A few years ago the cryptocurrency industry was perhaps most well known for its use in crime. Bitcoin, the flagship cryptocurrency, first became known to the wider public because of the now-defunct ‘Silk Road’, a marketplace on the darknet that saw users sell illicit goods and drugs online. This led to a distinct association between bitcoin and illegal activities.
While bitcoin has mostly shed its association with crime and is now largely seen as a legitimate financial asset, companies in the industry still struggle with maintaining banking relationships and remaining compliant. As such, those operating in the industry have to work with blockchain analysis firms such as Elliptic to ensure they aren’t unwillingly aiding criminals.
This year saw one of the largest crypto hacks in recent memory as leading exchange Binance suffered a theft of 7000 BTC , worth over $40 million at the time. The hack underscored just how vulnerable even the biggest players in the industry can be, and led the exchange to embrace new security measures, including a new AML partnership with Elliptic.
Failing to ensure proper anti-money laundering (AML) and know-your-customer (KYC) checks can have consequences for businesses dealing with cryptocurrencies.
The Financial Asset Task Force (FATF) Regulatory Guidance has Divided the Industry
Most cryptocurrencies, including bitcoin, are pseudonymous in nature. Funds aren’t sent from person A to B, they’re sent from address A to address B, and figuring out who these addresses belong to is a real problem for businesses looking to comply with regulatory strictures.
The Financial Asset Task Force (FATF) has recently outlined regulatory guidance that , among other things, would require virtual asset service providers (VASPs) to know the identity of the sender and recipient of every cryptocurrency transaction they enable. This rule has existed for decades in the traditional financial world and is commonly known as the “travel rule.”
The FATF’s regulations released in late June have divided the cryptocurrency community. Some believe the regulations are not technologically feasible and that they eliminate cryptoassets ‘unique selling point’ - a censorship-resistant transfer of value.
Elliptic is a blockchain analysis firm that believes cryptocurrencies are going to play a key role in the future of finance, and that for the industry to keep growing - without the restraints associated with a poor reputation - criminals must be siphoned out of the market.
In this vein, Elliptic have adopted a proactive approach to the FATF guidelines. The new guidance makes it clear that transaction monitoring solutions are essential for managing the risks associated with virtual assessment. Moreover, the FATF’s new standards apply to a wide range of digital assets and products - meaning the need for blockchain analytics will be great.
What’s particularly important for the cryptoasset sector is that the FATF’s new guidance makes it clear that banks should not completely ‘de-risk’ with respect to the crypto sector - avoiding such companies entirely. The body believes that this approach is not feasible, is undesirable and that banks should instead adopt a risk-based approach for managing relationships with VASPs. This again underscores the importance of effective and professional blockchain analysis.
Are Blockchain Analytics the Key to Compliance and Global Adoption?
Irrespective of the desirability of the proposed regulations, blockchain analytics companies such as Elliptic will likely be instrumental in helping crypto companies remain compliant. One of the key ways this is done is to provide monitoring tools that help regulated crypto businesses identify and halt risky addresses and transactions that may be associated with hacks, money laundering or terrorist financing.
Simone Maini, Chief Operating Officer at Elliptic explained to CryptoGlobe how they take a proactive approach to regulation:
“Something that Elliptic works really closely with the industry on is making sure that we can help ensure that the development of that regulation is done in an appropriate way and that we're not seeing regulatory overreach.”
Darkweb usage has grown 50% year-on-year making the task of compliance more challenging than ever. Using a combination of high-quality public and private data-sets Elliptic can map risky transaction typologies to individual cryptocurrency transactions. For example an exchange employing Elliptic analytics could identify and freeze an incoming bitcoin transaction that is associated with the darkweb or money laundering. Depending on the local regulations the risk level can be customized which allows companies to strike a balance between compliance and user experience.
Now that the FATF guidance has been published, and as larger institutions continue to enter the space - who seek greater levels of compliance - companies such as Elliptic will likely prove to be key components in the next stage of the evolution of cryptoasset markets.