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How Chainalysis Helps Catch Cryptocurrency Criminals

The blockchain analysis company has helped to track down drug dealers, terrorists and money launderers. Here’s how it works.

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In brief

  • Blockchain analysis company Chainalysis has helped law enforcement around the world to catch cryptocurrency criminals.
  • Some privacy advocates have raised concerns that Chainalysis’ tools undermine blockchain privacy.
  • Chainalysis is branching out into tools for economic analysis of cryptocurrency markets.

In 2014, the operators of the world’s largest cryptocurrency exchange, Mt. Gox, disclosed that hackers had drained 650,000 Bitcoin (worth about $500 million at the time). The ensuing chaos gave Michael Gronager, founder and CEO of Chainalysis, an idea: Since blockchain ledgers are public, what if someone created a tool that sifted through all of that data and traced the stolen money?

So Gronager, then COO at Kraken, the crypto exchange that was supporting the Mt. Gox investigation, built one. With access to Mt. Gox’s database, Gronager’s tool managed to trace the stolen 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 told Decrypt

Chainalysis made headlines in 2015, when it helped catch two rogue FBI agents who stole Bitcoin while investigating the Silk Road dark web market. It did so again for tracing the flow of cryptocurrency from child abuse markets, and again for hunting down money launderers, and again for disrupting terrorist financing. And again and again and again.

“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 five years old, Gronager’s company has about 174 employees, with offices in New York, Washington DC, London and Copenhagen. It works with the governments of approximately 30 countries, and private companies in more than 40, to trace stolen funds and identity suspicious transactions. 

How Chainalysis works

Every move you make on a public blockchain—buying, selling or trading cryptocurrency—is logged on the blockchain for all the world to see. Chainalysis’ tools can scrape this publicly-available transaction data from blockchains—it now supports 100 coins, representing over 90% of cryptocurrency transaction volume—to trace the money. 

Though blockchains are pseudonymous, sometimes you know the owner of the wallet. So, if a known thief launders money through an exchange, Chainalysis could identify the flow of transactions and could let the exchange know that stolen funds have entered its exchange. Or if the thief gets sloppy, and sends it to their friend, who unbeknownst to them has published their wallet address on Facebook, Chainalysis can let the police know that the thief may be related to the Facebook poster.

The Chainalysis dashboard, used to trace cryptocurrency transactions (Image: Chainalysis)

Crypto exchanges use another product, Chainalysis KYT, to trace cryptocurrency transactions, and financial institutions use Chainalysis Kryptos to work out whether cryptocurrency businesses are trustworthy. 

Rich Sanders, CEO of blockchain analytics firm CipherBlade, uses it every day. The combination of these tools creates an ecosystem for compliance professionals (KYT) and investigators (Reactor) to streamline their efforts to clean up the space,” he told Decrypt

Gronager says that in the US, about two-thirds of his revenue comes from government contracts, a market he’s cornered. Chainalysis already trains agencies to use his tools, and Gronager only anticipates competition from government contractors. 

He also notes that there’s a gap in the market for Russian and Chinese companies to do similar things, since Chainalysis’s ties to the US government prevents it from working with its enemies. However, until those governments warm up to crypto, there likely won’t be too much competition, he said. 

Gronager also thinks that the market hasn’t settled 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.” Small businesses may prefer local vendors, he said, and may only reach out to a larger company once their business grows. 

Chainalysis vs privacy?

Chainalysis’s close work with government has raised concerns that the company’s tools undermine privacy on the blockchain—one of the things that drew so many to Bitcoin to begin with. 

A New Hampshire resident last month filed a lawsuit against the IRS after it sent around 10,000 letters to those it suspected of avoiding taxes. The IRS had subpoenaed cryptocurrency exchanges to obtain the data, and also worked with Chainalysis to track down tax evaders. In James Harper’s complaint against the IRS, 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 said.

Gronager doesn’t think that his product undermines 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.”

