In finance, “track and trace” isn’t a formal technical term, but it refers to the process of monitoring, verifying, and following the movement of financial transactions, assets, or securities through systems, platforms, or supply chains. While it’s more commonly used in logistics and manufacturing, in financial contexts it takes on specific meanings depending on what is being traced. The term generally applies to compliance, fraud prevention, trade execution, and data transparency, particularly in systems where high accountability and traceability are essential.
En essence, track and trace in finance refers broadly to the ability to monitor and follow financial movements, ownership, and transactional flows. Whether it’s ensuring that a security settles correctly, detecting illicit money transfers, or maintaining digital audit trails, this function is crucial for trust, transparency, and regulatory compliance. As financial systems become more digital, interconnected, and decentralized, the demand for traceability and transaction visibility continues to grow.
The concept of tracking and tracing is relevant for several different fields of finance, where it plays different, but essential, roles. There is for instance the tracking and tracing necessary for safe securities trading, and the track and tracing used to combat money-laundering, terror-financing, and similar crimes. There is also the track and trace aspect of supply chain finance, where goods-related invoices purchase orders, and payment guarantees are traced and tracked as goods move physically through a logistics network and their associated payments move through a financial network. In our modern world, digitized systems are used to track invoice approval and status, match physical delivery with a financial payment, and stay on top of the chain of custody. This aspect of track and trace has become especially important for exporters, trade financiers, and retail platforms operating on a global scale.
The future of financial tracking and tracing will most likely involve blockchain technology, as distributed ledgers have proven to be highly useful for this type of tasks. The rise of cryptocurrencies, decentralized finance applications (DeFi), and blockchain-based ownership identification routines in the early 21st century has become both an asset, and a headache, for our ability to track and trace in the finance space. This type of new technology is currently being utilized both by those who strive to increase financial track and trace, and by those who wish to evade it.
Below, we will take a look at financial track and trace from several different viewpoints and in several different contexts. First, we will look at track and trace in securities trading, where it is involved in trade confirming, clearing, and post-trade compliance. Then, we will move on to the world of crime-fighting, with a special focus on how track and trace is used to prevent and combat money laundering, both nationally and internationally. Last but not least, we will go through how track and trace can work in the context of cryptocurrency payments and blockchain technology. One of the main attractions of blockchain in financial markets is the built-in “track and trace” capability, as every movement of a digital asset (token, cryptocurrency, or smart contract) is logged immutably. This visibility supports custody tracking, real-time audits, and secure settlement. Still, the world of blockchain networks is also heavily utilized by individuals and organizations who, for various reasons, wish to evade track and tracing.
Track and Trace in Securities and Trading
In capital markets, track and trace capabilities are used to follow the life cycle of a financial transaction or security from origin to settlement, including trade confirmation, clearing, and post-trade compliance.
During trade confirmation and clearing, it is necessary to verify that a trade executed on an exchange or over-the-counter (OTC) is accurately settled. Every step, including order placement, confirmation, allocation, clearing, and settlement, is logged and can be traced. Afterwards, post-trade compliance must be carried out, as regulators require financial institutions to retain detailed records of transactions, timestamps, and associated entities. This allows for audits and forensic investigations in the event of a breach or market manipulation claim.
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Trade Confirmation and Clearing
Trade confirmation and clearing are two essential steps in the life cycle of a financial transaction. They occur after a trade is executed and before the final settlement, ensuring that both parties agree on the trade details and that the necessary financial obligations are met. These processes form the backbone of risk control and operational efficiency in capital markets.
Modern financial markets handle millions of transactions daily, and manual confirmation and clearing are too slow and error-prone for that volume. Automated clearing systems, straight-through processing (STP), and real-time trade confirmation platforms are now standard in institutional trading environments. These systems reduce operational risk, cut settlement times, and improve transparency. Failures in these systems can lead to delays, errors, or regulatory scrutiny.
Trade Confirmation
Trade confirmation is the process of verifying and agreeing on the details of a transaction between the buyer and the seller (or their brokers) after the trade has been executed.
