Thomas Glucksmann is vice president of Merkle Science, a Singapore-based crypto compliance startup. He has extensive experience in the industry having worked in the industry as a crypto pioneer, particularly in Hong Kong and Japan. He speaks to Blockchain Asset Review on how Merkle Science helps clients looking to comply with global and local regulations governing cryptocurrency transactions.
By Staff Reporter
Q: Please tell us a bit about your company?
A: Merkle Science’s mission is to create a safer and more compliant ecosystem for individuals and organizations to trade, transfer and store blockchain based virtual assets. We accomplish this by providing blockchain monitoring solutions for financial institutions and government agencies to detect, investigate and prevent criminal activity involving virtual assets.
What does Merkle Science do to help companies handle KYC in digital assets?
A: Our transaction monitoring platform provides compliance teams with near real-time analysis of blockchain data to detect and flag suspicious virtual asset transactions. Once a transaction is identified as high risk through our platform, it is up to the organization’s compliance team to take the appropriate action which often involves freezing the associated client’s virtual asset account, filing a suspicious transaction report (STR) and liaising with local law enforcement agencies.
To ease the burden on compliance teams and law enforcement agencies we also offer “compliance as a service” which includes access to a team of on-demand fraud analysts that will investigate specific incidents and compile Enhanced Due Diligence (EDD) reports based on prescribed formatting and language requirements.
For organizations that are interested in the overall risk level of a virtual asset service provider, our team also provides Know Your Blockchain Business (KYBB) reports that assesses historical transaction data alongside the company’s compliance, security and risk management policies and processes. These KYBB reports are used by financial institutions as part of corporate client due diligence processes and by regulators to assess license applicants and holders.
How do you separate yourself from other digital asset solution providers?
A: As we are headquartered in Singapore with a focus on engaging with organizations in the Asia Pacific, our database of blockchain addresses associated with entities based in Southeast Asia, China, Korea, Japan and Australia is more comprehensive. We leverage a network of local language specialists, data providers and strategic partnerships to ensure extensive coverage of virtual asset service providers and criminal activities from the region.
Besides providing organizations with a database check, our proprietary risk algorithms measure transaction thresholds, laundering patterns and layering heuristics in line with methods used by established financial institutions. This enables firms to detect suspicious behavior as it happens rather than rely solely on the risk scores of associated blockchain wallet addresses. Our CTO, Nirmal AK was a former fraud data scientist at PayPal and payments firm Instamojo, so he is applying similar approaches to Merkle Science.
What is your value-added?
A: Our compliance as a service offering is also highly competitive in terms of cost, quality and customization, as we are able to cater our reports and investigations to suit the requirements of the organizations we work with.
Q: What are the current loopholes in due diligence with regard to digital assets trading and investment?
A: Many virtual asset service providers are based in jurisdictions without specific regulatory regimes for virtual asset businesses, so they conduct little or no client due diligence or Anti-Money Laundering (AML) checks. This opens opportunities for criminals to carry out regulatory arbitrage when transferring virtual assets between service providers and liquidating their illegally acquired funds without much risk of detection.
More sophisticated criminals are able to manipulate or bypass Know-Your-Client (KYC) and AML compliance checks performed by regulated virtual asset service providers. Often this involves hiring individuals or organizations without criminal backgrounds to sign up for services, so they would be able to successfully pass background checks or registering with stolen credentials and identity documents.
To avoid detection through blockchain monitoring systems, criminals will attempt to hide their transaction patterns by using services such as coin mixers, which makes traceability more difficult (although not impossible), exchanging their traceable virtual assets such as bitcoin into an anonymous virtual asset such as Monero or transferring a very small amount of funds per transaction to avoid common transaction thresholds.
Q: What kind of clients you are targeting and in which countries?
A: We work mainly with virtual asset service providers such as exchanges, custodians and investment firms who use our solutions primarily for compliance purposes. We also engage with government organizations like regulators and law enforcement agencies for due diligence reports and investigations. We also see potential working more closely with banks, payment services and asset managers as the regulatory landscape continues to evolve and stable coins and security tokens gain traction alongside existing virtual assets.
Currently the Asia Pacific is a core focus for our sales and business development activities, not just because we are headquartered in the heart of it in Singapore but also because this is where most virtual asset trading activity is occurring and the regulatory environment is moving towards greater certainty across the region.
Q: How does the G20 wire transfer rules digital exchanges and do you think they are ready to comply with the rules?
A: The so called FATF (Financial Action Task Force) travel rule, which requires virtual asset service providers to share information about their clients’ outgoing and incoming transactions is supposed to be enforceable from June this year. Ensuring that their compliance procedures are set-up to accommodate this travel rule is a key priority for all exchanges that wish to be considered in-line with global standards. However, exchanges have not yet implemented a common communication protocol for exchanging this required information and some service providers may struggle to obtain accurate data about their clients to share with counterparties. In the meantime, exchanges must continue to monitor for suspicious transaction activity and criminally associated blockchain addresses to prevent money laundering and terrorist financing from occurring their platforms using solutions such as ours.
Q: What is the future of digital asset trading especially in the Asian region?
A: More states in the Asia Pacific region are taking steps to provide greater clarity on the regulatory requirements for virtual asset service providers. Singapore and Hong Kong have recently launched new comprehensive regimes for virtual asset businesses, Japan is due to provide an update to their existing framework soon and legislators in South Korea are eager to ensure exchange operators can comply with the upcoming FATF travel rule.
This regulatory clarity is encouraging more institutions in the region to become involved with virtual assets through the launch of new services such as exchanges, payments, custody, or through the issuance of new asset-backed digital currencies and securities. Overtime this will mean the appetite for trading such virtual assets becomes greater and so the services providing access to this market become more prevalent and sophisticated. The fact that we receive a lot of inbound requests from established hedge funds about our data, is a sign that major institutional players are already excited to get involved in this market.