How to be a responsible member of the digital asset ecosystem with Merkle Science’s Ian Lee

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By Greg Hall Published: February 28, 2022
Merkle Science's Ian Lee

Ian Lee is one of the founding members of Merkle Science, the next-generation predictive cryptocurrency risk and intelligence platform. Buoyed by the digital asset explosion in recent years, their services are provided to a wide range of clients of many shapes and sizes.

Now primed to play a critical role in making blockchain accessible and compliant for business, any period of growth for the digital asset industry is a period of growth for Merkle Science. The latest wave of interest – one which has yet to fully break – is no exception.

This surge in interest and adoption has been driven by the growth of DeFi platforms that are welcoming newcomers – both retail and institutional – to the space, and specific applications such as non-fungible tokens (NFTs) generating mainstream interest.

‘What’s interesting about that is this brought in a whole new wave of participants to the crypto space, where in the past a lot of people got into crypto purely for financial reasons – they saw it as an investment opportunity.’

‘I think you’re finally reaching this point where they’re comfortable with their understanding of the technology to actively come up with clearer guidelines and actively start granting businesses licence to operate.’

‘The by-product of that is now you have licensed entities, licensed exchanges, and what this does is that it allows banks to enter the space. Traditionally, banks which have been hesitant to deal with crypto exchanges because they’re not licensed, can now come in and say hey, you know, I want to work with this exchange and it’s licensed by my local regulator, so they much be doing things by the books.

As a service which functions to help businesses monitor blockchain risk, each expansion in blockchain use-cases means more interest in Merkle Science. However, their service was built to be adaptable, so staying relevant in a constantly changing industry is not too difficult of a task.

‘I’d say we’d had to make certain modifications to existing products,’ explains Lee.

‘With the introduction of DeFi platforms and NFTs, a lot of these transactions now go through smart contracts. And not just one or two smart contracts – some transactions easily go through four or five smart contracts, which are just constantly speaking to one another to facilitate that transaction.’

‘Having tools that can then distil these flows between these smart contracts becomes more challenging. We can’t visualize it the same way we used to with our old platform, because that would be an information overload for our client.’
how can we distil these new data points and make it easier to digest for our users?

Perhaps just as important for a company like Merkle Science is the regulatory environment. With increasing mainstream interest has come increasing regulatory interest. Many jurisdictions around the world are beginning to shore up their legal regimes to make sure digital assets and their applications are appropriately covered under the law. In the space of just two years, the likes of Switzerland, Singapore, Germany and the broader European Union have all introduced or are in the process of introducing sweeping changes to the regulatory regimes governing digital assets.

Here too, Merkle’s philosophy of adaptability from square one has been vital.

‘When we started the company in 2018, by and large across Asia there were no licensing frameworks. Yes, over in the US and the UK/Europe, there was some, but it still wasn’t clear. So, we knew right from day one that any platform that we built had to be designed in such a way that it would accommodate for changing regulations.’

One of the concrete manifestations of this is in the platform’s risk detection protocol. Rather than a set-in-stone risk threshold, Merkle Science makes use of a risk engine that allows their clients to create bespoke alerts based on their own needs. The control of the risk engine lies with the clients, which means that any local changes in law or regulation that need to be implemented right away can be done so easily and quickly.

‘This allows them to really expand into any jurisdiction that they want, because again, the system that we’ve designed has not been tailored for just one set of rules or regulations, right? It’s agnostic.’

This bespoke approach is not solely concerned with regulatory flexibility. It also is designed to allow businesses of many sizes – from smaller start-ups to enterprise-level companies – to be able to enjoy the benefits of the platform freely without resorting to an unsatisfactory one-size-fits-all approach.

That’s just as well, because the digital asset boom has meant that virtually every cross-section of business you can imagine has started using the blockchain. According to Lee, the kinds of clients coming through Merkle’s doors has changed significantly over the past few years.

‘Back in the early days, the only guys who really wanted to speak to us were, let’s say, your typical exchanges and custodians, right? Guys who very obviously were dealing with cryptocurrency and needed to know where these funds were coming from.’

Slowly, regulators and law enforcement entities began to pile into the space as the companies or criminal activity they monitor began to make use of blockchain technology. But Lee says that now, the level of interest is such that their services are used by almost anyone.

‘Imagine you’re a bank and you have an exchange client and you can actually see your transactions going in and out in real time. How valuable would that be and how happy will your compliance team be if you could tell them, hey, if [our clients] are money laundering, we’ll actually see it in real time?’

One of the most tangible demonstrations of Merkle Science’s growing role in the development of the industry is their participation in an accelerator programme run by Lloyds of London. The insurance company had begun looking to the private sector to see what solutions could be used for risk assessment on digital asset companies such as exchanges. Insurance is an area where digital assets companies have in the past run into trouble because of how slow traditional providers had been to understand potential clients from this emerging industry. Earlier in 2021, it was announced the Merkle Science would be part of the September 2021 intake.

‘[Insurance] is a need that crypto companies face, right? I mean, it’s a problem that they face – they’re getting hacked, and there is a need for them to be able to secure their assets, and I think the insurance market recognizes that gap. And so, we’re working with them to build dashboard that can help them better understand the risk of these crypto exchanges so that they can calculate better premiums and offer better services.’

For Merkle, this is a great example of serving the industry in ways that go well beyond the exact products and services they are currently offering to the market. This kind of engagement with regulators and traditional institutions is as much a responsibility for the company as making profits for its shareholders because these efforts will determine whether the coming waves of global interest and regulatory changes will be as beneficial to the industry as they can be.