The crypto revolution is transforming traditional finance systems by increasing access to financial services, accelerating transfers and bringing transparency and auditability to finance transactions. These are amazing enhancements. To sustain the viability of this new, decentralized digital economy, it is important to prevent bad actors using cryptocurrencies to fund violence and inflict harm. Blockchain
A blockchain—the technology underlying bitcoin and other c… More analytics are one avenue for achieving that greater vision of financial freedom made possible by blockchain technology and the cryptocurrency
A cryptocurrency (or crypto currency) is a digital asset des… More economy.
What Blockchain Analytics Do
Blockchain Analytics use advanced algorithms to analyze the data available in public blockchains to identify potential sources of illicit finance and suspicious activities. The users of blockchain analytics firms are businesses facilitating transactions in cryptocurrencies that are legally obligated to comply with global Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) standards and regulations.
AML/CFT regulations are in place to protect people from crimes against humanity, such as arms trade, human trafficking, and drug cartels. If businesses, such as banks, exchanges, wallets, and decentralized applications (dapps) fail to comply with AML/CFT regulations, they face fines and possibly jail time. The decentralized design of public blockchains presents some unique compliance challenges that many companies are ill-prepared to address on their own.
For example, the Travel Rule, a standard published by the Financial Action Task Force (FATF), the global AML watchdog and standard-setter, requires that any business transacting in cryptocurrencies over a certain threshold share information pertaining to the transaction with the receiving cryptocurrency business. Critics of the Travel Rule and FATF’s guidelines on how it should be applied to virtual asset transactions felt that the rule undermined the core value of privacy underpinning cryptocurrency. First, transactions on the blockchain are logged as cryptographic hashes transparently on the immutable ledger, making them more traceable than cash. Furthermore, blockchain analytics can provide tools for businesses to affirm that they are indeed transacting with another legitimate entity and to securely share the required Travel Rule information to abide by AML laws.
It is worth clarifying that the FATF sets standards, but it is up to each individual jurisdiction to enact and enforce regulations that implement the FATF standards in line with FATF’s corresponding guidelines. The varying levels of adoption of the FATF guidelines around the world present what is known as “the Sunrise Problem.” This adds another challenge to cryptocurrency businesses, which must adhere to a myriad of laws depending on the jurisdictions where they operate. Blockchain analytics solve for the Sunrise Problem by empowering cryptocurrency businesses to comply with the global Travel Rule guidance, which is already enforced in major economies such as the United States, Canada, Japan, Singapore, South Korea, and Switzerland.
Some jurisdictions may look to adopt stricter standards when it comes to cryptocurrency transactions. The Financial Crimes Enforcement Network (FinCEN) in the United States, for example, proposed lowering the threshold at which businesses must follow the Travel Rule from $3000 to $250, which would have more than doubled the number of compliance events in the US. Again, in the summer of 2021, FinCEN doubled down on their focus by including cryptocurrency at the top of their priorities when it comes to preventing the financing of terrorism and money laundering. However, it’s not just the United States adopting a stricter stance on cryptocurrency regulations; around the globe governments
are shining a brighter spotlight on cryptocurrency transactions to curtail misuse by criminals.
What Blockchain Analytics Are And Are Not
Blockchain analytics leverage the transparency and auditability inherent to blockchain’s design to identify transactions likely to have originated in illicit finance. Blockchain’s decentralized ledger technology represents an identity-less democratic system, operating by consensus, which protects against fraud and can enable the generation of digital wallets in a privacy-preserving manner. User account data that informs blockchain analytics is pseudonymized (where information that identifies a user is removed or replaced) by way of public and secret key pairs. So, while blockchain analytics can be used to identify fraudulent transactions, it does not identify the bad actors behind the fraud.
Without Blockchain Analytics Where Would We Be?
As cryptocurrency becomes increasingly mainstream and globally accepted, AML/CFT regulations will be applied to cryptocurrency transactions just as they are to fiat-based value transactions, and it will be that much more essential for companies transacting in cryptocurrencies to comply with these global standards and laws. Blockchain analytics and cryptocurrency intelligence are key to ensuring these companies can achieve the compliance standards necessary and safely conduct transactions to keep operating and continue the growth of the burgeoning crypto economy.