In April, Bitcoin advocate Andreas Antonopoulos claimed that Chainalysis 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 said 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 Chainalysis spokesperson responding to Antonopoulos’s claims said that, “As a general rule, Chainalysis does not work with dictatorial governments.”

Going beyond solving crimes

There’s more that Chainalysis can do with its data than just solve crimes. A trio, headed by Chainalyis’s chief economist, Philip Gradwell, is working on harnessing the blockchain—essentially 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 told Decrypt

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 said it could provide institutions and asset managers with more comfort around cryptocurrency, helping them make decisions 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,” he said. But with more precise and granular information, people could “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. 

And the public nature of blockchain could allow new strategies that are impossible in regular markets. Studying secretive dark web markets, Chainalysis could piece together the structure of the black market economy. “Seeing that interconnectedness is something impossible to see in the traditional world [of finance],” he said. Monitoring traditional financial markets is expensive, and much of it private. Not so 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.  

Source: https://decrypt.co/41127/how-chainalysis-helps-catch-cryptocurrency-criminals

Blockchain

China aims to let foreigners use digital yuan at Winter Olympics in 2022

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China’s central bank is looking to enable foreign athletes and visitors to use the country’s digital currency during the Beijing Winter Olympics in 2022, according to a top central bank official.

Li Bo, deputy governor of the People’s Bank of China, said that the upcoming Winter Olympics could potentially become the first test of China’s central bank digital currency, or CBDC, by foreign users.

“For the upcoming Beijing Winter Olympics, we were trying to make e-CNY available not only to domestic users, but also to international athletes and like visitors,” Li said Sunday at a CNBC panel at the Boao Forum for Asia. The bank previously announced its plans on testing the digital yuan at the event in August 2020.

The official said that the PBoC doesn’t intend to replace the United States dollar’s dominance as the world’s reserve currency. Li reportedly noted that the central bank is focused on the domestic use of the digital yuan.

“For the internationalization of renminbi, we have said many times that it’s a natural process and our goal is not to replace the U.S. dollar or any other international currency. I think our goal is to allow the market to choose and to facilitate international trade and investment,” he stated.

Despite the PBoC’s focus on the domestic digital yuan, China’s central bank is still exploring cross-border CBDC use. “At the same time, working with our international partners. Hopefully, in the long term, we have a cross border solution as well,” Li said. At the forum, Li also said that China’s central bank now views the major cryptocurrency Bitcoin (BTC) as an “investment alternative.”

After launching its first domestic digital yuan tests in 2020, China started cross-border CBDC pilots in collaboration with central banks in Hong Kong, Thailand and the United Arab Emirates in February 2021. On April 1, PBoC director of research bureau Wang Xin announced that China’s central bank completed the first cross-border pilots of the digital yuan with the Hong Kong Monetary Authority.

Chinese authorities have stressed multiple times that the government is not seeking to replace existing fiat currencies including the U.S. dollar with the digital yuan. “We are not like Libra and we don’t have an ambition to replace existing currencies,” Zhou Xiaochuan, the president of the Chinese Finance Association and former PBoC governor, said in late 2020.

As previously reported by Cointelegraph, the U.S. has taken a careful approach toward CBDCs due to the U.S. dollar’s status of the world’s reserve currency and other CBDC-related challenges like privacy. The European Central Bank is also still deciding whether Europe needs a digital euro, with ECB President Christine Lagarde expecting the digital currency to be adopted in four years, at the earliest.

Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://cointelegraph.com/news/china-aims-to-let-foreigners-use-digital-yuan-at-winter-olympics-in-2022

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Blockchain

UK government establishes central bank digital currency task force

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Her Majesty’s Treasury and the Bank of England have begun preliminary central bank digital currency studies that could result in the creation of a national digital currency.

In a document published by HM Treasury, the exchequer announced the creation of a CBDC taskforce in collaboration with the U.K.’s central bank.