This typically includes:
- Trade date and time
- Security or asset traded
- Quantity or volume
- Price
- Currency
- Settlement date
- Counterparty details
- Fees and commissions (if applicable)
Trade confirmations may be generated manually, but are now mostly handled through automated systems and electronic messaging protocols (such as FIX or SWIFT), especially in institutional settings. The purpose is to catch and correct any discrepancies before the trade goes to settlement. Failing to confirm can lead to settlement failure, fines, or reputation damage. In equities and listed derivatives, confirmation often happens in real-time or within a few minutes. In over-the-counter (OTC) markets, it may take longer and involve more negotiation or documentation, especially for complex derivatives.
Clearing
Clearing is the process of updating the accounts of the trading parties and arranging for the transfer of money and securities. It ensures that:
- Each party has the assets or funds needed to complete the transaction
- The trade is matched and netted against other trades (where applicable)
- Any obligations are secured and backed by margin or collateral
- A central counterparty (CCP), where used, assumes the risk of default
Clearing may be done bilaterally or through a clearinghouse. When a clearinghouse is involved, it becomes the counterparty to both sides of the trade. This helps reduce counterparty risk and centralizes the risk management function. The clearinghouse manages margin requirements, monitors exposures, and ensures that one party’s failure doesn’t ripple through the financial system. For example, in equity markets, trades usually go through a central clearing agency like the Depository Trust & Clearing Corporation (DTCC) in the United States. In futures markets, clearing is handled by designated clearing members of the exchange.
Different asset classes have different clearing and settlement periods:
- Equities: Typically T+2 (trade date plus two business days)
- Futures: Often same-day or next-day clearing
- Bonds: Varies by market, but usually T+2 or T+1
- Derivatives: Dependent on contract terms and clearing agreements
Regulatory Oversight
Trade confirmation and clearing are heavily regulated functions. In the U.S., the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) oversee these processes. Globally, regulators have implemented post-2008 reforms to make clearing mandatory for many OTC derivatives, requiring standardized contracts to be cleared through central clearing parties. Rules around clearing aim to reduce systemic risk and increase transparency in financial markets, particularly for complex or high-leverage products.
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Post-Trade Compliance
Post-trade compliance is the process of monitoring, verifying, and validating financial transactions after they’ve been executed to ensure they adhere to regulatory rules, internal policies, and client mandates. It’s the final layer of control between trade execution and settlement, and it has been designed to catch issues that could expose a firm to fines, legal action, or operational failures.
This process doesn’t question whether a trade happened: it checks whether it should have happened under the rules in place.
In high-volume trading environments, where thousands of transactions may be executed daily, even a small oversight (buying a restricted security, exceeding risk limits, failing to document a derivative trade) can turn into a serious compliance breach. Post-trade compliance provides the backstop, flagging violations that weren’t caught at the point of trade. For investment firms, asset managers, pension funds, and broker-dealers, strong post-trade compliance is of vital importance. Regulators expect firms to demonstrate a documented, auditable process for post-trade review, with clear resolution steps for violations.
What Post-Trade Compliance Covers
The scope of post-trade compliance depends on the type of institution and its regulatory obligations, but common elements include:
- Investment guideline breaches
Ensuring that trades don’t violate client mandates. For example, a fund with a 10% cap on a single issuer’s exposure must not exceed that, even after market movement. - Restricted securities
Checking that the trade didn’t involve securities that are blocked or require prior approval. - Concentration limits
Monitoring exposure to sectors, issuers, or countries to ensure diversification rules are met. - Liquidity requirements
Verifying that the portfolio retains enough liquid assets to meet redemption or cash needs. - Leverage and derivatives limits
Confirming that use of leverage, margin, or derivatives stays within defined thresholds. - Regulatory reporting
Ensuring that trades are reported accurately and on time to regulators, clearinghouses, and repositories.
