How to Build a Regulatory Technology (RegTech) Stack for VASPs

For Virtual Asset Service Providers (VASPs) like exchanges and custodians, manual compliance is a high-cost, error-prone bottleneck. A modern RegTech stack automates core obligations under frameworks like the Financial Action Task Force (FATF) Travel Rule and Anti-Money Laundering (AML) directives. This automation reduces operational risk, ensures audit readiness, and scales with transaction volume. The stack typically integrates components for transaction monitoring, customer due diligence (CDD), sanctions screening, and secure regulatory reporting.

The foundation of this stack is blockchain analytics. Tools like Chainalysis, Elliptic, or TRM Labs provide APIs to screen wallet addresses against known illicit activities, calculate risk scores, and trace fund flows. Integrating these services allows for real-time transaction monitoring. For example, a withdrawal request can be programmatically checked against sanctions lists and risk databases before execution, flagging high-risk transactions for manual review according to your VASP's risk-based approach.

Automating the Travel Rule (FATF Recommendation 16) requires secure data exchange between VASPs. Protocols like the Travel Rule Universal Solution Technology (TRUST) or open standards such as IVMS 101 define the data format. Implementation involves setting up a secure messaging layer, often using a decentralized identifier (DID) for VASP verification. A smart contract can orchestrate this: upon detecting a cross-VASP transfer, it triggers an API call to package required sender/receiver data, encrypt it for the beneficiary VASP, and log the proof of submission.

Here's a simplified conceptual flow for an automated compliance check using a smart contract as an orchestrator:

solidityCopy
// Pseudo-code for a compliance orchestrator
function processTransfer(address _to, uint _amount) external {
    // 1. Screen addresses
    RiskScore senderRisk = analyticsAPI.getRiskScore(msg.sender);
    RiskScore receiverRisk = analyticsAPI.getRiskScore(_to);
    
    // 2. Apply business rules
    require(senderRisk != RiskScore.HIGH, "Sender high-risk");
    require(receiverRisk != RiskScore.SANCTIONED, "Receiver sanctioned");
    
    // 3. If cross-VASP, trigger Travel Rule
    if (vaspDirectory.isVASP(_to)) {
        travelRuleEngine.submitIVMSData(msg.sender, _to, _amount);
    }
    
    // 4. Execute transfer if checks pass
    _safeTransfer(msg.sender, _to, _amount);
}

This logic ensures compliance checks are immutable and executed consistently for every transaction.

Building this stack requires careful integration. Key steps include: - Selecting and integrating blockchain analytics APIs for on-chain intelligence. - Implementing or connecting to a Travel Rule solution like Sygna Bridge, Notabene, or an open-source alternative. - Designing an internal case management system to handle alerts and suspicious activity reports (SARs). - Ensuring data privacy by encrypting PII and using zero-knowledge proofs where possible for validation without exposure. The goal is a seamless pipeline where compliance is a byproduct of normal operations.

Ultimately, an automated RegTech stack transforms compliance from a cost center into a competitive advantage. It enables VASPs to operate globally with confidence, onboard users faster with streamlined Know Your Customer (KYC) flows, and provide regulators with transparent, tamper-proof audit trails. By leveraging programmable blockchain data and secure messaging protocols, VASPs can build a robust, scalable foundation for the future of regulated digital asset services.

Building a RegTech stack begins with a clear understanding of regulatory obligations. For VASPs, this typically includes Anti-Money Laundering (AML), Counter-Terrorist Financing (CTF), Travel Rule compliance (like FATF Recommendation 16), and Know Your Customer (KYC) requirements. The technical architecture must be designed to automate these compliance workflows. Core prerequisites include: a secure identity management system, access to blockchain analytics tools (e.g., Chainalysis, TRM Labs), integration with sanction list APIs, and a system for securely storing and transmitting customer data for Travel Rule messages.

The system architecture follows a modular, service-oriented design to ensure flexibility and maintainability. A typical stack consists of several key layers. The Data Ingestion Layer connects to on-chain data providers, internal transaction ledgers, and customer onboarding systems. The Analytics & Screening Layer processes this data, running checks against sanctions lists, conducting risk scoring, and monitoring for suspicious transaction patterns using rule engines and machine learning models. The Orchestration & Reporting Layer manages compliance workflows, generates alerts for human review, and creates reports for regulators.

