Cryptocurrencies and other blockchain-based digital assets play an increasingly central role in financial markets. They’re also becoming a more frequent source of regulatory concern, as well as criminal activity.
This summer, the Justice Department announced enforcement actions in cryptocurrency fraud cases involving over $100 million in intended losses. The cases included a fraudulent investment fund trading on cryptocurrency exchanges, a global Ponzi scheme involving the sale of unregistered crypto securities, and a fraudulent initial crypto coin offering.
For federal agencies, blockchain analytics offer a roadmap to navigating this increasingly hazardous landscape. Specialized analytical tools deliver real-time visibility into these often-chaotic markets, exploding the myth of anonymity on blockchain and bringing a higher level of transparency to supposedly secret transactions.
In fact, some high-level regulators are pushing for the use of analytics to help manage potential criminal activity associated with digital assets. The New York State Department of Financial Services, for example, recently issued guidance encouraging virtual currency firms to use blockchain analytics to help set controls and meet anti-money-laundering and sanctions-related compliance requirements.
Volume and intricacy make it nearly impossible for human operators to unravel the deeply interwoven threads of activity on a blockchain. Where the human eye cannot possibly account for the scale and complexity of transactions, analytics can paint a clear and definitive picture.
Machine-scale analytics are perfectly suited to drill down, organize the data, and present intelligible insights. Data analytics tools make it possible to go deep into the complex web of transactions in a distributed ledger: surfacing the jumps between transactions and identifying the relationships between the potentially thousands of exchanges.
Top federal use cases
The following four key use cases illuminate the power of blockchain analytics in the federal sector:
Tracking and tracing: Law enforcement and internal investigators already are familiar with a key capability in the realm of data analytics: “Link analysis.” In the global war on terror, analysts used this technique to connect the dots between key players, to gain clarity around the scope and activities of individuals who sought to keep their connections invisible to prying eyes.
For bad actors to exploit blockchain technology for criminal purposes, they need to move assets between addresses or entities. Understanding how those nodes are connected represents the digital equivalent of link analysis. Where counter-terror investigators used cell phone records to discover the ties between bad actors, blockchain analytics can scrutinize the activity of wallets to achieve the same end.
Identifying bad actors: These same techniques can be leveraged in investigations around money laundering and fraud, allowing investigators to see in detail where and how the money is flowing.
Analytics offer the ability to monitor transactions and detect suspicious patterns of activity. Because cryptocurrency is not truly anonymized, but rather ‘pseudo-anonymous,’ analysts can use their ability to follow illicit funds to find not just bad “actions” but also bad “actors.”
Ensuring compliance: Regulatory decision-makers need to understand the varied activities unfolding on a blockchain and how virtual money is shared. They need accurate insights into the economic activities of nations and individuals. Analytic tools offer that higher level of awareness.
With every piece of information coded, validated and stored, analytics offer the means to ensure compliance and track potentially nefarious activity. Given the rapid pace of adoption of cryptocurrency, analytics will be needed to drive a deeper understanding of where and how the money is flowing. For regulators, analytics will build confidence in the system, ensuring that all participants in the digital assets ecosystem are operating in compliance with existing statutes.
Evaluating Global Trends and Transfers: Regulators need a clear picture of economic activity at the macro level. The Ukraine crisis, for example, brought to the fore the need for nations to be able to understand and evaluate the transfer of funds on a global scale.
Along with their peers in the Defense Department and the Department of Justice, financial regulators have a vested interest in elevating their ability to parse out these global-scale economic trends. Analytic tools make it possible to literally see how money moves across the geographical map.
Blockchain represents a fundamental shift in the underpinnings of economic activity and will play a key role in supporting both law enforcement and regulators, in driving deeper insights, better decision making, and ultimately more effective actions for those impacted by the rising adoption of digital assets.