UK fintech startup Elliptic has pulled in a $5 million Series A round to keep building out its blockchain forensics tool. Its transaction-tracing technology mines the public Bitcoin ledger to identify and flag up suspicious transaction patterns within the distributed digital currency — offering the promise of combating Bitcoin-powered money laundering and other criminal activity.
That was a way for it to test the waters in a nascent space, says CEO and co-founder James Smith. He notes the founding team combines technical backgrounds with fintech expertise and saw early disruptive promise in Bitcoin/blockchain — albeit they weren’t immediately sure how it would shake out.
“We’re a startup, and you have to look around and see what the industry’s doing and find what you’re best suited to,” Smith tells TechCrunch. “When we first looked at Bitcoin we saw it both from the financial point of view, but also the technical point of view. And saw that there was going to be something to this.
“We wanted to jump in and start getting to know the industry, so we started we something fairly basic — which was the storage. Which is hard to do right but it’s not super hard and it’s not so much a technology solution as more of an operations solution. But it was something to get out feet wet and to start to get to know the industry and figure out what was really required.”
What it learn was that compliance was becoming an increasing pain-point for larger (legal) entities in the Bitcoin space, as the regulatory regime around the digital currency matured.
To address this need Elliptic built and launched its first blockchain analytics product last summer, and now has “in the region of 10 to 20” Bitcoin companies using it — which Smith describes as pretty much every large player in the Bitcoin ecosystem in the US and Europe.
“We started with a problem, and the technology came next,” he says. “The first product was for companies in the Bitcoin space who are transacting a lot of Bitcoin — so it’s the exchanges, payment providers and so on. They’ve got a responsibility to satisfy regulation. That’s particular in the States and in Europe where AML [anti-money laundering] regulation is more strict. And it’s particularly for the larger and better funded companies who have the most regulatory scrutiny.”
Elliptic has since also expanded its customer focus to encompass law enforcement agencies, offering a tool to help them acquire evidence connecting criminal entities through the Bitcoin network. Smith says it now has about five U.S. law enforcement agencies plus a few others across Europe using its tool.
How Elliptic’s technology works involves tracing transactions via the public Bitcoin ledger in order to be able to connect different entities by creating a template of linkages. And while it has to do some labeling of Bitcoin addresses itself, to make sketching such a picture of interesting activity possible, it’s more acting as a connective tissue layer for its customers — by joining up, for example, Bitcoin address data held by a BTC exchange with a suspicious series of transactions unearthed by its pattern-spotting technology.
Smith notes that suspicious patterns might initially be identified by a (human) compliance officer, employed by one of its customers, with its machine learning algorithms then using that data to spot variations and multiple instances of the same patterns.
You can start to build up a real view of how real world entities are interacting with each other within this ledger. And that’s quite a powerful tool.
“By looking at the patterns of transactions and how they interact, over time we can start building up a picture of which transactions are associated with which entities,” he explains, noting that links could be similar spending patterns as well as direct connections between different Bitcoin addresses. “You can start to build up a real view of how real world entities are interacting with each other within this ledger. And that’s quite a powerful tool.”
“Our focus is on particularly criminal entities within this world. And so we do a lot of data gathering to start to identify who those transactors are — so we go and gather a lot of information from the dark web particularly, but also from the clear web and other sources — to start building up data points that help us label that view of the world that we have.
“And then we can start saying ok now I see that that entity there is really the Silk Road and I can see that the funds flow from the Silk Road to this guy, to that guy, to a few different places and then they’ve tried to cash out at an exchange.”
And no, its mission is not to make every Bitcoin transaction and every address holder radically transparent, confirms Smith. It’s about targeting its data gathering and labeling for specific compliance and law enforcement needs.
“Bitcoin has this reputation for anonymity but it’s not actually completely anonymous in that every transaction is recoded,” says Smith. “Bitcoin was designed to be a form of censorship-resistant digital cash; anonymity was never the original design goal.”
“There’s a lot of powerful information recorded [in the Bitcoin blockchain] if you go back. This is only seven years old and people’s understanding of it is evolving, and there are some transactions people have made in the past before they realized it wasn’t anonymous,” he adds.
“People will have to be pragmatic about how you treat things that happened four years ago as well. Because if you take some of the exchanges, for example, who are perfectly legitimate businesses because they didn’t have tools like ours available four years ago or two years ago even, they were often getting people… taking money out of the Silk Road and then cashing out on their exchange. And they had no way of identifying that.”
Bitcoin has been through many ups and downs, from peak hype and fluctuating values back in 2013 to something that feels rather more questioned than hyped now. Just as well then that Elliptic has not hitched its wagon to the fortunes of Bitcoin per se, with Smith talking up the potential of the underlying blockchain technology — and envisaging future applications for its technology that don’t involved Bitcoin itself.
“Bitcoin is one of several areas we may end up deploying this technology,” he notes, adding that in fact the analysis can be applied to any ledger of transactions (it does not even need to be a blockchain-powered ledger).
“What it really is is you build up a view of a network. You look at the different entities in a network — that’s a graph of entities — and we’re able to identify patterns within that. Quite complex patterns that connect together different entities in ways that might not be immediately obvious. And that’s what allows us to identify things like money laundering or people trying to obfuscate where their funds are flowing for other reasons.”
One possible blockchain application he sees potential for is settlements of securities — something he notes banks are doing trials with now. Aka deciding, after a trade, when shares are transferred.
“In a domain like that where you’ve got a lot of regular movement around of valuable securities the market supervisor will want to be aware of whether there are any signs of market abuse. And again with securities frauds, people are pretty smart, generally, and there are quite complex patterns of how it’s done. So again it’s an area we can use our ability to understand patterns within a network of entities to highlight things were people might be trying to abuse the system.”
But (for the moment) back to Bitcoin, Smith says that while the digital currency may now be a less easy route to launder money, vs its earlier Wild West years, he remains confident the criminals will keep trying to use Bitcoin — and that, ultimately, is good for Elliptic’s (current) business.
“Every asset is to some extent [used by criminals]. And Bitcoin is a way to move large amounts of money with low cost and low friction so it will always have some attraction. And it will become a bit of an arms race. It already is. The sophistication with which criminals try to hide their tracks within Bitcoin will continue to increase and our ability to uncover that will continue to increase alongside it,” he adds.
“I hope that this will be a catalyst for more legitimate businesses to feel like they are ready to start having a look at this space. And I hope we’ll see a growth in Bitcoin as a result. But we’re very confident that blockchains more broadly are going to become a bigger part of how financial services work over the coming years.”
Elliptic’s $5M Series A round was led by Washington-based Paladin Capital Group, with participation from Santander InnoVentures, KRW Schindler, Digital Currency Group, and existing investor, Octopus Ventures.
Smith says the round will be used to expand the team, with key hires planned for the product and technology side. The funding is also intended to give the company 1.5 years’ worth of runway — which he says he hopes will be enough time to develop applications for the technology outside Bitcoin.
“The reason we have raised to give us a year and a half is we think that’s about the amount of time it’s going to take for other blockchains to start coming online in any sort of production capacity. There’s a lot of trials out there but we think it’s still a way away before banks start using blockchain technology in anger,” he says.
“I don’t think [Bitcoin] is going away… but I’m undecided as to whether it’s going to become huge. In recent years as a society we’ve somewhat been moving away from cash and as much as people’s faith might have been shaken by the credit crisis, everybody relies on credit. And everybody relies on trusting institutions that are bigger than them. So I would like to see Bitcoin become bigger but I’m much more bullish on the technology underneath than I necessarily am on the currency.”Featured Image: Bryce Durbin