Published: September 12th, 2020
A new breed of technology tools designed specifically to track and trace cryptocurrency transactions is helping law enforcement agencies around the globe battle terrorism, tax evasion, and online fraud.
QLUE (Qualitative Law Enforcement Unified Edge) from the Blockchain Intelligence Group, software maker Chainalysis, and blockchain investigation agency Cipherblade are all putting their technological and investigative acumen to work on behalf of regulators, governments, and police forces; helping track down illicit transactions that would otherwise be kept anonymous by blockchain's built-in privacy structures.
Every action that happens on a public blockchain, including all buying, selling or trading in cryptocurrencies, is logged and available to view (anonymised). Tools like QLUE and Chainalysis KYT claim they can capture publicly-available blockchain transaction data and use it to trace where virtual money originates from, as well as where it's going.
Though blockchains use pseudonyms to keep users identities secret, wallet ownership can be easier to identify. So if a known criminal attempted to launder money using a crypto exchange, these tools could flag questionable transactions originating from that user, and alert the exchange that illicit funds (may) have arrived on its systems.
In another scenario, a fraudster might send crypto to an associate, not realising that he or she has published their wallet address social media for all to see. The blockchain analytics software would let police know that a connection has been made between the fraudster and the associate.
Blockchain analytics firm CipherBlade assists law enforcement and regulatory agencies in their ongoing hunt for financial infractions and money laundering in particular. The company pair sits proprietary technologies and investigative expertise with tools from Chainalysis. By joining forces, they aim to build an ecosystem for investigators and compliance professionals that will streamline government efforts to clean up the cryptocurrency space.
Chainalysis first came to prominence back in 2015 when it helped the FBI catch two rogue agents who had stolen a cache of Bitcoin in the course of their Silk Road darknet investigation.
Five years later, the company has grown to 175 employees and expanded its locations from Washington DC to London, Copenhagen, and New York. The company says it now works with ca. 30 countries and 40 Fortune 500 companies to identify suspicious transactions and trace stolen cash.
While Chainalysis and QLUE look to be the market leaders, the market for blockchain analytics is growing in tandem with the growth of crypto in international transactions. Several startups and solutions from established companies are all trying to address demand for know-your-customer checks, to transaction monitoring, and sending crypto data. There are solutions for small businesses, SMEs and large corporates.
The close working relationship between blockchain analysis companies and governments has raised concerns that the tools could undermine privacy on the blockchain—one of the benefits that attracted so many to crypto in the first place.
In one recent example, a US resident filed a lawsuit last month against the IRS after it sent more than 10,000 letters to crypto holders it suspected of dodging taxes. The tax agency had compelled cryptocurrency exchanges with legal orders to obtain the data and then worked with blockchain analytics companies to track down likely tax evaders.
Of course, the blockchain analysis companies don’t believe their products undermine privacy. But others are raising concerns. Bitcoin advocate Andreas Antonopoulos claimed in April this year that Chainalysis is directly or indirectly assisting dictatorial regimes as they suppress democracy and crackdown on demonstrators, calling the company ‘fundamentally immoral’.
The company said in a statement that the accusation is categorically untrue, noting that it's legally barred from dealing with governments that are under sanctions.
QLUE’s crypto analytics tools can be used to track how cryptocurrency moves across exchanges and between counterparties. The company says that its analysis has shown that the majority of Bitcoin – close to 80 per cent – is used for market speculation. Tether is increasingly being used as a store of value, while ETH usage fluctuates between speculation and dapps.
The opens the possibility that these technologies could be used regularly by asset managers and institutions as investors become more comfortable with cryptocurrency. Investment decisions and risk assessments of counterparties would be data-driven, as opposed to the current situation where most crypto trading occurs with comparatively little information, at least when compared to the expectations of traditional financial markets.
With more precise and granular information, analysts believe the current investment consensus around crypto, which is basically to buy and hold, could mature. With the data in-hand to create a more innovative crypto investment strategy, investors and forex traders will arguably be in a better position to read crypto opportunities.
Blockchain’s public nature could also enable approaches that would be impossible in traditional finance, learning, for example, from the operations of the darknet. By studying marketplaces that only operate on the darknet, blockchain analytics companies might be able to map the secretive structure of the online underground economy.
If one bank sends money to another bank, for example, bank one loses sight of the money the moment it arrives at bank two. With blockchain, that doesn't happen, meaning investors and institutions can use advanced algorithmic approaches to surface how funds flow.
The connections between black market counterparties are notoriously tricky to suss out in traditional markets. The tools and processes required to monitor conventional financial markets are labour-intensive, time-consuming, and expensive. In blockchain, investigators have a ready-made store of reliable data to start from.