As state regulators take more interest in Bitcoin, third-party vendors are looking to apply the expertise they built in other markets to digital currency. One such vendor, Strevus, has a background in securitization, which is another volatile and risky market.
"In some ways cryptocurrency vetting is the same as mortgage-backed securities vetting," says Ken Hoang, CEO of Strevus, which is selling a compliance tool to help virtual currency exchanges and other companies that process Bitcoin transactions comply with current and future regulations.
The exchanges that facilitate digital currency transactions are subject to similar identity, criminal activity and third-party risks as financial institutions that manage mortgage-backed securities trades, other capital markets transactions, large payments and account-to-account transfers.
"You have to collect all of this complex data to ensure that you know who you are doing business with," Hoang says, adding Bitcoin exchanges and other companies that trade virtual currency must be mindful of existing laws that govern "know your customer," anti-money laundering and Patriot Act requirements, as well as pending federal and local regulations governing virtual currency.
Strevus, which was founded in 2012, provides a regulatory compliance lifecycle management product that allows companies to gather, track and report information between counterparties, clients and regulatory agencies. The company initially formed to focus on Dodd Frank and other regulations on the mortgage-backed securities market that followed the financial crisis of 2008.
Strevus' system is designed to manage counterparty risk, in an attempt to ensure that entities that are using Bitcoin for payments or investments are not using the proceeds to fund illegal activity. It uses the same sort of rules-based flagging mechanism that exists for other payments and financial transactions.
"There could be a threshold, that any transaction with a value of over $150,000 carries a greater risk, or if there is a transfer or a payment to a certain region or a subsidiary that is a higher risk, and get flagged for more vetting," Hoang says.
Bitcoins already have a reputational risk, as they have been associated with illegal activities such as drug sales, and many traditional financial institutions have refused to do business with Bitcoin companies.
As the Bitcoin market becomes larger and more legitimized, it will be harder for banks to stay on the sidelines, Hoang says. And as the regulatory environment evolvesregulators in states such as New York and Texas have begun to weigh in on Bitcoin rules, for examplethe compliance pressure will build, he says.
"Banks that are getting into Bitcoin will want to make sure the parties go through a vetting process. Right now that's still at an early stage," Hoang says. "Companies that are jumping into Bitcoin will want to get ahead of the curve on these regulations."
Strevus' "business model certainly speaks to a market need. Regulatory uncertainty is one of the things that is keeping banks and payments companies on the sidelines right now," says Julie Conroy, a senior analyst at Aite Group. "However, the stakes are high, and the challenges for these companies will be to prove that they have the expertise and a better ability to assure compliance than the businesses can do themselves."