A critical architectural decision is choosing between a monolithic application and microservices. For most VASPs, a microservices approach is preferable. It allows independent scaling of high-load services like transaction screening and enables easier updates to comply with evolving regulations in different jurisdictions. Each service (e.g., sanction-screening-service, risk-scoring-engine, travel-rule-messaging) should expose well-defined APIs (REST or gRPC) and publish events to a central message bus (like Apache Kafka or AWS EventBridge) for asynchronous communication.

Data architecture is paramount. You need a unified customer and transaction view that aggregates data from on-chain addresses, off-chain records, and KYC documents. This often involves creating a compliance data lake that stores raw, normalized, and enriched data. Use a graph database (like Neo4j) or a specialized tool to map relationships between entities (wallets, transactions, counterparty VASPs) for effective network analysis. All personally identifiable information (PII) must be encrypted at rest and in transit, with strict access controls following the principle of least privilege.

Finally, the stack must integrate with existing VASP infrastructure. This includes hooks into the transaction processing engine to screen withdrawals in real-time, connections to the user onboarding flow for KYC, and APIs for the front-end dashboard where compliance officers review cases. Implementing a RegTech-specific API gateway can help manage authentication, rate limiting, and logging for all compliance-related services. The goal is to create a system that is both a control plane for regulators and an enablement layer for the business's core operations.

A modern RegTech stack for a Virtual Asset Service Provider (VASP) is not a single tool but an integrated system of specialized components. Its primary function is to automate the compliance lifecycle, from customer onboarding to transaction monitoring and reporting. The core modules typically include a Customer Identity Platform (CIP) for KYC/AML checks, a Transaction Monitoring System (TMS) for real-time surveillance, a Sanctions Screening engine, and a Case Management system for investigator workflows. These modules must be orchestrated to share data seamlessly, creating a unified compliance posture rather than a collection of siloed alerts.

The data flow is the central nervous system of this stack. It begins with user onboarding data—name, ID documents, wallet addresses—flowing into the CIP for verification and risk scoring. Approved customer profiles and their associated blockchain addresses are then propagated to the TMS and sanctions screener. The TMS ingresses a live feed of on-chain and off-chain transactions, enriching them with the customer context to detect patterns like structuring or interactions with high-risk addresses. Critical to this flow is the Travel Rule data (IVMS101 standard) for cross-border transactions, which must be captured, validated, and shared with counterparty VASPs.

Technical integration is achieved via APIs and webhooks. For example, when a user initiates a withdrawal, the exchange's core system should call the sanctions API to screen the beneficiary address against global lists (/api/v1/screening/address). A POST request to the TMS might log the transaction: {"txHash":"0xabc...", "originVASP":"your-vasp-id", "amount":"1.5 ETH"}. Alerts from monitoring systems should trigger webhooks to the case management tool, creating a ticket for review. Using a message bus (e.g., Kafka) or a workflow engine (e.g., Apache Airflow) can help decouple these services and manage complex, multi-step compliance rules.

When selecting components, prioritize interoperability and audit trails. Key evaluation criteria include support for the Travel Rule Protocol (TRP) or other open standards, the ability to handle UTXO and account-model blockchains, and detailed logging for regulatory examinations. Open-source tools like TRISA's implementation or commercial providers like Chainalysis KYT and Elliptic offer different integration models. The stack should produce immutable logs of all screening decisions, alert dispositions, and data transmissions to demonstrate a risk-based approach to regulators like FinCEN or the FCA.

Finally, the stack must be continuously tuned. This involves regularly updating risk parameters, tuning transaction monitoring rules to reduce false positives, and re-screening customers against updated sanctions lists. The case management module is where human judgment is applied; it should provide investigators with a holistic view of a customer's activity, linked alerts, and past decisions. The output is a set of actionable reports—Suspicious Activity Reports (SARs), currency transaction reports, and audit logs—that form the evidence of your compliance program's effectiveness.

For VASPs, Know Your Customer (KYC) is a non-negotiable regulatory requirement. The process involves collecting and verifying a user's identity using official documents like government-issued IDs, proof of address, and sometimes biometric data. Modern solutions go beyond simple document checks, employing liveness detection and biometric verification to prevent spoofing with photos or videos. The goal is to create a verified digital identity that can be referenced for all subsequent transactions and compliance checks.