The Workflow for Post-Trade Compliance
After a trade is executed and confirmed, post-trade compliance systems ingest the transaction data and compare it against pre-defined rules. This includes both real-time market data (like updated prices or positions) and static data (like client rules, regulatory limits, or internal policies). If violations are detected, they are flagged, and usually passed to a compliance officer or back-office team for review. In many cases, small violations (such as a position temporarily breaching a threshold due to price movement) are logged but not escalated. More serious or repeat issues may require remediation, e.g. reversing a trade, filing a report, or escalating to a senior manager.
Post-trade compliance relies heavily on automation, as modern systems are integrated with order management platforms (OMS), portfolio management tools, and risk engines, to pull in trade data in real time. Rules are coded into the system using parameters that can be updated as mandates or regulations change. Without automation, the scale and speed of today’s markets would make post-trade compliance nearly impossible. However, even the best systems require regular oversight, backtesting, and audits to ensure accuracy.
Examples of Real-World Scenarios
- A portfolio manager buys a security from an issuer blacklisted under sanctions regulations. The post-trade compliance system flags the violation and the firm must report the breach and possibly unwind the trade.
- A mutual fund exceeds its permitted exposure to a high-yield bond rating. Compliance triggers an alert and requires portfolio adjustments or client notification.
- A fund operating in the EU fails to meet the UCITS liquidity requirements due to a cluster of illiquid securities. The compliance team must take steps to rebalance or face penalties. (UCITS stands for Undertakings for Collective Investment in Transferable Securities. It’s a regulatory framework of the European Union that creates a harmonized regime for investment funds that can be sold across all EU member states.)
Who Oversees Post-Trade Compliance?
Post-trade compliance is typically handled by a dedicated compliance department within the firm, working alongside legal, operations, and risk teams. While pre-trade compliance is usually built into the trader’s platform, post-trade checks are broader and often catch what pre-trade filters can’t, especially issues related to cumulative exposure, market events, or delayed data.
Firms are also subject to audits by regulators and may be required to demonstrate that their post-trade compliance processes are functional, documented, and independently reviewed.
Track and Trace in Anti-Money Laundering (AML) and Know Your Customer (KYC) Compliance
In regulatory finance and banking, track and trace refers to identifying the source, movement, and final destination of funds. This is a core element of anti-money laundering (AML) operations and Know Your Customer (KYC) protocols.
Financial institutions use software and databases to trace:
- The origin of funds, especially for large or otherwise suspicious transactions
- The identities and jurisdictions of account holders
- Cross-border money flows flagged for further review
- Patterns indicative of suspicious layering, structuring, or illicit fund transfers
This data is shared with financial intelligence units and regulatory bodies when required.
Anti-Money Laundering (AML)
Anti-Money Laundering (AML) routines are essential functions in the modern financial industry, aimed at detecting, preventing, and reporting suspicious activities tied to illegal money flows. Financial institutions, investment firms, and other regulated entities are legally required to implement AML programs that monitor customer behavior, enforce due diligence, and maintain robust recordkeeping systems. AML isn’t just a box to check, it’s a defense mechanism against financial crimes. The goal is to stop the process by which money from illegal activities (such as drug trafficking, corruption, or tax fraud) is “cleaned” through legitimate channels to hide its criminal origin.
It is the responsibility of each applicable firm to draft and implement internal policies that define how AML obligations will be met, what thresholds will trigger reviews, and who is responsible for monitoring. Internal audits or external reviews assess the effectiveness of the AML program and test whether red flags are properly identified and escalated.
AML compliance is typically embedded in a broader financial crime and risk management framework. Among other things, applicable institutions are obliged to comply with relevant domestic regulations such as the Bank Secrecy Act (BSA) in the U.S. and the Fifth and Sixth Anti-Money Laundering Directives (AMLD) in the European Union. There is also the global standards of the Financial Action Task Force (FATF). Founded by the G7 in 1987, FATF is an intergovernmental organization used to combat money-laundering, terror-financing, and proliferation-financing (e.g. nuclear weapons and weapons of mass destruction).
