Managing Financial Crime Risk on Distributed Ledgers


A CBBC video series discussing stable coin technology design and policy considerations. In this edition, the focus is on mitigating and managing financial crime risks associated with decentralized and permissionless platforms. Jay Ramaswamy, a risk regulatory and compliance expert from Sea Labs, provides insights and answers questions regarding the challenges and strategies in this area.

The Needs Addressed by Decentralized and Permissionless Ledgers

Decentralized and permissionless ledgers, such as Celoh, aim to address various needs in the financial system. They can provide access to banking services for populations without bank accounts and bridge gaps in the traditional banking system, particularly evident during the COVID-19 crisis. Financial crime risks, encompassing money laundering and terrorist financing, are challenges that decentralized ledgers seek to tackle.

Understanding Pseudo-Anonymity

Pseudo-anonymity refers to a level of transaction transparency while preserving the anonymity of individuals involved. Unlike complete anonymity, where no information is known about the transacting parties, pseudo-anonymity allows for transaction analysis while keeping individual identities confidential.

Risks Associated with Decentralized and Permissionless Platforms

Decentralized and permissionless platforms bring unique risks. Some of the key concerns include the difficulty in identifying participants, potential global exposure to risks, and the varying risk levels based on platform and cryptocurrency attributes. While traditional financial institutions can know their customers, decentralized systems lack this capability, making risk management more complex.

Strategies for Risk Management and Mitigation

To manage risks effectively, three key elements come into play: governance, controls, and transaction limits. Establishing a strong governance structure within the community or organization can foster the sharing of best practices and risk information. At the protocol level, international principles set by organizations like the Financial Action Task Force help shape controls. Long-chain analytics and transaction limits can be employed at the protocol and application levels to monitor and restrict suspicious activity while respecting privacy concerns.

Regulators’ Role and Balancing Risks

Regulators play a crucial role in striking a balance between privacy and managing financial crime risks. Preserving privacy while ensuring compliance with obligations becomes more challenging as transaction volumes increase. While certain activities may be debated for their permissibility, preventing the emergence of new technologies altogether can be difficult. Regulators need to consider the varying risks associated with different types of transactions and strike a balance between privacy and mitigating illicit financial activities.

Leveraging Technology for Risk Mitigation

Decentralized ledgers offer technological advantages for risk mitigation. Unlike the traditional financial system, which often focuses on collecting extensive identity information, decentralized platforms can prioritize anomaly detection and behavior monitoring. This shift can lead to more efficient risk identification, reducing cybersecurity and identity theft risks associated with extensive data collection.


Managing financial crime risk on distributed ledgers requires a comprehensive approach that includes governance, controls, and transaction limits. Striking a balance between privacy and risk mitigation is a key consideration for regulators. Leveraging the advantages of decentralized technology, such as long-chain analytics and anomaly detection, can enhance risk management practices. Continued collaboration between industry experts, regulators, and organizations like Sea Labs can help address the challenges and opportunities in this evolving field.