When building your stack, you must choose between building an in-house solution or integrating a third-party provider. Building in-house offers maximum control but requires significant investment in AI/ML models, global ID document libraries, and ongoing maintenance to combat evolving fraud tactics. For most projects, integrating a specialized provider like Jumio, Sumsub, or Onfido is more efficient. These Software-as-a-Service (SaaS) platforms offer APIs that handle the entire verification flow, from document capture to risk scoring, and maintain compliance with global standards.

A critical technical consideration is data privacy and storage. Regulations like GDPR and CCPA mandate strict controls over personal data. Your architecture must ensure that sensitive Personally Identifiable Information (PII) is encrypted, access is logged, and data retention policies are enforced. Many providers offer a zero-knowledge or non-custodial model where the verification result (a pass/fail and risk score) is returned without storing the raw PII on your servers, significantly reducing your compliance burden and data breach liability.

Here is a simplified example of integrating a KYC provider's API using Node.js. This snippet demonstrates a server-side call to initiate a verification session and handle the asynchronous callback with the result.

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const axios = require('axios');
// Initialize verification for a user
async function initiateKYC(userId, userData) {
  const response = await axios.post('https://api.verification-provider.com/v1/sessions', {
    customerInternalReference: userId,
    userInfo: {
      firstName: userData.firstName,
      lastName: userData.lastName
    }
  }, {
    headers: { 'Authorization': `Bearer ${process.env.KYC_API_KEY}` }
  });
  // Return URL to redirect user for document upload
  return response.data.verificationUrl;
}
// Webhook handler for verification result
app.post('/webhook/kyc-result', async (req, res) => {
  const { event, verificationId, finalResult } = req.body;
  if (event === 'verification.completed') {
    await db.updateUserKYCStatus(verificationId, finalResult);
    // Trigger next steps: AML screening, risk scoring
  }
  res.sendStatus(200);
});

Finally, KYC is not a one-time event but the first step in an ongoing Customer Due Diligence (CDD) program. The verified identity becomes the anchor for continuous monitoring. Your system should link this identity to transaction monitoring tools to watch for suspicious activity and to periodic re-verification triggers, such as when a user's transaction volume exceeds a threshold or their profile information changes. This creates a closed-loop compliance system where identity, behavior, and risk are continuously assessed.

Transaction Monitoring (TM) is the automated, real-time analysis of blockchain transactions to detect suspicious activity indicative of money laundering or terrorist financing. For VASPs, this involves screening all inbound and outbound transfers against a set of heuristic rules and behavioral patterns. A robust TM system must analyze transaction attributes like amount, frequency, counterparty risk, and geographic origin to generate Suspicious Activity Reports (SARs) for further investigation. Unlike traditional finance, blockchain's transparency allows for more sophisticated on-chain analysis but requires specialized tools to parse pseudonymous addresses.

Implementing a TM system starts with defining your risk-based ruleset. Common rules flag transactions that exceed a certain volume threshold, involve high-risk jurisdictions from the FATF's grey list, or interact with known illicit service addresses (e.g., mixers, gambling dapps). For example, a rule might trigger an alert if a user receives over 10 ETH from a mixer contract within 24 hours. These rules are typically codified in a rules engine. You can build a basic monitor using off-chain indexers like The Graph to query transaction data and a service like Chainalysis Oracle or TRM Labs' API to assess risk scores for wallet addresses.

Sanctions Screening is a parallel, critical process that checks all transaction counterparties—both the sending and receiving wallet addresses—against global sanctions lists, such as the OFAC SDN List. This is a legal requirement; transacting with a sanctioned address can result in severe penalties. Screening must be performed in real-time before a withdrawal is processed and periodically on your entire user base. Services like Elliptic or Mercury provide APIs that accept a blockchain address and return a match confidence score against updated sanctions lists. A simple integration might look like a pre-withdrawal check: const riskData = await sanctionsApi.screenAddress(withdrawalAddress); if (riskData.isSanctioned) { blockTransaction(); }.