AML efforts are becoming more and more international, and it is evident how cross-border data sharing, regulatory coordination, and public-private partnerships are essential to building an effective global AML structure. Increasingly, countries that fail to meet FATF standards are “greylisted” or “blacklisted,” which affects their access to international finance. The Financial Action Task Force (FATF) sets international standards, pushing countries to align their laws and enforcement. Financial institutions operating across borders must reconcile different legal frameworks, which often means implementing the highest standard available.
A financial firm, and employees, that fail to comply with applicable AML regulation can face various consequences, including criminal penalties, civil penalties, loss of license, a private or public reprimand, and higher scrutiny in future audits. In recent years, major banks and financial institutions have paid billions in AML-related fines for failing to flag suspicious activity or operating weak compliance programs.
What AML Programs Cover
AML programs are structured around several core functions that work together to flag and mitigate suspicious activity.
- Customer Due Diligence (CDD)
Know Your Customer (KYC) procedures that verify client identity, source of funds, and business activities. High-risk customers may trigger Enhanced Due Diligence (EDD). - Transaction Monitoring
Automated systems scan for patterns consistent with money laundering, including rapid movement of funds, unusual wire transfers, or transactions inconsistent with a client’s profile. - Suspicious Activity Reporting (SARs)
Institutions must file reports with regulators when they detect transactions that may be tied to criminal activity. - Record Keeping
AML regulations require retention of documents such as customer onboarding records, transaction logs, and internal compliance communications. - Training and Governance
Staff must be regularly trained on AML risks and procedures. Firms must maintain a compliance structure with designated officers responsible for oversight.
Examples of AML Red Flags and Typologies
AML systems are trained to look for behavior that deviates from a client’s expected profile. Common red flags include:
- Structured deposits just under reporting thresholds (a tactic called “smurfing”)
- Frequent wire transfers to high-risk jurisdictions
- Unexplained large cash deposits
- Transactions through shell companies with unclear ownership
- Accounts controlled by politically exposed persons (PEPs)
Money launderers often rely on layering, which is the moving money through multiple transactions or jurisdictions in an effort to obscure its source. AML systems track and trace these flows, linking seemingly unrelated events into a broader suspicious pattern.
Modern AML compliance handles enormous amounts of data and largely depends on technology. Financial institutions does for instance use automatic rule-based transaction monitoring system to flag activity that match certain patterns, and in recent years, machine learning models have been employed as well; algorithms that adapt to new typologies or anomalies. Automated systems are also continuously doing the mundane by important task of screening against sanction lists, watchlists, and adverse media. In the context of AML, adverse media (also known as negative news) refers to publicly available information from reputable sources that links an individual or entity to potential involvement in criminal activity or unethical behavior, including activities that may entail money laundering, fraud, corruption, or terrorist financing. When employed correctly, technology can help improve detection speed, and can also reduce the number of false positives, giving human compliance teams with more time to focus on genuinely risky activity.
Sanctions Compliance and Screening
AML overlaps with sanctions enforcement, and financial institutions must screen customers, transactions, and counterparties against global watchlists. Failure to block a sanctioned transaction or entity can lead to heavy fines and reputation damage. Examples of notable lists are the watchlists published by the U.S. Office of Foreign Assets Control (OFAC), the United Nation´s Council, the European Union, and the United Kingdom.
OFAC maintains several watchlists, with the most important one being the Specially Designated Nationals and Blocked Persons (SDN) List. Financial institutions are obliged to screen both customers and transactions against OFAC´s lists. If there is a confirmed match, assets will be blocked and the match reported to OFAC.
The OFAC SDN List contains the names of individuals, companies, organizations, and vessels that are flagged because they are involved in activities that threaten U.S. national security, foreign policy, or economy, such as terrorism, destabilizing activities in conflict zones, human rights abuse, drug trafficking, weapons proliferation, corruption, cybercrime, or support for sanctioned governments or regimes.
Examples of Notable Cases Involving Anti-Money Laundering (AML) and Counter Terror Financing (CFT) Investigations
The HSBC Case of 2012
In 2012, U.S. authorities fined HSBC, one of the world´s largest banks, for lapses in AML controls. The fine amounted to $1.9 billion and is still the largest for this type of case.