Jon Cunliffe, deputy governor of the Bank of England and Katharine Braddick, director general of financial services at HM Treasury will co-chair the task force.

According to the terms of reference document, the task force will synergize the efforts of all relevant statutory bodies in the U.K. regarding CBDC development.

As part of its duties, the task force will explore preliminary issues associated with the design, implementation, and operation of a CBDC in the U.K. The task force will also interface with stakeholders across academia, fintech and other relevant industries to identify the technological hurdles involved in creating a sovereign digital currency.

The joint HM Treasury and BoE task force will also monitor CBDC-related developments on the international scene especially as other nations are actively exploring their own central bank digital currency projects.

According to a BoE press release issued on Monday, the central bank will also run its own internal CBDC unit headed by Jon Cunliffe.

The establishment of the task force is yet another indication of the U.K. government’s focus on digital currencies and fintech in the aftermath of Brexit. In November 2020, Rishi Sunak, chancellor of the Exchequer said that Brexit offered an opportunity for the U.K. to revamp its financial services sector.

Since Brexit, Sunak has overseen a significant policy shift towards harnessing novel fintech innovations like CBDC and stablecoins. As previously reported by Cointelegraph, U.K. financial services minister John Glen has identified stablecoin regulations as the major focus of the government in the area of cryptocurrency regulations.

According to a report by Reuters, the U.K.’s financial market focus is also extending towards distributed ledger technology firms. Speaking during a financial industry conference on Monday, Sunak announced that the government plans to establish a fintech sandbox for blockchain startups.

Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://cointelegraph.com/news/uk-government-establishes-central-bank-digital-currency-task-force

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Blockchain

China ‘endorses’ BTC investment: 5 things to watch in Bitcoin this week

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Bitcoin (BTC) is beginning a new week grinding back to $60,000 as the shock of a weekend price crash settles.

After dropping to as low as $52,000 in a snap sell-off event, Bitcoin has spent the past two days slowly recovering its losses. What’s next?

Cointelegraph presents five factors to consider as a new trading week gets underway and cryptocurrency holders across the board nurse their wounds.

Stocks primed for “up only” short term 

The macro picture is fairly stable in Asia and Europe, with United States markets yet to open.

A mixed picture greeted investors at the open, but volatility has been broadly absent, with only oil showing signs of more pronounced weakness.

As such, little impact on Bitcoin is to be expected from equities moves, these forecast to continue building on record highs in the coming weeks.

Russel Chesler, head of investments and capital markets at the Australian branch of crypto-friendly investment manager VanEck, captured the mood in a note quoted by Bloomberg.

“Our current view is that with short-term interest rates set to remain low for the medium term and our expectation that earnings will continue to increase, it is unlikely that the increase in long-term interest rates will trigger an equity market fall,” he wrote.

Coronavirus concerns still linger despite stocks’ relentless surge higher, with more reported official cases last week than ever before worldwide.

Economic responses continue to vary, with a patchwork of openings and closings characterizing countries’ latest attempts to control the outbreak.

Bitcoin recovers from $52,000 crash

In Bitcoin circles, the main talking point naturally remains the weekend’s events, which saw a sudden cascade of selling send BTC/USD down by $7,000 in a matter of minutes.

Bouncing at just above $52,000, the crash echoed several similar events this year, and Bitcoin managed to regain around 50% of its lost ground within hours.

BTC/USD 1-hour candle chart (Bitstamp). Source: Tradingview

Responses, however, are split between those who consider the volatility “business as usual” and more conservative voices calling time on the latest bull run.

As Cointelegraph reported, suspicions are focusing on a Chinese power blackout hitting hash rate, as well as rumored legal action by U.S. regulators against unnamed financial institutions related to money laundering.

In his own breakdown of what happened, popular statistician Willy Woo highlighted both China and skittish moves by futures investors as contributing to the losses.

