigations.
- Review operational effectiveness on a regular basis.
- Training of the relevant staff members and employees
AMLI Analysis: Businesses that incorporate blockchain data into their regular AML processes usually have better banking relationships and fewer supervisory problems.
Benefits Beyond Regulatory Compliance
- Decreased risk of enforcement and supervisory findings
- Increased reliability in banking and payment services
- Operations that are scalable as business volumes increase
- shown trustworthiness with counterparties and regulators
AMLI Analysis: Programs built solely from templates often fail under supervisory scrutiny. Effective blockchain data usage reflects real operational practice.
Frequently Asked Questions
Q: Do regulators mandate specific blockchain analytics tools?
A: No. Effectiveness and governance matter, not vendor choice.
Q: Are crypto AML templates sufficient?
A: No. Template-based programs often lead to supervisory follow-ups.
Q: Is blockchain data only relevant for exchanges?
A: No. Any firm exposed to digital asset flows may be assessed.
Q: Does having tooling guarantee favorable regulatory reviews?
A: No. Supervisors focus on governance, judgment, and operational documentation.
Getting Support
While blockchain analytics tools are widely available, effective implementation requires governance, process discipline, and ongoing oversight. AML Incubator supports firms through:
1) Regulatory readiness and effectiveness reviews
Identifying policy-practice gaps, documentation weaknesses, and operational control failures before supervisory review.
2) Compliance leadership (MLRO / CAMLO) support
Strengthening accountability, escalation authority, decision quality, and evidence standards required for supervisory defense.
Firms that embed blockchain insights into operational AML workflows typically experience fewer regulatory issues and more efficient examinations.