HSBC paid the fine in full as a part of the deferred prosecution agreement with the U.S. Department of Justice. By paying, the involved avoided criminal prosecution, and also ensured that HSBC could continue to operate in the United States. The HSBC acknowledged serious lapses and admitted to facilitating transactions for Mexican drug cartels and sanctioned entities in several countries, including Sudan and Iran.
The HSBC also invested $290 million to enhance its ALM systems. For five years, and independent monitor supervised the improvements.
The Al-Barakaat Money Transfer Network Case of 2002
This was one of several cases concerning terror-financing that arose in the aftermath of the September 11 attacks in 2001. In this case, Al-Barakaat was a Somali-based money transfer service that U.S. authorities suspected of facilitating terror financing for al-Qaeda.
As a part of the track and trace process, the U.S. Treasury and intelligence agencies used financial monitoring and AML tools to identify suspicious transfers. Eventually, Al-Barakaat´s assets were frozen by U.S. authorities.
Al-Barakaat, which still exist, is a part of a group of companies in Somalia, with roots going back to 1987. The firm is involved in hawala, an ancient value transfer system based on the inherent trust within a network of agents known as hawaladars. A transaction requires a minimum of two hawaladars and no money needs to be physically moved to complete the transaction, since the system is based on trust.
When the September 11 attacks occurred, Al-Barakaat had outlets in 40 countries and handled roughly $140 million USD per year from the Somali diaspora. After the September 11 attacks, U.S. authorities listed Al-Barakaat as a terrorist entity and detained several people associated with the company. This placed an enormous strain on the Somali economy. The blow was two-fold: Al-Barakaat was one of the largest employers within the country, and a majority of Somalian families relied om remittances sent through Al-Barakaat.
Five years later, in 2006, both the United States and the United Nations removed Al-Barakaat from their blacklists, citing that there was no evidence of the company being involved in funding any terrorist activities. It would take until 2020 before the Barakaat Group of companies was completely removed from the sanctions list by the U.S Office of Foreign Assets Control (OFAC).
The Holy Land Foundation Case (2008)
Founded in Texas in 1989, the Holy Land Foundation grew to become one of the largest Islamic charities in the United States, before it was shut down by the U.S. government in December 2001, in the aftermath of the September 11 attacks.
While the foundation itself claims to provide humanitarian aid to Palestinians in need, the U.S. authorities accused them of funding terrorism, specifically Hamas.
After a long investigation by the FBI and other agencies, indictments were finally made in 2004. As a part of the investigation, U.S. authorities unveiled suspicious patterns in the financial transactions between the foundation and charities abroad. Bank records, wire transfers, and documentation of fund flows were used to build the case. The evidence included documents seized in raids and information obtained through wiretaps. Critics, including civil liberties defenders, argued that the case relied heavily on anonymous witnesses and secret evidence. The case raised widespread concern over due process in terror-financing cases and the treatment of charitable aid organizations that work with foreign charitable aid organizations.
The trial concluded in 2008. The U.S. government accused the Holy Land Foundation and five of its leaders of conspiracy to provide material support to a foreign terrorist organization (Hamas), operating an unregistered agent of a foreign government, money laundering, and tax fraud. Prosecutors argued that the foundation has given millions of dollars to Islamic charities in the West Bank and Gaza that were allegedly controlled by Hamas. The five leaders were convicted on all counts, with sentences ranging from 15 years to 65 years in prison. The Holy Land Foundation was dissolved and its assets were seized.
The Panama Papers of 2016
Starting in April 2016, news stories began to emerge based on the information contained in 1.5 million leaked documents (2.6 terabytes of data) originating from the Panama-based law firm and corporate service provider Mossack Fonseca. An anonymous whistle-blower dubbed John Doe obtained them and compiled them with similar leaks into a searchable database, before leaking the information to the German journalist Bastian Obermayer at the newspaper Süddeutsche Zeitung.
The papers contain financial and attorney-client information for nearly 215,000 offshore entities. Some of the information dates back as far as the 1970s. The documents exposed how offshore entities were used by wealthy individuals and corporations to hide assets and evade taxes. Sometimes, there were also ties to other criminal activities, including corruption and espionage.