The key technical challenge is achieving low-latency screening at scale without degrading user experience. For high-throughput exchanges, consider a multi-layered approach: a fast, local cache of high-confidence sanctioned addresses for instant pre-checks, backed by an asynchronous, full API scan for comprehensive due diligence. False positives are a major operational burden; tuning your system involves adjusting risk thresholds and implementing a case management dashboard for analysts to review and dismiss alerts. Integrating with a blockchain analytics platform provides crucial context, such as visualizing fund flows from a flagged address to help determine if the activity is truly suspicious.

Ultimately, your TM and screening outputs must feed into a centralized Compliance Dashboard. This dashboard should display real-time alerts, risk metrics, and allow compliance officers to investigate cases, document their decisions, and file necessary reports to regulators. The technical stack—comprising the data indexer, rules engine, sanctions APIs, and alert dashboard—forms the operational core of your VASP's compliance program, enabling you to meet regulatory obligations like the Travel Rule and demonstrate a proactive approach to financial crime prevention.

The FATF Travel Rule mandates that VASPs must obtain, hold, and transmit required originator and beneficiary information for virtual asset transfers exceeding a designated threshold (e.g., $1,000/€1,000). This includes the originator's name, account number (wallet address), and physical address or national ID number, plus the beneficiary's name and wallet address. The core technical challenge is building a secure, interoperable system to exchange this Personally Identifiable Information (PII) between VASPs, which are often on different platforms and jurisdictions, without compromising user privacy or data security.

A Travel Rule solution is built on a RegTech stack comprising several key layers. The foundation is the data layer, which defines the message format (like the IVMS 101 data standard) and encryption protocols. Above this sits the communication layer, which handles the actual secure transmission of data between VASPs, often via APIs. The discovery layer is critical for identifying and validating the counterparty VASP, typically using a Travel Rule Information Sharing Architecture (TRISA) protocol or a decentralized directory service to map wallet addresses to certified VASPs. Finally, the compliance layer integrates with your existing KYC/AML systems to screen transactions and maintain audit trails.

For developers, implementation starts with integrating a Travel Rule Protocol (TRP) SDK or API. A common approach is using the open-source TRISA protocol. You would generate cryptographic certificates for your VASP, register with a TRISA directory, and implement endpoints to send and receive encrypted Transfer messages. Here's a simplified conceptual flow in pseudocode:

pythonCopy
# Upon user withdrawal request exceeding threshold
transfer_msg = create_ivms101_message(originator_info, beneficiary_info)
encrypted_envelope = encrypt_for_beneficiary_vasp(transfer_msg, beneficiary_vasp_cert)
send_to_trisa_endpoint(beneficiary_vasp_url, encrypted_envelope)
# Await and decrypt a response with beneficiary VASP's confirmation or rejection

Key technical decisions involve choosing between inter-VASP messaging systems (IVMS) like TRISA, Sygna Bridge, or Shyft, and assessing their interoperability. You must also design for data minimization and secure storage, ensuring PII is encrypted at rest and in transit. The system must handle edge cases like unhosted wallet (private wallet) transfers, which may require collecting enhanced due diligence information from your customer or using a validated Travel Rule solution for decentralized compliance. Performance considerations include low-latency message exchange to avoid transaction delays and robust queueing for failed delivery attempts.

Finally, your implementation must be auditable. Maintain immutable logs of all Travel Rule messages sent and received, including timestamps, message hashes, and counterparty VASP identifiers. This log is essential for regulatory examinations. Integrate alerts for missing required data fields or failed counterparty validations. By architecting your stack with modular components—separating discovery, communication, and data handling—you can adapt to evolving standards and integrate new protocols as the regulatory landscape for cross-chain compliance continues to develop.

Regulatory reporting for VASPs involves the automated submission of structured data to authorities and counterparties. The core requirement is the FATF Travel Rule (Recommendation 16), which mandates sharing originator and beneficiary information for transactions above a threshold (e.g., $/€1,000). To build this, you need a system that can parse blockchain transactions, enrich them with verified user KYC data from your internal database, and format the data into a standard like the IVMS 101 data model. The system must then securely transmit this data to the receiving VASP, typically via a Travel Rule protocol like TRISA, OpenVASP, or a solution from a licensed provider such as Notabene or Sygna.

