San Francisco-based cryptocurrency exchange Coinbase has successfully patented a “compliance determination and enforcement platform” for possible internal use in KYC-AML (know your customer/anti-money laundering).
The system uses “self-learning” as well as a “factor entering module (that) enters factors from each user account into a compliance score model.”
From there, “The compliance score model determines a compliance score for each one of the accounts… (and) A comparator compares the compliance score for each account with a compliance reference score to determine a subset of the accounts that fail compliance and a subset of the accounts that meet compliance.”
Accounts flagged as non-compliant are funnelled to a “corrective action system” that further determines whether a particular account is “bad or good.”
Accounts determined “bad” are then fed into “a feedback system” and the account is closed.
The patent application was filed in September 2016 and the inventors of the system are Bradley J. Larson, Linda Xie, Paul Jabaay and Jeffrey B. Kern.
It is not clear at this time whether Coinbase will be implementing the system as this type of work is often outsourced to dedicated firms like Chainalysis and Elliptic. Coinbase has been contacted regarding this and any comment will be appended.
In February, Coinbase announced it had acquired “blockchain intelligence platform” Neutrino, a move that was largely regarded as an attempt by Coinbase to ensure it is optimally set up as compliance regimes escalate both locally and globally.
The guidelines compel VASPs (Virtual Asset Service Providers) to ensure they can identify all parties to cryptocurrency transactions larger than $5000 USD.
Coinbase’s move to acquire Neutrino induced controversy, however, because Neutrino has previously provided spyware to repressive regimes, including some in the Middle East who used it to suppress Arab Spring activism and persecute journalists.
A #DeleteCoinbase campaign ensued on Twitter, to which Coinbase CEO Brian Armstrong responded by issuing a blog post stating that there had been “a gap in (Coinbase’s) diligence process,” and firing key Neutrino staff.
Getting old-school crypto on-side when it comes to compliance may be somewhat of a lost cause due to strong sentiment around always controlling one’s own private keys and not leaving pools of crypto on exchanges anyway.
Blockchain forensics company can be more disliked than exchanges because their business model is based on reversing anonymity in crypto transactions.
Crypto forensics firms counter that they are part of the necessary infrastructure for making cryptocurrencies safer to use and more mainstream.