Exploring the Application of Regtech in Combating Financial Crime

Regtech ( Regulatory Technology ) is a technology that helps maintain regulatory compliance, designed to ensure that industries and consumers adhere to the rules and regulations set by law. It is akin to the braking and safety mechanisms of a supercar, helping not only regulators and companies to ensure that the "engine" runs smoothly but also to ensure that this "financial express" can be used safely.

Regtech is primarily applied in the financial sector because stable, efficient, reliable, and fair finance is crucial for social development. Governments around the world have been working to establish rules to ensure financial stability, detect and prevent financial crimes, and financial institutions must also comply with these rules and demonstrate compliance to regulatory authorities.

Due to the fact that modern finance is mainly technology-based and very complex, it is difficult to achieve regulatory compliance and efficiently adhere to rules without leveraging Regtech. Regtech helps to automate and simplify compliance. Currently, many financial institutions and regulatory agencies are utilizing Regtech solutions to achieve automation, ensure compliance, and monitor financial activities.

The emergence of virtual assets has brought new challenges and opportunities for financial regulation. Compared to traditional capital markets, the virtual asset market operates around the clock, with real-time trading that is not limited by geography. This means there is a need for regulatory technology capable of monitoring trading activities in real-time and around the clock. Furthermore, the technical characteristics of virtual assets reduce the relevance of traditional regulatory technology.

At the same time, due to the high transparency and efficiency of blockchain, blockchain-based finance actually aids regulation. For example, in some cases, criminals who might escape in traditional finance cannot evade in the realm of virtual assets because all their activities are recorded on the blockchain.

When transforming the virtual asset market, financial companies and regulatory agencies need to adjust their compliance and Regtech capabilities. The key is to draw best practices from traditional financial compliance and Regtech and add technological elements to address the unique challenges of virtual assets. This includes the ability to detect on-chain and off-chain issues, operate around the clock, and utilize artificial intelligence to process risk data.

In KYC( understanding your customer), AML( anti-money laundering) and MAR( market abuse regulation), the virtual asset market needs to take special measures. For example, regulated crypto companies must have on-chain Regtech capabilities to ensure the legitimacy of fund sources. AML requires cross-monitoring of on-chain and off-chain, combining off-chain capabilities that monitor account behavior with on-chain capabilities that understand wallet behavior and fund sources.

The cryptocurrency market has some unique forms of financial crime and market abuse. For example, research has found that among DeFi tokens listed on major exchanges, 56% exhibit insider trading behavior on decentralized exchanges. Another example is smart contract scams, where a new scam token is created on average every 4 minutes.

In places like Hong Kong, regulators are working to establish a comprehensive regulatory framework for virtual assets. Professional Regtech solutions can help exchanges meet regulatory requirements and achieve effective oversight of virtual asset trading. These solutions can monitor transactions to detect suspicious activities, prevent market abuse and market manipulation, and assist exchanges in applying for and obtaining licenses.

With the development of the virtual asset market, Regtech will play an increasingly important role in maintaining market order and preventing financial crime. Financial institutions and regulatory agencies need to continuously improve their Regtech capabilities to address the ever-changing challenges.