• Norbert Gehrke

Merkle Science, Crypto Compliance Challenger

In an industry that seems to be dominated by well-funded Western companies like Chainalysis, Elliptic, Ciphertrace and Coinfirm, and that has seen crypto exchange giant Coinbase also enter the fray by selling analytics tools to US government agencies, Merkle Science, originating from the elite Entrepreneur First program in Singapore, has carved out a notable position as a provider to Asian crypto exchanges, financial institutions, and regulatory/government entities.

Merkle Science detects, investigates and prevents crypto crime. The company is headquartered in Singapore, with offices in Korea, Japan, and India. Still today, people always associate cryptocurrencies with criminals using it for buying and selling drugs, or ransomware attacks and the like. That in fact is not too far off from Merkle’s definition — they generally define crypto crime as the illicit acquisition and use of cryptocurrency for money laundering, terrorist financing and other criminal activities. And as we are shifting further and further to a more digital economy, this type of crime has become easier as it can be executed fully electronically, without the need for any in-person interaction. In 2019, it is estimated that $11 billion worth of cryptocurrency were transferred by criminal entities, which is an increase of 160% over the prior year.

Merkle Science looks at the process of crypto crime from three different perspectives: the acquisition method, the laundering method, and the beneficiaries. First, there are different acquisition methods applied by criminal entities, hacker groups and nation states to gain access to cryptocurrencies. The ones most commonly known are exchange hacks, ransomware and extortion schemes, as well as investment scams and frauds. Once these crypto crime organizations have acquired the cryptocurrency, it then becomes a matter of how to the launder the funds, often taking advantage of exchanges, crypto ATMs, and coin mixers.

With the rise of COVID, there has been an increase in ransomware, for example through emails with a link asking people for donations. Then just yesterday, Twitter got hacked, and several messages were sent from well known individuals and organizations, asking for Bitcoin to be sent to specific addresses. In the end, the scam yielded approximately $120,000.

To combat such crypto crime, major jurisdictions around the globe have come out with their own regulation. Also, last year, the Financial Action Task Force (FATF) published a list of recommendations, notably the travel rule, which is imposing interbank transfer-like requirements on the movement of cryptocurrencies. In Hong Kong, the Securities and Futures Commission (SFC) introduced a framework for security token operators, as well as an optional licensing framework for companies dealing with plain vanilla cryptocurrency assets.

Merkle Science can help investigate and prevent crypto crime through a combination of software tools and service elements. First and foremost, the company offers a blockchain transaction monitoring platform that is used by a number of exchanges, custodians, and payment companies to identify where their customers are sending the cryptocurrency from. So if this involves ransomware, darknet marketplaces, or sanctioned addresses, it can be detected in real time, the transaction blocked and the appropriate report filed with the regulators.

The second offering is a forensics tool used by law enforcement agencies and regulators to investigate and apprehend criminal entities. Lastly, the company offers customized intelligence reports and performs due diligence and investigations as a service. I’m helping manage the risk that comes with dealing and professionals.

Broadly speaking, Merkle Science works with crypto asset businesses, financial Institutions, government agencies as well as research and technology companies. In this industry, collaborations are important and the company has various alliances locally and globally, for example with Access at their headquarter in Singapore, and then Global Digital Finance, Crypto Valley in Switzerland, and Blockchain Australia.

Merkle Science’s investors include Digital Currency Group (DCG), SG Innovate and Kinetic, in addition to Entrepreneur First, LuneX and BitMex.

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