The key to reconciliation between Bitcoin companies and banks lies in this new tool

Bitcoin intelligence provider Elliptic and California-based Silvergate Bank have teamed up on a project to analyze and screen the bitcoin blockchain for possible illicit activity.

The goal of the project is to help banks better evaluate potential future bitcoin corporate clients. For banks, the potential risks of new bitcoin clients often far outweigh the potential benefits, and bitcoin is seen as a stumbling block to the industry.

Elliptic CEO James Smith said:

It is really difficult for banks that work with Bitcoin companies to understand how their customers are dealing with the risks of Bitcoin transactions.

Smith told CoinDesk:

Until now, banks have had to put their faith in the exchange or the company (that processes the trades) saying 'we did everything we could.'

Elliptic’s software enables financial institutions to provide a more robust approach to vetting bitcoin businesses while complying with Know Your Customer (KYC), Anti-Money Laundering (AML) and Bank Secrecy Act (BSA) regulations.

The platform will help banks monitor suspicious Bitcoin activity, reduce risk assessment costs for existing and potential customers, and demonstrate to regulators that their internal protection mechanisms can exclude malicious actors.

Smith said:

We see this collaboration as an important step towards improving industry standards, compliance, and reducing risk levels. Ultimately, Silvergate will be able to work with more companies using Bitcoin.

A ray of hope

Since gaining this advantage, Silvergate has become the "alternative" in the banking world to deal with Bitcoin companies. Currently, more than 30 Bitcoin companies are working with the bank, including digital currency exchanges, institutional investors, miners and software developers.

Participants in the project believe that greater transparency could help banks as the regulatory environment changes and banks are now accountable to their customers' customers.

In addition, Silvergate and Elliptic believe that the platform can also help financial institutions conduct better and more accurate assessments when the client’s internal controls are not trustworthy.

Ben Reynolds, Vice President of Business Development and Digital Banking at Silvergate, said:

We hope to study whether the client's internal control environment is becoming more sound through its daily performance.

Like Elliptic’s other anti-money laundering products, the platform monitors all blockchain transactions for links to suspicious activity and then issues a corresponding risk rating.

Actively promote

While their efforts to distinguish between so-called “good” and “bad” bitcoin users have drawn opposition from some in the bitcoin community, Elliptic and Silvergate stressed that their goal is not to spy on customers but to gain a holistic understanding of their customers.

Smith said:

What they want to know is, what percentage of transactions involving Bitcoin companies are suspicious? What is the changing pattern of this data? Are they improving their internal control capabilities?

Reynolds said the main hope is that the software will help them reduce overall risk management costs.

For us, every client we take on is a pretty big investment because we first need to do due diligence.

Reynolds went on to say that while Silvergate does not have the regulatory authority to enforce the project, it is a forward-looking approach to improving the legitimacy, credibility and sustainability of the Bitcoin industry and dispelling negative stereotypes.

Smith concluded:

With this level of transparency, they (banks) can better understand the risk control capabilities of these companies and are therefore more willing to provide them with banking services.