“We just saw the single largest 1-day drop in mining hash rate since Nov 2017. The hash rate on the network essentially halved, causing mayhem in BTC price as it crashed,” he told Twitter followers.

In a sign that the future could see fresh sustained upside, Woo reiterated the “reset” in an on-chain metric, the spent transaction output ratio (SOPR), showing that long-term investors will likely soon stop selling altogether.

“The on-chain SOPR metric near a full reset. A classic buy the dip signal,” he added.

“In simple terms, profit taking by longer term investors is completing, very little sell power left unless investors want to sell at a loss from their entry price. Unlikely in a bull market.”

Fundamentals point higher

It’s not just SOPR — a whole range of Bitcoin network indicators and fundamentals are buoying bulls’ cause, even as BTC/USD remains below even February’s high of $58,300.

For Woo and others, particularly important are the transfer of funds to investors who have traditionally hodled, not sold — another classic trait of Bitcoin’s rise in recent months.

Bitcoin liquid supply change chart showing transfers to strong hands. Source: Willy Woo/ Twitter

“Serious strong-handed holders are buying this dip. In the last 24 hours, over 200,000 Bitcoin became illiquid, a 3-year record,” fellow analyst William Clemente added Sunday.

“This illiquid supply increase is not only just dip buyers with no history of selling, but partially accumulation from 5-6 months ago of which those wallets have just crossed the ‘illiquid’ threshold for this metric.”

Lastly, around 13.5% of the total available Bitcoin supply has been active above $53,000, something which Woo says is confirming its status as a trillion-dollar asset. At around $53,800, Bitcoin’s market cap becomes a solid $1 trillion.

“This dip happened while unprecedented numbers of new users are arriving onto the network per day. There’s been a retail influx in the last 2-3 weeks,” Woo additionally noted, with total wallet numbers nearing 10 million.

Difficulty takes care of miner woes

A closer look at hash rate, which at one point dipped by almost half, shows that a recovery in line with price is underway.

According to rough estimates from on-chain monitoring resource Blockchain, Bitcoin network hash rate is already back above 150 exahashes per second (EH/s), having broken through the 200 EH/s barrier for the first time in history last week.

Bitcoin hash rate chart. Source: Blockchain

Miners leaving the network due to power problems leads to Bitcoin’s network difficulty decreasing to incentivize more to come online.

Further confirmation that the weekend’s issue was firmly temporary comes from difficulty forecasts — in two weeks’ time, when it next adjusts, difficulty will only drop by around 4%, a modest move which could yet be cancelled out altogether as miners return.

This balance between hash rate and difficulty is arguably the most important aspect of Bitcoin, one which allows it to govern itself and preserve security and functionality regardless of sudden events impacting network participants.

Chinese central bank praises Bitcoin and stablecoins

In another unanticipated event which is arguably yet to be fully appreciated by the market, China has given an unprecedented stamp of approval to cryptocurrency as an “investment alternative.”

Speaking at a conference organized by CNBC, Li Bo, deputy governor of China’s central bank, the People’s Bank of China (PBoC), broke ranks to validate both Bitcoin and stablecoins.

“We regard Bitcoin and stablecoin as crypto assets… These are investment alternatives,” he said.

The comments are surprising as despite being a center for Bitcoin mining activity, China has had a blanket ban in place on trading and transacting in cryptocurrencies since September 2017.

“Every country that bans Bitcoin eventually reverses that ban. You simply cannot be competitive in the 21st century economy without it,” Charles Edwards, founder of investment firm Capriole, responded.

“China is playing 4D chess. The last 3 days have made very clear they still dominate global mining. Slowly, slowly then all at once.”

The market barely reacted to this high-level affirmation of Bitcoin’s long-term potential. At the time of writing, Bitcoin is still hovering at $57,000, as yet failing to see an attack of familiar resistance levels.

Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://cointelegraph.com/news/china-endorses-btc-investment-5-things-to-watch-in-bitcoin-this-week

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