Bitcoin intelligence provider Elliptic is rolling out a program with California-based Silvergate Bank to analyze and screen possible nefarious activity on the bitcoin blockchain.
The effort is focused on helping banks assess future bitcoin-based business clients. For banks, often the associated risks are deemed higher than the potential rewards when considering new clients that operate in the bitcoin space – an often-cited stumbling block in the industry.
"The banks that are working with bitcoin companies really don’t have much visibility into how effective they are at handling the risk associated with bitcoin transactions," said James Smith, Elliptic's CEO.
Smith told CoinDesk:
"Until now, they pretty much have had to rely on the word of the exchange or whoever [processed the transaction] to say 'We’re doing the best we can.'"
Elliptic's software allows financial institutions to take a more robust approach in vetting bitcoin businesses and complying with know-your-customer (KYC), anti-money laundering (AML) and Bank Secrecy Act (BSA) requirements.
The platform will help banks find suspicious bitcoin activity, allowing them to reduce risk assessment costs for current and potential customers, while demonstrating to regulators that there are internal safeguards in place to weed out bad actors.
"We see this as a great step forward in terms of raising the industry standard, in terms of compliance, improving the level of risk mitigation and, ultimately, allowing Silvergate to work with more businesses who are handling bitcoin," said Smith.
While beneficial in this regard, Silvergate is already one of the exceptions to the rule in the banking world when it comes to bitcoin. The bank currently provides services to more than 30 bitcoin-related companies, including digital currency exchanges, institutional investors, miners and software developers.
Still, those involved in the project argue better visibility will in turn aid banks as the regulatory environment moves to one where banks are now responsible for their customer's customers as well.
Plus, Silvergate and Elliptic argue that the platform will allow financial institutions to better assess when their customers' internal controls may be suspect.
"What we’re looking for is to see how a client is performing over time as an indication of whether their internal control environment is getting stronger," said Ben Reynolds, vice president of business development and digital banking at Silvergate.
Similar to Elliptic's other anti-money laundering products, the platform screens each blockchain transaction for potential linkages to suspicious activity and then issues each with a risk score.
While efforts to separate the allegedly 'good' bitcoin users from the 'bad' ones have been met with pushback from certain factions of the bitcoin community, Elliptic and Silvergate emphasize that the goal is not to micromanage clients, but rather to understand holistically what clients are doing to filter out eyebrow-raising activity.
"What they want to know is – at a high level – what percentage of transactions going through this business are suspicious? How has that changed over time? Does it look like they are improving their controls?" said Smith.
The bottom line, Reynolds said, is that the software will soften Silvergate’s overall risk management overhead. "For us, each client that we take on initially is a pretty large investment in terms of the due diligence process that we go through," he said.
Reynolds went on to explain that while Silvergate has no regulatory obligation to enact such a program, it's being proactive to advance the legitimacy, credibility and sustainability of the bitcoin industry and pushback on negative stereotypes.
"With this extra visibility, they’re able to understand how effective these companies are at handling risk and therefore get more comfortable with the idea of banking them."
Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Elliptic.
Silvergate Bank image via La Jolla Center