In the wake of the Panama Papers leak, investigators used track and trace techniques to follow financial flows, ownership structures, and document trails. By following “breadcrumbs” such as company registrations, bank transactions, shell companies, and email communications, authorities could trace who owned what and where funds moved globally, even when structures were deliberately opaque. Authorities were able to identify layers of ownership and follow transactions through multiple jurisdictions. Leaked data was cross-referenced with public registries and banking data, and researchers had to pay close attention to timestamps and transaction records.
It is notable that the investigations that commenced as a result of the leak did not originate due to standard AML routines or any other types of track and trace routines within financial institutions. It was instead the deliberate actions of an individual whistle-blower, and the work of numerous journalists, that got the ball running. Still, the subsequent investigations involved a lot of tracking and tracing, and the Panama Paper investigations are therefore nevertheless considered prime examples track and trace-heavy operations.
Dues to the enormous size of the Panama Papers, journalists from over one hundred media organization worked to analyze the documents for a year before any news stories were published. That project is considered an important milestone for the use of data journalism software tools and mobile collaboration.
So far, few people have been convicted as a result of the Panama Papers. Some have been acquitted, and for some, investigations are still ongoing. At least two individuals are staying in countries that will not extradite them.
For some people that have managed to avoid arrests and convictions, the consequences have still been notable. In Iceland, Prime Minister Sigmundur Davíð Gunnlaugsson resigned as PM on April 5, 2016, after being linked to an offshore company held jointly with his wife and tied to bonds of failed Icelandic banks. Juan Pedro Damiani, a FIFA Ethics Committee Member, also stepped down from his position when it became clear that he was connected to offshore entities linked to indicted individuals in football corruption investigations. José Manuel Soria, Spanish Minister of Industry, Energy and Tourism, resigned from his post and also gave up his seat in the Spanish Congress and leadership of his party in the Canary Islands. Gonzalo Delaveau, interim President of Transparent Chile, also resigned after being linked to offshore companies. Chile Transparente is the official Chilean chapter of Transparency International, and its mission is to fight corruption in Chile from a holistic civil society perspective, raising awareness about transparency, integrity, and the social and economic costs of corrupt practices. Understandably, being even briefly linked to the Panama Papers was deeply embarrassing for the organization.
What the future holds when it comes to extraditions and more court cases remains to be seen. What we do know is that the public outrage resulting from the Panama Papers leak spurred law makers to enact stricter AML laws and pro-transparency rules.
Tracking and Tracing Blockchain Transfers
In the field of blockchain transactions, track and trace is about the ability to follow the path of digital currency or token transactions across a network to determine their origin, movement, and final destination.
While digital assets are often perceived as anonymous, most of them (particularly those using public blockchains like Bitcoin or Ethereum) are in fact pseudonymous. That means every transaction is recorded publicly and permanently, but tied to alphanumeric wallet addresses rather than identifiable names. With the right tools and context, these wallet addresses can often be linked back to individuals or organizations.
Every transaction on a public blockchain creates a permanent and immutable record, timestamped and openly accessible to anyone. This includes sender and receiver wallet addresses, amount transferred, date and time of the transaction, and any associated smart contracts or token activity. Specialized blockchain analytics firms (such as Chainalysis, Elliptic, and TRM Labs) use these data points to trace flows of cryptocurrency across wallets, exchanges, and services. By clustering wallet addresses, mapping known service providers, and tagging illicit addresses (e.g. darknet markets, sanctioned entities, or ransomware operators), they have been able to trace the origin and flow of funds with surprising accuracy.
Challenges
While most major cryptocurrencies are traceable, the process isn’t always straightforward. Users who actively try to obscure their transactions use techniques such as mixers/tumblers, chain-hopping, and privacy coins. These techniques make tracing more complex, though not always impossible. In high-profile investigations, authorities have traced funds through hundreds of transactions using a mix of blockchain analytics, data subpoenas from exchanges, and metadata matching.
