It’s not often that a startup in a challenging tech sector changes focus barely a year into its existence but it’s a feat that seems to have been pulled off in some style by British bitcoin and blockchain tech firm Elliptic.
When Techworld caught up with the firm in February 2015 its market pitch was around the firm’s bitcoin Vault platform, a digital location for investors to store their virtual currency in gilded, fully-insured security. This seemed logical. If people speculate on bitcoins they were going to need somewhere very reliable to keep them where they wouldn’t be pilfered.
This was a complicated enough challenge but within months the firm’s founders had spied what they believed was an even bigger issue that needed solving: how to spot criminal misuse and laundering of bitcoins into hard currency.
Institutions have no easy way to work out which deposits are from legitimate sources and which aren’t, something that has the potential to dramatically slow down the adoption of bitcoins and other virtual currencies by an industry extremely wary of compliance and risk.
Peering deeper into bitcoin transactions and the identities behind them is supposed to be extremely difficult but according to Elliptic co-founder and CTO Dr Tom Robinson the company found a way to do just that to service customers in financial services and, more recently, law enforcement.
The firm started working on the new idea in the early summer of 2015, by August producing the beta of what is now a data-gathering and analytics database capable of risk scoring bitcoin identities and transactions.
“The Vault is still being operated but our focus has shifted,” opens Robinson, who stresses that the idea of bitcoin forensics was always seen as a future development possibility during the firm’s early days. Taking on analytics also keep the firm within its technical areas of expertise when the vault was side-tracking them with complex operational requirements.
Anti-money laundering legislation was suddenly being taken very seriously in financial services.
“We realised that what was holding back bitcoin use by financial institutions was illicit activity on the darkweb. Financial institutions were scared to death,” says Robinson.
“Imagine you are a bitcoin exchange that receives money from your customers. You’d like to know whether that’s come from legitimate sources or illicit activity. That is very difficult to do just looking at the blockchain.”
UK startup Elliptic plots future in blockchain forensics - spotting criminality
What Elliptic’s methodology does is look beyond single transactions using clustering analysis to tie specific bitcoin identities – individuals can use large numbers to make life harder for investigators – to strings of transactions. This requires manual targeting of darkweb forums to trace identities which are then connected to transactions resulting in a risk score, zero being fine, 10 being a warning flag.
Robinson doesn’t sell this as an easy challenge but if it was easy the market probably wouldn't need a startup like Elliptic to do the legwork. Beyond the anonymity of the blockchain itself and its multiple identities users will attempt to hide their tracks using what are called tumblers, services that ‘wash’ bitcoins to boost their anonymity. The number of these transactions is a small percentage of the bitcoin market but they’re the ones nobody wants to be left holding.
Patterns still exist. Criminals transact on a different scale and in a different way to simple currency investors and this in theory makes them traceable. After the hype about blockchain anonymity, the Achilles heel of the criminal is always identity. At some point criminals still need to cash out through an exchange.
A second market has been law enforcement agencies hunting down criminals using bitcoins to receive ransomware payments, mentions Robinson.
It’s all a long way from the early days of securing bitcoins even if those days were less than two years ago. Longer term, the tide is slowly turning in favour of digital currencies and distributed blockchain ledgers, Robinson maintains, with growing interest from the Bank of England only one piece of evidence to support this view.
The financial sector and governments will take a long time to find their feet, he predicts, held back by a mixture of self-interest and innate caution. But the criminality that has migrated to virtual currencies does not have to be a free ride.
“Our technology will be needed to analyse transactions and fraud and to monitor the economy. We see this shift towards open payment systems they will be an opportunity. There will be great scope for reducing financial fraud.”