When Decentralization Means Risk: Why Transaction Monitoring Matters in Web3

Over the last decade, I’ve watched the rise of crypto and Web3 with mixed optimism and concern. The promises of decentralization are tempting: financial systems free of gatekeepers, peer-to-peer payments, and permissionless innovation in one neat ecosystem. Yet, as this ecosystem develops and matures in a non-linear way, it’s become clear that decentralization doesn’t just shift control. It also shifts risk along with it. Without robust risk controls and transaction monitoring, that risk becomes an easy invitation for fraud.

Before diving in, it’s important to clarify some key concepts. Decentralization is the distribution of control and decision-making away from a central authority. Web3 refers to the underlying technology stack that enables decentralized applications, smart contracts, and blockchain-based protocols. Crypto, in contrast, is the broader industry built on top of this technology, including exchanges, stablecoins, token issuers, and different financial services.

How regulation applies

Now that we’ve defined decentralization, Web3, and crypto, it’s important to clarify how regulation interacts with these layers. First, the technology itself is not regulated. However, activities built on top of it, such as trading on centralized exchanges (CeX), issuing stablecoins, or running token offerings, are regulated. These regulations vary widely across jurisdictions, creating inconsistencies that amplify risk. 

In other words, while the underlying protocols can operate freely, the human-driven activities they enable are subject to legal frameworks, and this patchwork of oversight introduces new challenges for compliance and risk management. These inconsistencies help explain why some platforms end up in a semi-regulated gray zone, leaving users and regulators uncertain about accountability.

Decentralization distributes risk, too

The decentralized architecture of Web3 addresses many legacy problems related to speed, volume, and security. There is a paradox: when control is decentralized, so is risk. Threat actors no longer need to compromise a central authority; they can exploit weak links across many actors and platforms. The very systems that give Web3 its power also expose it in new ways. They also place a target on the back of users that would have been under the umbrella of a large financial institution in the TradFi way of doing business. 

In traditional finance, regulatory frameworks have evolved over decades to mitigate such risks. They are not perfect by any stretch, but they are predictable and mature. In Web3, however, risk compounds on a global, automated scale and is distributed across platforms and actors with varying degrees of security and controls. Hacks, exploits, and scams now happen at lightning speed—and on networks that, at least partially, bypass traditional supervisory mechanisms. All of this is already up and running, while regulators are playing catch-up. 

The challenge of attribution and legal certainty

Effective transaction monitoring depends fundamentally on attribution, or being able to link blockchain addresses to real-world entities and risk signals. Presently, tracking results across different platforms can be inconsistent and, crucially, the results can be hard to audit.

Some Web3 platforms provide attribution data; others do not. The quality and transparency of data vary wildly. Control over that data is also inconsistent. More worryingly, when attribution is needed for enforcement (or for convincing a court or regulator), it may not hold up to scrutiny. As seen in recent court cases, some courts might hesitate to rely on platform-produced attribution if they don’t understand how the data was derived or verified. And even more concerning, some platform providers may not be able to demonstrate clearly how attribution was made. 

This lack of clarity could prove serious without proper measures in place. Without reliable sources, we risk creating compliance models that aren't solid.

Suggested read: AML Transaction Monitoring in 2025: The Complete Guide

“Semi-regulated” isn’t a safe harbor

Often, Web3 entities are neither fully regulated nor entirely off-grid. Many non-regulated platforms are, in fact, “semi-regulated”: they may hold a license in country A, but accept transactions from country B under certain terms, and country B may lack any coherent licensing regime. This often leaves all stakeholders in part limbo. 

The complex legal issues around where data is stored can make it difficult to know what to do if there are problems. Some of these semi-regulated entities are highly aggressive in avoiding legal exposure: they refuse legal service anywhere, making accountability nearly impossible. That is not a theoretical issue but a real threat to the integrity of on-chain monitoring and enforcement.

Web3 under siege

From a financial crime risk perspective, while Web3 is evolving, it is also under siege. Organized fin-crime groups now devote much (if not most) of their energy to crypto. These groups are better organized and consolidated than before, and financial crime is increasing, by incident count as well as amount stolen. Scams are sophisticated and unbound by regulatory constraint. Crypto is quickly becoming the main vehicle for money laundering globally. Transaction monitoring in this environment cannot be business as usual.

To put this into perspective, according to the FBI’s 2024 Internet Crime Report, for example, Americans lost a record $9.3 billion to crypto-related scams, a 66 % year-over-year increase. Individuals aged 60 or older, who are the most vulnerable group, lost about $2.8 billion. Even more striking, scam-related flows remain massive: TRM also reports at least $10.7 billion in funds sent to fraud in 2024.

These are not just headline numbers, but they reflect deeply ingrained criminal activity.

Moreover, Chainalysis data points out that private-key compromises accounted for 43.8% of all stolen crypto in 2024, and North Korea-linked actors were responsible for a large share of that. The risk is not a minor thing—it affects the whole system if left unattended.

What effective monitoring must look like in Web3

So, what does this all mean for transaction monitoring in Web3? To me, there are a few important things to remember.

1. Attribution is essential. We need to advocate for clearer and more transparent wallet address attribution, even from decentralized platforms. Without it, we cannot effectively monitor actions, and enforcing the law becomes difficult.
2. Automated systems must be wisely governed. Building on-chain monitoring is powerful, but only if risk models are able to adapt and are designed with real-world fraud tactics in mind.
3. Collaboration across jurisdictions is non-negotiable. Compliance cannot work in isolation. We need collaboration among licensing authorities, legal systems, and technology providers to ensure effective regulation. This way, even platforms that are only partly regulated can still meet the required standards.
4. Treat Web3 like an industry under active threat. Financial crimes in crypto are not a coincidence; it is a key strategy for bad actors. Monitoring systems need to reflect this seriousness.

A regulatory turning point: The role of legislation

If you look at recent regulatory developments, you can see glimmers of progress. The passage of the GENIUS Act in the US is especially noteworthy. The new law creates the first comprehensive federal regulatory framework for stablecoins, requiring stablecoin issuers to hold 100% liquid reserves and publish monthly disclosures. Many stakeholders have taken a positive view on this and are expecting other countries to follow suit.  

Rather than confrontation, we should ideally see software providers and governance systems evolve in tandem with regulators. In many ways, this is the maturation Web3 needs. This will take some time to achieve, however, and some large countries, such as China, are still taking an outright hostile position to the decentralized components of Web3. Many groups in the Web3 space have a distrust against regulators and central authorities, and often for good reasons. 

Clear rules help companies build better transaction monitoring tools with more confidence and legitimacy. However, new laws alone are not enough. Technology must keep up, and companies need to focus on creating strong systems that can effectively ensure compliance.

We need to acknowledge that decentralization brings risk just as much as power. Transaction monitoring and risk management in Web3 shouldn’t be an afterthought, but its foundation.

As someone who cares about the future of Web3, I believe there are opportunities here to create a safe and innovative environment. To achieve this, we need to focus on tracking transactions accurately, use automation wisely, push for meaningful and clear regulations, and approach Web3 as a serious industry, not just a lawless frontier.