John Jefferies on CipherTrace’s role in crypto compliance

0:00i'm ashlyn Addison from event chain for investmentpitch media and FinTech news network and today on blockchain interviews we have John Jeffries the chief financial analyst of cipher trace John welcome to the show it's a pleasure to have you here today thank you action it's a pleasure to be here today as well you're very welcome I'd love to start off the show by

0:21learning a little bit about the background on what is cipher trace and how is your team making the cryptocurrency industry a safer place and the banking industry sure that's a you know it's a great place to start so cipher trace is a blotching analytics company we work with financial institutions and banks and exchanges and other types of VAS to help make sure

0:43that their payment networks aren't being used for illicit purposes so really what we try to do is we make the cryptocurrency ecosystem safe from crime so if your crypto gets stolen we can track it down if you're a victim of fraud we can help recover it we also you know we work very closely with regulators we've we have good relationships with law enforcement as

1:07well we're originally funded by the Department of Homeland Security and we work closely with the SEC as well to help you know the ecosystem stay safe and I think you know it's really important to appreciate the fact that you know as an ecosystem the crypto currency system lives you know by the graces of the regulators and so what we do is we communicate with them what the

1:31risks are and we help them to understand that it's really not quite as bad as many people think so we we do a lot of reporting a lot of analysis to show trends and crime and trends and how things are getting safer and I think the other big big part what we do is we we help banks understand the risk profile of cryptocurrency businesses so they feel comfortable to engage with them as

1:55customers because as you know sometimes when when they can't get bank accounts that's when some of the biggest problems happen mm-hmm that's interesting and I've heard of you know people calling the cryptocurrency industry the Wild West but I've also heard of people saying that it's not that bad love to hear your you know opinion on how I know how big is the crime part of

2:19cryptocurrency industry and you know how big is that market that you're serving sure yeah it's you know that's very much a misconception that there's a lot of crime it you know truly was the Wild West you know nine eight nine years ago but you know crypto is over ten years old now and it's it's really grown up and we're able to measure the level of criminality directly and indirectly

2:44within the Kryptos space so we are able to trace and identify money flowing through illicit spots so it's through dark markets ransomware and things like that one of the other things we're doing to help crypto be safe is I have an initiative initiative we call the cipher Trace defenders League where we have graduate level students trained and certified on our analytics tool that

3:09help people recover funds in the case of fraud and theft that's really interesting and that's great and when you're working with crypto currency exchanges say in Canada and in the United States how how closely are you working with them to and make sure that they're following the compliance needed to protect the funds and the personal information of the users of those

3:33exchanges that's a very good question so we work with exchanges really in two different ways so we work with them in our core business which is we help them identify risky transactions so we help them identify transactions that may be coming from illicit sources or trace funds that may be from of questionable sources and actually feel safe about about banking them so we you know for

4:02instance DV trading who's one of the the largest market makers of Manero we help them understand the risk associated with it so they can take that mineiro and still maintain a low risk profile simultaneously so that's on the business side simultaneously we run a we were part of an organization called Trista the travel rule information sharing a line

4:27and that is an organization that's focused on helping change exchanges and other vast as they're called virtual asset service providers comply with these pending laws that are a result of the Financial Action Task Force guidelines so there's a series of laws that really make the cryptocurrency space behave a lot like the banking space in terms of communicating

4:53information prior to moving money mm-hmm that's really good to know and I guess my next question surrounding that is there are cryptocurrency exchanges that are quite popular that can station themselves into certain jurisdictions which are favorable maybe it's not inside of the US but still serving those customers do you work with offshore or like you know exchanges that are in

5:17small countries that are popular that aren't actually located in North America sure absolutely you know the nature of of crypto currencies in general is that it's very global so we work with you know the largest of the exchanges such as finance globally right which has multiple subsidiaries across the world to help them comply and we also help you know some of the smaller ones comply I

5:40think you know one of the the issues and we're starting to see the US federal government take action is you know if you're in one of these unregulated places unless you're registered with FinCEN you should not be doing business with US citizens and you know the long arm of the US government reaches out and unless people know that mm-hmm and and earlier on you mentioned Mineiro

6:07and I want to talk a little bit about privacy coins you know there's mineiro – Zee cash dozens of other smaller privacy coins which may have more or less anonymity than Bitcoin does and some of those are you know favorable for criminals because they're more anonymous do you do you as a team have extra precautions that need to be taken when there's different types of

6:32cryptocurrencies that have different consensus algorithms in terms of managing that illicit activity sure well let me just you start out by saying that you know as a company we are you know deep privacy advocates and so we believe in the right to financial privacy and you know honestly most cryptocurrencies have let less anonymity than cash does hey you

6:58know for instance you had Ryan on your show and and – and Z cash and Manero are all part of our travel rule Alliance so they're helping make sure that you know they can comply when they're on the institutional payment rails but when individuals are exchanging currency or purchasing things back and forth you know they should have a certain financial privacy so we help as I you

7:21know as in the DB trading case we help them understand the risks such that you know different regulators still feel obliged to take a knee-jerk reaction and you know as we've seen in Korea where they just yank them off some of the exchanges mm-hmm definitely and I'm glad that cipher trace is taking that approach because as you mentioned at the beginning it's a small percentage of the

7:44crypto currency used that is illicit you know very similar to how there's a small percentage of cash that's illicit but there's lots of it use it for legitimate purposes right and people can prefer whatever crypto currency or whatever method of transaction that they want so I'm glad that those companies are working with you and now at the beginning you mentioned that traditional

