Blockchain, Crypto Apps, Cryptocurrency, News & Updates

Chainalysis: Cryptocurrency Detectives

September 8, 2020

Mt. Gox, the world’s largest cryptocurrency exchange, has disclosed in the year 2014 that hackers have drained 650,000 Bitcoin (about $500 million during that time). Because of this, the founder and CEO of Chainalysis, Michael Gronager, came up with an idea; Since blockchain ledgers are public, what if someone will create a tool that will sift through all of the data and trace the money that has been stolen?

A COO at Kraken before, Gronager built one to support the Mt. Gox investigation. Holding an access to Mt. Gox’s database, Gronager’s tool managed to trace the funds to BTC-e, a shady cryptocurrency exchange run by Russian national Alexander Vinnik. It showed that:

“Yes, you can actually solve cases using blockchain analysis and you can follow the money,” Gronager stated.

In 2015, Chainalysis helped catch two rogue FBI agents who stole Bitcoin while investigating the Silk Road market in the dark web. Also, Chainalysis traced the flow of cryptocurrency from child abuse markets, then hunting down money launderers and disrupting terrorist financing, and then the list goes on.

“We’ve seen time and time again that these cases can actually be solved, and they can be solved at a pace and acquisition that is way better than what we’ve seen in the past,” said Gronager. “That’s what enables crypto to flourish and grow: no one should be afraid of crypto anymore.”

Now prospering for five years, Chainalysis has about 174 employees, holding their offices in New York, Washington DC, London, and Copenhagen. They work with the governments of nearly 30 countries and more than 40 private companies, tracing stolen funds and identify suspicious transactions.

How does Chainalysis operate?

Every move that has been made on a public blockchain, for example, buying, selling, or trading cryptocurrency, will be logged on the Blockchain for anyone to see. The tools form Chainalysis can scrape the publicly-available transaction data from blockchains. Blockchain now supports 100 coins, representing over 90% of cryptocurrency transaction volume tracing the money.

Even though blockchains are pseudonymous, sometimes, one can identify the owner of the wallet. Chainalysis could locate the transactions’ flow and let the exchange know that the stolen money entered its trade. If the thief gets sloppy and sent the deal to their friend, who unknowingly has published their wallet address on Facebook, Chainalysis can alert the police that the thief may be related to the Facebook user.

Another product, Chainalysis KYT, can be used by crypto exchanges to trace cryptocurrency transactions. Other financial institutions use Chainalysis Kryptos to know whether cryptocurrency businesses are trustworthy.

The CEO of blockchain analytics firm CipherBlade, Rich Sanders, uses it every day. These tools can create an ecosystem for compliance professionals (KYT) and investigators (reactors) to streamline their clean-up space.

As stated by Gronager, in the US, almost two-thirds of his revenue comes from government contracts, a market that he has cornered. As of now, Chainalysis are already training agencies to use his tools, and Gronager only expects competition from government suppliers

He further notes a gap in the market for Russian and Chinese companies to do similar things, since Chainalysis’s ties to the US government and stops it from working with its enemies. Nevertheless, until those governments get comfortable with crypto, there won’t probably be too much struggle, he said.

Gronager also believes that the market hasn’t established on a winner in the private sector where “we definitely see a flourishing like group of companies doing anything from new ways to [perform] KYC [checks], to sending data, to doing some level of transaction monitoring.” Aside from that, small businesses may prefer local vendors, he said, and they may only reach out to a larger company once their establishment grows.

Privacy vs. Chainalysis?

Chainalysis’s work with the government has raised concerns that the company’s tools undermine the Privacy on Blockchain, this is one of the things that drew so many to Bitcoin, to begin with.

Last month, a resident from New Hampshire filed a lawsuit against the IRS after sending around 10,000 letters to those suspected of avoiding taxes. The IRS had subpoenaed cryptocurrency exchanges; they also worked with Chainalysis to track down tax evaders. In the complaint against IRS by James Harper, he alleged that the IRS “unlawfully violated” his Fourth and Fifth Amendment Rights. “The Internal Revenue Service has now acquired the power to demand access to anyone’s private information without any judicial process,” he stated.

Gronager believes that his product weakens Privacy. “Privacy doesn’t mean that you can’t trace money and find leads. It means that I can’t see the nature of transactions on crypto and the Blockchain,” he said. “If we started an investigation, there will probably be leads that could figure it out, but that would require the reach of law enforcement.”

A Bitcoin advocate Andreas Antonopoulos claimed in April that Chainlaysis helps “the world’s worst dictators and regimes either directly or indirectly,” and that it was “fundamentally immoral to even work at a company like this.” Gronager added that it does not work with dictators, and that “Countries that are under sanctions and other things, we can’t work with,” he said. A spokesperson from Chainalysis responded to Antonopoulos’s claims noted that “As a general rule, Chainalysis does not work with dictatorial governments.”

Chainalysis to solve crimes

A trio, being led by Chainalysis’s chief economist, Philip Gradwell, is working on harnessing the Blockchain – one massive data set – for economic analysis, “Blockchain tells you about the whole crypto economy. And my job is to analyse that data set, understand it, and to bring the bigger trends out into the open,” he stated.

Using Chainalysis’s market analytics tools, which track how cryptocurrency flows across exchanges and around the world, he discovered that about 80% of Bitcoin is used for speculative purposes; ETH usage is split between speculation and dapps, and Tether is increasingly being used as a store of value in East Asia.

“You can’t use this data to predict how the price is going to change hour by hour. But it gives you a reasonably good understanding of the momentum of the market,” he said.

Gradwell noted that it could provide institutions and asset managers with more comfort around cryptocurrency, helping them make conclusions based on data.

“It’s always surprising that there was so much trading going on and cryptocurrency on the basis of so little information,” he said. “At the moment, the main investment thesis is to buy Bitcoin and hold it,” However, with more accurate and granular information, people can “have the data to do more innovative strategies to make better investments, because they can actually see there is some demand for the companies that they’re backing,” he said.

It is in the public nature of Blockchain to allow new approaches that are impossible in traditional markets. As they are studying secretive dark web markets, Chainalysis will be able to piece together the black market economy structure. “Seeing that interconnectedness is something impossible to see in the traditional world [of finance],” he said. The price of monitoring traditional financial markets is high, and much of it private. But not with Blockchain, whose data integrity can be relied on.

“If I’m a bank and I send money to another one, I lose sight once it goes over to the new bank. Whereas the Blockchain that doesn’t happen. And that means that you can take much more advanced algorithmic approaches to understand how the flow of funds happen, because you don’t have this uncertainty or loss of visibility,” he said.

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