Fintech CEO: Binance Money Laundering Probe Highlights Need for Greater Trust in Crypto Markets

Last week, Bloomberg broke a story detailing how Binance, the world’s largest cryptocurrency exchange, is being investigated by the DOJ and IRS in an attempt to eliminate financial crimes which have arisen due to under-regulation in the sector. 

Modulus CEO Richard Gardner today offered a statement noting that the investigation is indicative of exactly why the industry must increase compliance among digital exchanges. Notably Gardner recently filed for a patent on a “Digital Exchange Auditing System,” a revolutionary solution which aims to restore trust in exchanges, particularly those dealing in digital assets and cryptocurrencies.

“What’s interesting about this probe is that Binance has not been accused of any wrongdoing as the inquiry launched,” said Gardner, CEO of Modulus, a US-based developer of ultra-high-performance trading and surveillance technology that powers global equities, derivatives, and digital asset exchanges. “Right now, regulators are trying to get a handle on the scope of financial crimes, including money laundering, which exist in the sector. They’re still trying to figure out how to regulate a technology that many have trouble fully grasping.”

Incorporated in the Cayman Islands, Binance is without a corporate headquarters, though it has an office in Singapore. According to the Bloomberg article, Chainalysis “concluded last year that among transactions that it examined, more funds tied to criminal activity flowed through Binance than any other crypto exchange.”

“Binance is the biggest, so that’s not necessarily shocking. Though it raises questions about financial crimes more generally. If even the largest exchange can’t, or won’t, limit money laundering and other financial crimes, how do traders, as well as government agencies, know who to trust? They can’t lodge inquiries into every single exchange. There must be a better way. And we think we’ve found it,” Gardner said.

Utilizing the Exchange Trust Score System, exchanges and custodial service providers would implement open-source server-side software which obfuscates and anonymizes data. It then calculates a counter value, which can be inspected in real-time by any third party, such as a regulator or anybody else using Modulus’ explorer app. The counter values are calculated from exchange order data, deposit, and withdrawal figures, among other data points. The data gets inserted into a blockchain via the Modulus application. The counter and encrypted data allows the Modulus explorer app to read data from the blockchain, and it compares the data with real-time counter values being provided by exchange and custodial service APIs.

“What we’ve created is truly revolutionary because the app grades the data collected and will give regulators, or any other end user, a trust score. If an exchange is involved in nefarious financial activities, the trust score will indicate such. We determine the trust score by comparing the expected counter value with the actual counter value. We also partner with custodial service providers to ensure that this mechanism is always operational and is not tampered with in any way,” noted Gardner. Additionally, Modulus’ Exchange Trust Score System utilizes Benford’s Law to analyze the distribution of leading and trailing digits for both the buy and sell orders, as well as the ratio of deposits to withdrawals.

Modulus has been leading the way on exchange trust for years. Earlier this year, Modulus launched a groundbreaking Blockchain-as-a-Service offering, an enterprise blockchain for decentralized verification and tracking, featuring cutting-edge AI-based capabilities. And, in 2018, Modulus launched a market surveillance and risk management solution, which targeted abuse within cryptocurrency markets. Modulus developers are known for upending industries and changing what the industry conceives to be possible. Over the past twenty years, the company has built technology for the world’s most notable exchanges, with a client list which includes NASA, NASDAQ, Goldman Sachs, Merrill Lynch, JP Morgan Chase, Bank of America, Barclays, Siemens, Shell, Yahoo!, Microsoft, Cornell University, and the University of Chicago.