Mixers/Tumblers
Mixers (also called tumblers) are specialized services that blend coins from multiple users to deliberatly obfuscate the source and destination of funds. Typically, mixers are operating for-profit, charging a small fee for each transaction.
Examples of well-known mixers:
- Wasabi Wallet. At the time of writing, this mixer is still active, but under scrutiny.
- Samouri Wallet. At the time of writing, this mixer is still active, but under scrutiny.
- Blender.io. The first-ever mixer to be sanctioned by OFAC (May 2022). Allegedly involved in money laundering from North Korea.
- Tornado Cash. An Ethereum-based mixer. Sanction by OFAC in August 2022. Allegedly, Tornado Cash was used to move funds from the North Korean hackers Lazarus Group.
- ChipMixer. Seized by law enforcement in 2023. Allegedly associated with darknet markets.
- Helix. In 2020, the U.S. Department of the Treasury issued a $60 million civil penalty, the first-ever against a mixer operator, for operating without registering as a Money Services Business (MSB), not implementing AML controls, and failing to file Suspicious Activity Reports under the BSA. In 2021, the Helix owner pleaded guilty to conspiracy to commit money laundering. In 2024, he was sentenced to 3 years in federal prison, followed by 3 years of supervised release. He was ordered to forfeit over $400 million in assets.
Chain-hopping
Chain-hopping is the practice of moving assets across multiple blockchains or converting through decentralized exchanges to make tracking and tracing more difficult.
Privacy Coins
Certain cryptocurrencies, such as Monero (XMR) and Zcash (ZEC), specialize in focusing more on privacy than the average cryptocurrency and network. Such coins are often referred to as privacy coins. Typically, they use encryption techniques that attempt to hide sender, receiver, and transaction amount.
The Role of Cryptocurrency Exchanges
Centralized exchanges are a critical chokepoint in crypto traceability, and several big exchanges now require Know Your Customer (KYC) data for users to trade or withdraw large sums. When a suspicious wallet cashes out through such an exchange, investigators can often subpoena or obtain account information linking the wallet to a verified identity. Exchanges also use internal systems to trace incoming and outgoing funds, sometimes working with law enforcement when flagged wallets are detected.
Track and Traceability for Stablecoins
Stablecoins like Tether (USDT) and USD Coin (USDC) are typically issued on public blockchain and are then traceable just like any other blockchain asset. However, because they are issued by centralized entities, those entities can also freeze or blacklist tokens linked to flagged wallets, further enhancing traceability and regulatory control.
Use by the Legal System
The track and traceability of cryptocurrency transactions have been utilized in several high-profile cases in recent years. Among other things, law enforcement agencies have used cryptocurrency transactions to track suspected terror financing and the proceeds going to ransomware extortion groups. Tax authorities have also become more proficient in linking cryptocurrency transactions to ownership.
With that said, the track and traceability of cryptocurrencies and blockchain tokens is still limited, and there is also a growing debate surrounding privacy issues. While traceability can help stop crime, surveillance also undermines legitimate use cases, e.g. pro-democracy and human rights organizations and individuals operating under authoritarian regimes, and underbanked regions and marginalized groups that have come to rely on cryptocurrencies and DeFi apps but are now running into increasing issues due to ramped up AML routines.
It is also worth noting that not all countries cooperate in the enforcement of track and trace laws for cryptocurrency. Also, some countries cooperate in spirit, but do not have enough resources to actually do much in reality.
How Can Blockchains and Other Types of Digital Ledger Technology (DLT) Help With the Future of Tracking and Tracing?
Distributed ledger systems (DLS), including blockchains, are technologies designed to record, store, and validate data across multiple participants in a secure, transparent, and tamper-resistant way. In financial services, these systems are used to track ownership, verify transactions, and reduce the need for intermediaries by establishing a shared, auditable record of activity.
In traditional finance, record keeping is siloed, with banks, brokers, clearinghouses, and custodians each maintain their own ledger. This creates friction, delay, and complexity. Distributed ledgers offer a shared infrastructure where records are agreed upon automatically and transparently, reducing operational risk and cost.
