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Crypto Trade Surveillance: An Essential Tool for Regulatory Compliance

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By Greg Tishelman, Director of Crypto Sales, OneMarketData.

The growth of the crypto market has brought about new challenges for both regulators and financial institutions alike. Unlike traditional financial markets, most crypto exchanges are decentralized and operate 24/7, making it difficult to efficiently monitor trading activity and detect potential market abuse. The anonymous nature of cryptocurrencies also makes it easier for traders to engage in fraudulent behavior and market manipulation.

To address these challenges, trade surveillance systems have been developed to monitor crypto trading activity and detect potential market abuse. These types of solutions can help companies detect and prevent market manipulation, fraud and other forms of unethical behavior. With the increasing popularity and adoption of cryptocurrencies, trade surveillance has become a crucial piece of the digital asset industry and an essential tool to help firms comply with regulatory compliance and risk management initiatives. Ultimately, this helps ensure market integrity.

These systems use advanced algorithms and data analytics to analyze large amount of trading information in real-time. They can identify patterns and anomalies that could indicate potential market manipulation, and trigger alerts to investigate further. One of the key features of crypto trade surveillance systems is their ability to track and analyze trading activity across multiple exchanges and jurisdictions. This is crucial, as it allows regulators and financial institutions to gain a comprehensive view of the crypto market and detect cross-border trading activities that could indicate market abuse.

Crypto trade surveillance is also crucial for its ability to monitor for insider trading, which is the illegal practice of using privileged information for personal gain. Insiders could include employees, executives, or anyone else with access to confidential information about a company or market. As crypto markets grow, so does the potential for insider trading – and regulators and financial institutions have taken notice. Today’s crypto trade surveillance solutions can detect insider trading by analyzing patterns of trades, comparing them to market trends and triggering alerts to prompt further investigation by using advanced algorithms and data analytics to identify trades that deviate from the normal market trends. With these types of proactive alerts, financial institutions can quickly identify and prevent potential insider trading and help safeguard market integrity and protect client funds.

Trade surveillance can also help detect Ponzi schemes within the crypto space by monitoring financial transactions in the crypto market and detecting patterns of behavior that are indicative of such a scheme. This can include monitoring inflows and outflows of funds to determine if they follow a pattern of new investments paying off earlier investors, transaction between the creator and insiders to help deter and prevent detection and investment returns to determine if they are unusually high.

There have been many recent cases where trade surveillance could have played a significant role in stopping fraud within the crypto space, including Mt. Gox, during which surveillance could have detected the breach that resulted in the loss of 850,000 Bitcoins; and QuadrigaCX, in which surveillance could have uncovered the activity between the CEO and other parties and potentially raised red flags to prevent the loss of customer funds.

Beyond detecting market abuse, crypto trade surveillance systems also help financial institutions comply with regulatory requirements. The increasing regulatory scrutiny of the crypto market has led to the development of various regulations, including Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements. These trade surveillance systems can assist financial institutions by providing real-time information about suspicious trading activity and helping to identify potential money laundering or terrorist financing.

Even so, quality surveillance is not a one-time exercise. Financial institutions must continuously invest and update their surveillance systems to keep up with changing market conditions and evolving regulations, especially as new digital assets and trading platforms emerge and regulatory requirements change. Only with this level of commitment to risk management, governance and transparency will financial institutions build trust with clients, give confidence to regulators and accelerate their competitive advantage by positioning themselves as leaders in the crypto space.

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