Implementation requires integrating with your transaction processing engine. For outgoing transfers, your system must intercept the transaction, query the user's verified information, package it, and send it before the crypto transaction is broadcast. For incoming transfers, it must receive, validate, and store the counterparty's data, linking it to the on-chain transaction. A common architecture uses a message queue (e.g., RabbitMQ, Kafka) to handle the async communication between your wallet service, KYC database, and the Travel Rule protocol adapter. Failure to send or receive required data must trigger a compliance alert and a suspension of the transaction flow.

Audit logging creates an immutable, tamper-evident record of all compliance-related actions. Every event—user login, KYC check, transaction review, sanction screening hit, report submission—must be logged with a timestamp, user ID, IP address, and action details. These logs should be written to a secure, append-only datastore. A best practice is to hash log entries and periodically anchor them on-chain (e.g., via a Merkle root committed to Ethereum or a similar chain) to provide cryptographic proof of their integrity over time. This blockchain-anchored audit trail is invaluable during external audits or regulatory examinations, providing verifiable evidence of your compliance program's operation.

For transaction monitoring, logs must feed into your suspicious activity detection systems. Structured log data allows you to reconstruct the complete story of any user's activity, from onboarding through every transaction. When building this, consider using a specialized logging framework like Auditd or logging libraries that enforce structure (e.g., JSON format). All logs should be centrally aggregated in a system like the ELK Stack (Elasticsearch, Logstash, Kibana) or a SIEM solution, enabling complex queries, dashboarding for compliance officers, and automated alerting based on predefined rulesets for unusual patterns.

Finally, your reporting stack must generate periodic regulatory filings. This includes suspicious activity reports (SARs), currency transaction reports (CTRs), or specific reports required by local regulators like FinCEN in the US or FCA in the UK. Automate these by creating templates that pull data from your audit logs, KYC database, and transaction history. The system should allow a compliance officer to review, annotate, and submit the final report. Code that aggregates transactions for a reporting period, filters them based on jurisdictional rules, and formats the output is essential to reduce manual workload and prevent errors.

Your foundational RegTech stack should now integrate core components: a Transaction Monitoring System (TMS) like Chainalysis KYT or Elliptic, a Customer Identity Verification (CIV) platform such as Sumsub or Jumio, and a Sanctions/PEP Screening tool. The critical next step is establishing a clear governance model. Define roles for a Compliance Officer, data stewards, and IT support. Implement documented procedures for alert review, suspicious activity reporting (SAR), and record-keeping to ensure audit readiness and demonstrate program effectiveness to regulators.

To move from theory to practice, begin with a controlled pilot. Onboard a small segment of users or process a limited transaction volume through your new stack. This allows you to calibrate rule thresholds, reduce false positives, and validate data flows between your VASP's core ledger, the TMS, and reporting modules. Use this phase to train your compliance team on the new tools and procedures. Document any gaps or integration challenges, as these findings will inform your scaling strategy and vendor negotiation points.

Regulatory technology is not a set-and-forget solution. Establish a routine for stack maintenance and evolution. This includes:

• Regularly updating sanctions lists and risk scoring parameters.
• Conducting periodic audits of your KYC/AML processes.
• Staying informed on new regulations like the EU's Markets in Crypto-Assets (MiCA) framework or FATF Travel Rule updates through sources like the CoinCenter policy blog or official regulator publications.
• Re-assessing vendors annually to ensure they meet evolving technical and compliance standards.

For developers, the next technical frontier involves leveraging on-chain analytics and smart contract risk assessment. Tools like Chainscore's Risk API or TRM Labs' blockchain intelligence can be integrated via API to screen wallet addresses at onboarding and monitor for exposure to sanctioned protocols or high-risk DeFi activities. Consider building internal dashboards that aggregate risk scores from multiple sources to provide a holistic view of counterparty risk, moving beyond simple transaction monitoring.

Finally, view your RegTech stack as a competitive advantage. A robust, transparent compliance program builds trust with users, financial partners, and regulators. It enables safer expansion into new jurisdictions and facilitates the integration with traditional finance rails. Continue to engage with industry groups like the Global Digital Asset & Cryptocurrency Association (GDACA) to share best practices and contribute to the development of sensible regulatory standards for the entire ecosystem.