Navigating New Financial Currents: How Banks Can Support Virtual Currency Companies

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It’s no secret that one of the biggest challenges facing cryptocurrency/virtual currency companies is obtaining and sustaining a bank account. This fact has been debated in various media outlets, at industry events, and is a popular rant theme on Reddit forums and ‘crypto Twitter.’

This issue is such a challenge that most virtual currency businesses have created staff positions solely dedicated to managing relationships with banks.

Numerous factors are making banks hesitant

Currently in the US market there are fewer than a dozen banks actively and intentionally serving the virtual currency industry. Despite the potential business from promising new companies with significant capital resources, there are still few banking options available to these companies. In part this is due to the regulatory uncertainty surrounding virtual currencies and the reputational risk banks face if they “get it wrong.”

Many banks are already suffering from deficiencies of some form when it comes to BSA or regulatory compliance and lack the resources to develop a program for a new business line. Understanding the complex technology—and the funds flow of transactions processed through the virtual currency business—can be overwhelming.

Most banks lack the agility to dedicate resources toward exploring this new industry. Further, negative news surrounding the potential illicit use cases and the lack of consistent regulatory treatment or licensing framework have rendered most banks unwilling to serve this customer base.

Forward-leaning banks are playing a long game

In 2016, Arnold and Porter, a prominent law firm in the financial services industry, in conjunction with the leading advocacy center on public policy issues facing cryptocurrencies, Coin Center, conducted a study to determine the factors contributing to the challenges companies in this ecosystem were encountering when trying to establish bank accounts.

The results of this study indicated that the handful of banks serving this client base have made multi-year investments in education, regulatory dialogue,  products, customized policies and procedures, and specialized systems tailored to support virtual currency businesses.

How banks can prepare themselves for this new world

Banks interested in servicing this industry should consider the elements required to build a successful new line of business. The foundations for every successful new financial institution product should be:

  • A detailed risk assessment and a comprehensive P&L forecast
  • Strategic focus and dedicated resources to ensure key objectives to developing the business stay on track
  • Training on the industry and technology for employees, executive management, the board of directors, audit partners, and the financial institution’s regulators   
  • An understanding of the risks associated with the business line and the controls necessary to manage these risks
  • Policies and procedures which include specific audits of these controls
  • Specialized software solutions to provide high-tech customers with access to data and transactions while also monitoring for risk and exposure from cyber attacks, illicit activities, and to support anti-money laundering efforts

While the preparations and costs associated with serving the virtual currency industry can be steep, they can also provide great rewards and help move banks toward providing services for the customers of the future.

There are several resources to help both the virtual currency industry and financial institutions to become more comfortable working together. Virtual currency technology and its applications offer valuable new business opportunities for many new and existing businesses that have taken the time to explore its potential. Review the following to learn more:

http://www.wolterskluwerfs.com/article/virtual-currencies-what-banks-need-to-know.aspx

https://coincenter.org/entry/banking-for-virtual-currency-companies

https://coincenter.org/wp-content/uploads/2016/05/banking-obstacles.pdf


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How Transaction Monitoring Works at Chainalysis

One of the reasons Chainalysis KYT is so popular is that it uses global anti-money laundering (AML) standards common across regulatory bodies. We apply these standards when each transaction is screened.

Cryptocurrency businesses also need to understand the aggregate risk profile of each of their users. That’s why Chainalysis KYT provides a view of risk profiles at the user level, which reflects all of a user’s screened transactions. For example, if an organization has a user who receives funds from a darknet market, our software automatically flags that transaction as high risk. If the user sends funds to a regulated exchange, our software marks that transaction as low risk. And so on. Every screened transaction feeds into a user’s risk profile. Chainalysis KYT displays all user profiles, sortable by high, medium or low risk (using traffic light colors) for easy scanning.

We apply our risk methodology in real time to all users within an organization’s user base. This saves compliance teams from laborious, manual screening work. They can instead focus on developing comprehensive compliance programs. Organizations that work with us tell us this has enabled them to meet regulatory expectations and launch or grow their businesses.

Customizable risk level

We’re now giving our customers the ability to adjust the risk level of a category or a service. For example, not all jurisdictions around the world treat gambling the same way. In some countries, gambling is not considered a legitimate business activity and thus online gambling sites would be treated as high risk. In other countries, gambling is not considered illicit, which means properly licensed online gambling sites would be treated as low risk.

The ability to customize the risk level of categories and specific services means our customers can automate even more of their compliance workflows.

Organization-wide dashboard

One of the most useful facets of Chainalysis KYT is having a view of all users and their risk profiles directly accessible upon first logging in. It provides a visual alert of which users have high risk profiles and therefore require the most immediate attention. In keeping with the spirit of simplified visual cues, we have now launched a dashboard that summarizes key indicators at the total organization level. For example, organizations can now see what percentage of their user base is falling under high, medium or low risk. They will soon be able to see things like total exposure by category, or total transaction volume per day. These and other metrics will provide our customers additional understanding of their organization’s total exposure trends over time.

In-app chat

At Chainalysis, we strive to provide as much support to our customers as we can. To make it easier to interact with us, we added in-app chat to Chainalysis KYT. This allows our customers to send us questions or feedback without having to leave the environment. Our team typically responds within minutes.

Looking ahead

We know software is most valuable when it makes the lives of our customers easier and more productive. This means we’ll continue to add intuitive capabilities to our compliance products while increasing versatility for ongoing transaction monitoring. In the coming months, we will improve how transaction information is displayed. We will also boost our monitoring capabilities for other cryptocurrencies beyond Bitcoin. And we will deepen the integration with Chainalysis Reactor, which is used for enhanced due diligence and investigations.

The momentum around cryptocurrency compliance is only just starting and we look forward to continuing to offer software that builds trust in blockchains.

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