How Coinbase identifies bad actors and keeps the ecosystem safe

Tl;dr: Coinbase utilizes a number of proprietary and blockchain-based compliance tools to make sure our customers feel safe using our platform, including our proprietary analytics software, Coinbase Tracer, our Customer Risk Scoring system, and the Travel Rule Universal Solution Technology consortium. 

By Melissa Strait

Policy

, January 24, 2023

, 3 min read time

Coinbase

At Coinbase, our goal has always been to be the most trusted company in crypto. It’s why we spend a lot of time and effort on compliance — making sure we follow all the relevant laws and regulations in the places we operate so customers feel safe using our platform. While the Compliance team at Coinbase focuses on a number of distinct compliance disciplines, the largest group within the Compliance team is dedicated to financial crimes compliance (FCC), including anti-money laundering, sanctions, and anti-bribery and corruption. 

At a basic level, our FCC Program incorporates all of the components and controls customers expect from a traditional financial institution — from policies and procedures, to training, to customer due diligence. But the unique characteristics of crypto — especially the public ledger of transactions within the blockchain — also provide interesting opportunities to identify bad actors and keep the ecosystem safe.

Our FCC work is led by a team of specially trained experts in compliance within a crypto context. They come from regulatory agencies, government, traditional finance, tech companies, and have deep experience navigating relatively uncharted territory.

In order to free up these experts to focus on the hardest, most complex work, we’ve also built proprietary tools and technology that take advantage of the blockchain to add layers of protection that set us apart.

Here are a few of those tools, and what they mean for our customers:

Interdiction

In the context of sanctions compliance, “interdiction” means intercepting assets intended for or sent from individuals and entities subject to certain types of sanctions.  While this process is straightforward in fiat, the push-based nature of crypto means that we can’t prevent an on-chain transaction from happening. As such, many exchanges have to take reactive steps to recover funds after a transaction to a sanctioned party has occurred. This is a lengthy process, and there’s a chance funds could be gone before the exchange is able to take action.

At Coinbase, we’ve figured out a better way.  Our proprietary blockchain analytics software, called Coinbase Tracer, allows us to investigate illicit activities, screen risky transactions, monitor risk, trace the flow of funds, and analyze blockchain data. It’s fully integrated into our transaction monitoring system, which is a proprietary tool with sophisticated scenarios covering both crypto and fiat activity.

Using Tracer, we can screen crypto transactions in real time. If we identify an inbound transaction from a sanctioned address, we can automatically interdict it and transfer funds to an internal holding account where they are held securely. This process prevents sanctions violations from even happening – something we believe is novel in the industry. 

Customer Risk Scoring

As is the case in traditional financial institutions, we use a Customer Risk Scoring system to assign customers a risk rating when they join Coinbase. This allows us to identify high-risk characteristics, including ones that are indicative of potentially unusual or indicative of bad intent. When we identify high-risk indicators, our team conducts a thorough assessment to determine whether we can onboard the customer and what mitigants we might need to apply. 

Unlike many other companies, however, our risk scoring system is dynamic — meaning we don’t just score our customers when they join, or at a specific moment in time. Our system monitors for real time changes. This allows us to look for red flags in standard “know your customer” information, but also through location changes, asset flows, transactions, and other key information that is updated on a daily basis.

TRUST

Our compliance work is an important part of what sets Coinbase apart, but we also work to move the entire crypto industry forward.

The so-called Travel Rule requires financial institutions to share certain basic information about their customers when sending funds over a certain amount to another financial institution. The rule was written before crypto existed, but crypto exchanges are required to satisfy it.

At first, this was a problem no one knew how to solve. So we created an industry consortium, and eventually helped launch the Travel Rule Universal Solution Technology (TRUST). Today, TRUST includes more than 75 entities around the world, allowing them to comply with the Travel Rule while also protecting the privacy and security of their customers.

These tools allow Coinbase not only to meet our regulatory commitments, but our own expectations for the prevention and detection of illicit activity within the ecosystem. At Coinbase, we are continuing to build and innovate. We are excited to explore existing issues in new ways, such as decentralized identification, while keeping our users and the ecosystem safe.

Coinbase logo

Take control of your money. Start your portfolio today and get crypto.

Sign up for a Coinbase account today and see what the world of decentralized finance can do for you.