Without joining the overly prophetic pundits about the future of Facebook’s cryptocurrency, Libra, it is becoming abundantly clear that the road to digital asset adoption must be made in conjunction with global regulators. Despite the massive amounts of venture capital that have been poured into everything related to blockchain, and the investment and talent behind building out the tools - the infrastructure necessary to protect consumer accounts and privacy is significantly behind the times.
We are happy to formally announce our $3m seed investment into Solidus Labs, an end-to-end compliance cloud. For the first time in history, this solution looks to make compliance a single journey: from customer on-boarding all the way through to potential fraud detection, case management and automated regulatory reporting.
Market manipulation and fraud are not unique to digital assets — while most of the manipulation and fraud in traditional equity, commodity and futures markets have been prevented over time — in the digital asset space, manipulation is rampant. Just a snapshot of how big a problem this is, Business Wire reported that “a December study conducted by the Blockchain Transparency Institute estimated that over 80% of top 25 Bitcoin pairs (by volume) listed on CoinMarketCap are driven by manipulation.”
While manipulation is rampant, even during the heavy bear-market of 2018, the number of ID-verified users on crypto exchanges doubled. 95% of the 150 endowment funds surveyed said they are already investing in crypto, with 50% planning to increase allocations according to this report in Trade Crypto. The problem of compliance and market transparency is only growing.
Trust But Verify
Former President Ronald Reagan often famously said, “doveryai no proveryai” (trust but verify). This is redundant in the crypto space as, in theory, in a decentralized world, trust and verification are meant to be verified by the network. When we look at its bottom line, however, while the underlying assets might be truly decentralized, the exchanges are not.
There will be a day of reckoning, as regulators will start putting together frameworks over the next few years and more market participants such as exchanges, brokers and traders will realize that they should pre-empt the regulators if they want to gain the trust of their clients. When addressing compliance, this has historically been a challenge for legacy financial service providers such as NASDAQ Smarts and NICE.
In conversations we’ve had with customers, we’ve come to realize that the legacy tools are completely ill-equipped to handle a range of modern challenges, including complex trading workflows, unfamiliar and non-standardized data structures, currency pairs built on different technological infrastructures (ex., Bitcoin/ETH), and widespread new methodologies for fraud. Fraud and market manipulation that are crypto native are challenges that legacy systems are not designed to address.
Why We Chose to Invest
We liked the Solidus Labs founders, Asaf, Praveen, Chen and the rest of the Solidus Labs team from our first meeting. They offered a rare combination of financial markets trading expertise, compliance know-how and an all-around strong ML and data-science team. The team has already been able to secure a wide range of financial institutions such as hedge funds, broker-dealers, and exchanges to adopt their web-based compliance platform globally.
We believe that, in the short-term, the opportunity is for the company to serve as a bridge between exchanges and regulators. A virtuous cycle for the digital asset industry could be created if exchanges truly understand what would make regulators comfortable. This could be done by showing regulators the level of visibility and protections that certain exchanges are putting in place to protect their customers. Medium-term regulatory acceptance will open the market, from the pure exchanges to traditional financial players entering the space (ex., a Bitcoin ETF offered by financial giants such as Goldman Sachs and J.P. Morgan).
In looking at the long-term, Solidus Labs is the first ML-powered and crypto native compliance cloud, and that could allow the company to become a shared surveillance network. One of the challenges and opportunities around digital assets is that they have no borders, or “local ownership.” Over the long-term, Solidus Labs’ ability to cast a global compliance net across digital financial markets will enable better local protection of consumers. This will also give regulators a global risk threat assessment map which they can monitor and use to react to risks.
We made a bet on the Solidus Labs’ team ability to bring viable solutions to the problem of market manipulation in the world of digital assets, thus becoming a huge enabler to the industry. However, we believe the opportunity of bringing transparency to global financial markets and serving as a bridge between consumers, regulators and market participants is significantly larger. There are many future permutations of where those opportunities may lie, and we believe Solidus Labs is in the best positioned to capture them.