How can transaction monitoring protect your digital assets?

Since the beginning of 2023, an astounding $400 million worth of digital assets have been stolen. With this worrisome number expected to keep growing throughout the year, it is hardly surprising that people are hesitant about venturing into the realm of digital assets. Fortunately, as the dawn of mass adoption comes ever closer, there are things you can do to mitigate the risk of crypto theft.

So, how can you protect your crypto from theft?

Utilising transaction protection provides you and your customers with the confidence to move and store digital assets with confidence. Amongst many other processes and tools, you can use to protect your cryptocurrency, transaction protection can be implemented to keep your mind at ease from a multitude of crypto risks.

What is transaction protection?

Transaction protection is a crucial tool used to track and analyse cryptocurrency transactions. Automated analysis of transactions can protect your digital assets from theft, money laundering, terrorist financing, and other illegal activities. It does this by detecting unusual transactions, for example, a transaction could be much bigger than usual or go to an unknown or malicious wallet address.

The anti-money laundering (AML) legislation is compulsory in traditional finance. This legislation means that finance services must put processes in to place to comply with the rules. Although in the world of DeFi this is not yet a rule, the principle can help to prevent money laundering activities from exchanges and custodians.

How does transaction protection work?

Each transaction request is automatically checked to determine whether the patterns and behaviours based on previous transactions. When an abnormality is flagged, it is alerted as suspicious, and it could be an indication of illegal activities – or even just human error like a mistyped wallet address.

Coincover’s Transaction Protection follows a three-step process.  

1) The customer initiates a transaction, and the receiving wallet address is screened by our transaction-checking technology for illicit addresses and wallets.  

2) The transaction is then determined as either protected or malicious. If the transaction is found malicious, your customer will be protected up to an agreed amount.  

3) Unsafe transactions will be flagged as ‘Not Protected’, and then your customer can choose whether they would like to complete the transaction. If funds are lost after a transaction is already flagged as ‘Not Protected’, the funds will not be compensated.
 

What are the benefits of transaction monitoring?

Amplified detection of financial crimes

Implementing transaction protection provides an active barrier, protecting against vulnerabilities to crimes such as money laundering and theft. In 2022 alone, $23.8 billion of cryptocurrencies as laundered, this was a massive increase from $14.2 billion the previous year. The research shows most of this crypto was received by exchanges where assets could be transferred into tangible cash, or fiat currency. Thankfully, the vigilance of transaction protection can detect these transactions and send alerts to block them.

Compliance with AML regulations

Transaction protection not only helps combat financial crimes but also ensures compliance with AML regulations. Returning to our earlier example, transaction protection detects attempts to launder money, granting exchanges and custodians the ability to adhere to legislative mandates and maintain the integrity of the system.

Enhanced customer due diligence processes (CDD)

Customer due diligence requires companies to take steps to verify their customer, in other terms to ensure that their customers are who they say they are. As regulation for digital assets is gradually starting to materialise, custodians are obliged to perform CDD and so using transaction protection can help them comply to the process.

Shielding customers from fraud and theft

Transaction protection provides an added layer of defence by protecting your funds from being hacked and stolen. Cunning hackers are wary of sending large sums of money to empty cryptocurrency wallets as they’re aware this could be detected easily. Coincover’s theft protection products help to optimise transaction authorisation, by employing behavioural analysis where it will detect any malicious activity.

Reducing risk of reputational damage

The path to mass adoption of cryptocurrencies is somewhat blocked by a lack of trust. From looking at the history of crypto and the likes of previous cases such as FTX, Terra Luna and the Ronin network, it is understandable that consumers are tentative when adopting crypto. Transaction protection can help mitigate risks of reputational damage by helping to prevent illegal activities from taking place, while addressing the main barrier to mass adoption: trust.

Increased operational efficiency

Automated processes for protecting crypto transactions will help improve efficiency for exchanges, custodians, and even consumers. Human interaction is only needed once a suspicious transaction has been alerted. To find out more about potential threats in the crypto space and how you can protect yourself against them, you can learn more about our products here.

What are the challenges of transaction protection?

The anonymity of cryptocurrency transactions

Due to the anonymous nature of cryptocurrency, it can be hard to identify the individuals involved in a transaction. This means that despite a transaction being notified as suspicious, you may not be able to prosecute perpetrators or gain any lost crypto back if you fall victim to a scam or theft.  

The complexity of cryptocurrency blockchains

The constantly evolving world of blockchain technology proves it difficult to stay up to date with the ever-growing suspicious activities. With cunning criminals becoming ever more sophisticated in their latest scams, it may be hard to know what to look for when protecting your digital asset transactions.  

Complexity also lies in the ability to make transactions across multiple blockchains. Much like their elusive and complex character, they can have different layers of transparency which proves a challenge for the regulators who aim to monitor them.  

The speed of cryptocurrency transactions

Crypto users often benefit from speedy transaction processes compared to traditional banking processes. For example, Ripple (XRP) is known for its quick transaction process of cross-border payments. Blockchain platform EOS, it can process 4,000 transactions per second (TPS). However, when it comes to monitoring these processes, it may already be too late to track the movement of crypto in real-time. Disappointingly, this could lead to you losing your crypto.

However, despite these challenges, in a world where regulation is still at its roots, transaction protection is a crucial tool to help you safeguard your digital assets. This is why the benefits of transaction protection will continue to outweigh the challenges to provide a more secure way to hold and use cryptocurrencies.