8:04banks of financial institutions are also getting involved and you're working with them to help them understand the risks that are involved with these types of transactions as well could you talk a little bit about your relationship with the traditional banks sure we've we recently launched a banking product and it's really fun it's called armada and

8:24sniper trace a lotta is a suite of products that help banks understand their cryptocurrency risk exposure so if you were to ask most banks you know if they do crypto you know 98% of them are going to tell you no in reality they are right we've been working with one of the top three US banks we've uncovered approximately two billion dollars a year on their payment rails right so either

8:49being sent to cryptocurrency entities or received from them so vast essentially we also find people in the dark markets using the bank rails and for illicit MSBs so we have an excellent case study on our website that that covers one of these illicit Ms B's and you can see them advertising on the dark markets they might say you know hey deposit ten thousand and three dollars and twelve

9:16cents into this account and I will give you Bitcoin at this exchange rate mm-hmm and then when we go back with the banks we see those sort of transactions actually occurring across those accounts so we find there's really two types of banks those that you know choose to to try to manage and understand their risk and mitigate them and not do anything

9:35with respect to crypto but you know increasingly we're seeing more and more banks that actually want to engage in this this industry right as it becomes a safer asset class even some of the the banks such as JP Morgan that said they would never do cryptocurrency right you know are now banking coinbase so you know it's it's increasingly becoming a you know a major asset class and that's

10:00forcing the banks to sort of sit up and pay attention you know and the other thing we're seeing is the advent of nation-state based digital currencies so the so-called central bank digital currencies are CB DC's so we're seeing a lot of activity around that which also going back to my previous point you know really highlights the importance of understanding the privacy components and

10:25where the limits are especially you know in in less freedom-loving countries mm-hmm that's really interesting and yeah I think there are a lot more banks involved than they're letting people know because I did see some recent studies that leaning into the you know a third of of banks at least are starting to hold these kinds of assets and now in terms of North America or even in terms

10:48of United States specifically you know how important do you see the next five years for banks to step up and make sure that they're fully providing you know all information analytics services cryptocurrency cryptocurrency related services you know in the next three to five years that one's going to ask another really really insightful question I think you know just in the

11:11last just in this year we've seen a lot of activity we've seen the OCC the the office of currency actually take action against the US Bank for failing to implement adequate anti money laundering capabilities so my Safra Bank in New York was faced with actions recently where I was discussing the Colorado case down in Los Angeles where once again an

11:39unlicensed msb what was convicted and he pleaded guilty and faces up to life in prison so we're we're starting to see some very major actions and while it's not crypto related there was a banker just this once again in this last six months that in had four hundred and fifty thousand dollars in fines personally imposed upon him so we're starting to see personal liability as

12:06well which really makes people sit up and pay attention mm-hmm Wow well so you also are working on an open source initiative that is dear to the hearts of the blockchain community because they really appreciate open source and you know decentralized protocols could you give a little bit more information about you know the open source part sure absolutely so we have

12:30launched what we what we call the travel rule information sharing Alliance which is alliance of over 50 different cryptocurrency entities and stakeholders that are focused on complying with this upcoming travel rule rule as it's called which is basically before avast which includes it's it's obviously exchanges but it includes ATMs and other different

12:53sorts of market makers in the crypto space before crypto gets sent between the two of them and exchanged that both parties must be in possession of the of the contact information in the account information of the other parties now in a world where you know this is a very global environment with mixed regulatory and security and privacy regulations it

13:16becomes a very risky thing to start to send your PII around the world so part of the reason that we launched this in the is really to enable a a sense of privacy to be imbued in it and to make sure you know at the very base level that strong confidentiality was was a component of it so what we've done is we've just taken some of the the very best parts of

13:41the Crypt so a lot of the the founders and members of your team are deeply steeped in cybersecurity so I've spent 20 years in cyber so essentially what we've done is pulled together some of the known good parts things like public infrastructure certificate authorities enhanced verification that's used in e-commerce and communication today to enable laughs to securely communicate

14:04with each other so what we've done is we've created Alliance which now has over 50 entities today Ripple just announced support for for pay ID and for Tricia so tris is the initiative the website is tr is a Geo and it's an open source initiative so an open architecture and an open source base that allows these entities to start to communicate in a secure manner and

14:32also we're working very closely with the regulators both at a global level and at a national level in the u.s. to make sure that they are comfortable with the approach once again so we don't see overly harsh reaction by regulators and they understand that the industry is you know doing the best to make sure that we comply hmm well it sounds like a great

14:54initiative John thanks for the information on Teresa where can the viewers learn more about cipher trace and how can they get involved sure so cipher traces website is simply Sanford trace comm I encourage everyone to to subscribe to our newsletter it comes out weekly and it only covers two or three four or five really highly relevant stories with some insights into why it

15:18matters with respect to the areas that we cover so around regulatory issues around risk with respect to crypto and also we publish a quarterly cryptocurrency anti money laundering and crypto crime report which once again if somebody is interested in some of the specifics you can see exactly we published in this this particular report the current one which

15:40is free on the website is you can see that the crime within the US was under point oh one percent direct criminal deposits into cryptocurrency exchanges and if you go there you can also see which countries weren't so clean mhm very interesting well thank you so much for your time John I will leave those links in the description box below I appreciate you coming on the show

16:02learning about cipher trace and let's follow up in the near future great thank you so much Ashton I enjoyed it