Note: Although blockchain is a type of distributed ledger, the terms are often used interchangeably. The key difference is that not all distributed ledgers are blockchains, but all blockchains are distributed ledgers.
Understanding DLS and Blockchains
Distributed ledger systems (DLS) create synchronized databases across several nodes or participants. Each party has access to the same version of the truth, reducing discrepancies, manual reconciliation, and the risk of fraud.
A blockchain, which is type of DLS, organizes data in blocks, each linked to the previous one using cryptographic hashes. Once recorded, the information in a block can’t be altered without changing every subsequent block, a feature that makes the system inherently resistant to tampering. Once added, data is nearly impossible to modify without detection.
The blockchain is also characterized by decentralization, transparency, security, and security. There’s no central authority, as each node maintains and verifies the ledger. All nodes see the same data and changes are visible to all. Transactions are verified by consensus mechanisms like proof of work (PoW) or proof of stake (PoS).
Public blockchains (like Bitcoin or Ethereum) are open to anyone, while private blockchains require permission. Private blockchains are today used by financial institutions to maintain confidentiality and control.
A non-blockchain DLS uses distributed ledger technology without the chain-of-blocks structure. These ledgers still allow multiple participants to share and update records, but they may not use consensus mechanisms like mining or staking. Instead, permissions and validation rules are defined by the network. These are often used in enterprise environments where performance and control are more important than full decentralization. Examples include Hyperledger Fabric or R3 Corda, platforms built for financial institutions and corporations to share data securely without exposing it publicly.
DLS Use in Finance
Distributed ledger systems are currently reshaping core areas of finance, including payments, securities settlement, and rule compliance. There is also the rapid development of new fields, such as self-executing smart contracts the tokenization of assets.
If we look at payments, DLS is offering faster and cheaper transactions, especially cross-borders. With DLS, we can have real-time clearing, reducing delays from intermediaries. In the world of securities trading, recording asset ownership on a blockchain can shorten settlement times from days to minutes. And instead of working against AML regulation and routines, DLS can boost them, e.g. through shared identity frameworks and transaction histories that will help streamline regulatory checks and reduce duplication
Instead of simply using blockchains and other DLS for moving around cryptocurrencies, networks such as Ethereum have been constructed for the use of self-executing contracts that are coded into the blockchain, reducing some of the legal and operational costs associated with ownership transfers.
Notably, it is now also possible for assets such as securities, commodities, and real estate to be represented by tokens on a blockchain. This can enable smoother and more traceable transactions, 24/7 trading/selling, and even facilitate fractional ownership for certain asset types.
At the time of writing, several central banks are exploring the use of Central Bank Digital Currencies (CBDCs), which use distribute ledgers to issue and track digital versions of the national currency.
Real-World Examples
- J.P. Morgan’s Onyx platform uses Digital Ledger Technology (DLT) for interbank payments and settlement solutions.
- The Depository Trust & Clearing Corporation (DTCC) is using its DLT-based Project Ion to modernize post-trade settlement of securities. Right now, it is running parallel with existing systems and has not replaced them. Project Ion aims for T+0 settlement, instead of the T+2 of the parallel systems.
Of course, the field is still in its infancy, and many financial institution are still ironing out the kinks. The Australian Securities Exchange (ASX) is for instance working to replace its clearing system with a blockchain-based platform, but is currently struggling with delays and complications.
Challenges and Limitations
Energy consumption
Proof-of-work chains like Bitcoin use vast amounts of energy. Newer consensus methods, like proof-of-stake, aim to reduce this footprint.
Scalability
Public blockchains can be slow and expensive during periods of high use. Transaction speeds and fees can be a barrier to adoption.
Privacy
Public blockchains make all transactions visible, which isn’t acceptable for many financial institutions and legal framworks. Privacy-enhancing technologies and private ledgers are being developed to address this.
Regulatory uncertainty
Legal frameworks are still catching up, especially for tokenized assets and decentralized finance (DeFi).
Interoperability
Most blockchains are isolated from each other. Cross-chain communication and standardized protocols are still evolving.