Seeking a Bank Account? What the Due Diligence Process Entails for Virtual Currency Businesses

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Since the late 1990s, financial institutions have been terminating client relationships and banning entire industry groups from banking services. Regulatory scrutiny, increased enforcement actions, and large civil monetary penalties are largely to blame. The financial crisis in 2009 caused many banks to consolidate, leaving those that remained in need of limiting their risk exposure. 

After being hit with $461 million in fines for failures related to their anti-money laundering program, J.P. Morgan Chase began backing away from money service business (MSB) relationships in 2014. Several other large global banks followed suit after facing significant civil penalties related to such clients. 

MSBs, correspondent banking relationships, marijuana-related businesses, and the virtual currency industry have been among those hit hardest by the continued effects of de-risking.

In recent years, regulatory agencies have been issuing guidance—for both the virtual currency industry and financial institutions—related to compliance obligations of virtual currency businesses (VCBs). There are currently fewer than a dozen banks actively serving the virtual currency industry in the US market. Such banks have built programs tailored specifically to conducting due diligence on their prospective clients using this guidance.

On May 9, 2019, FinCEN published “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies” (FIN-2019-G001). This document provides a consolidated view of the current FinCEN regulations, administrative rulings, and guidance issued since 2011. (A breakdown of key points is found in a summary by Chainalysis).

VCBs looking to engage with new banking partners should be prepared to present a comprehensive overview of their business. Banks will be particularly interested in understanding the following:

  • Who has invested in the company and who is operating it? 
  • What are the qualifications of executive management and the compliance team?
  • What is the product roadmap? What are the licensing requirements?
  • What is the compliance philosophy? What are the elements of the compliance program?
  • What are the transactional needs?

If the business is an exchange or is conducting MSB activity, an enhanced due diligence review may also include:

  • Review of anti-money laundering policies and procedures
  • An evaluation of the company’s transaction monitoring program and systems
  • On-site visit

Once a VCB has been granted approval for an account, they may be subject to ongoing review and due diligence by the bank. 

A best practice recommendation for maintaining a positive relationship with a company’s banking partner includes keeping an open dialogue between both parties. This is most effectively accomplished by proactively communicating any changes. Changes may include new patterns of transaction activity or any material changes in the business model. 

Licensing changes, compliance staffing changes, regulatory actions or audit findings should also be liberally shared with the banking partner. There should be open communication regarding any enhancements made to improve the company’s compliance program. 

Transparency and a willingness to remediate concerns the banking partner may have goes a long way toward maintaining the overall health of the business relationship.


Michelle Sabins is SVP Managing Principal, Fintech Consulting Practice at Silvergate Bank and consults for Chainalysis as a regulatory compliance subject matter expert (SME). Michelle is a Certified Regulatory Compliance Manager (CRCM), and Certified Anti-Money Laundering Specialist (CAMS). Previously, Michelle served as CCO and BSA Officer for Silvergate Bank. 

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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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Michelle Sabins, guest author, SVP Managing Principal, Fintech Consulting Practice, Silvergate Bank

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