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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.

Republished by Plato

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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

PlusToken Crypto Scammers Slammed With 11-Year Jail Sentence

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Principal actors in the PlusToken Ponzi scheme have bagged 11-year prison sentences in China. The scheme managed to defraud investors of billions of dollars in various cryptocurrencies.

End of the Road for PlusToken Scammers

According to the South China Morning Post on Dec. 1, principal members of the PlusToken scam project were sentenced to 11 years imprisonment by a Chinese court. The suspects were found guilty of duping investors of $2.25 billion worth of crypto tokens.

As previously reported by CryptoPotato, authorities arrested 27 key members of the crypto Ponzi scheme in July, in addition to apprehending 82 other individuals linked to PlusToken.

Later in November, Chinese law enforcement seized $4 billion worth of crypto from operators of the fraudulent project. According to court documents, the confiscated cryptocurrency tokens included 94, 775 BTC, 79,581 BCH, 833,083 ETH, 74,167 DASH, 1.4 million LTC, 6 billion Doge, 27.6 million EOS, and 213,724 USDT.

The clampdown of the PlusToken scam project is in line with China’s agenda to rid the country of fraudulent schemes. Also, the latest development signals a win for authorities as the PlusToken platform was one of the largest Ponzi schemes in China.

What Happened?

PlusToken, founded by Chen Bo back in 2018, had all the hallmarks of a classic Ponzi scheme, with funds generated from later investors used to benefit early investors. Chen and other operators employed social media and offline activities to get members, who in turn paid for membership fees up to $500 worth of bitcoin and other crypto tokens.

Between 2018-2019, the platform had over 2.5 million members, with rewards based on the number of new recruits that others brought on board. Meanwhile, the total number of funds generated from members was reportedly over $2.2 billion worth of crypto.

Also, court documents alleged that Chen Bo spent some of the funds on extravagant lifestyles, buying expensive cars and properties for himself and his relatives.

In addition to the PlusToken founder and other key members spending time behind bars, the ringleaders were slammed with fines. The PlusToken scammers were fined between 120,00 yuan ($18K) and 6 million yuan ($912,922),

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Source: https://cryptopotato.com/plustoken-crypto-scammers-slammed-with-11-year-jail-sentence/

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Cryptocurrency Asset Management Provider NYDIG Raises $100M From a Single Investor

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NYDIG, the cryptocurrency asset management company, has raised $100 million from a single investor. The firm collected the amount during its newly-announced fund Digital Assets Fund II, after the previous fundraising project, named Digital Assets Fund I.

$150M In Just Two Crypto Investment Funds

According to officially published documents filed with the U.S. Securities and Exchange Commission, the New York-based digital asset firm revealed that it raised $100 million from only one investor on their recently announced project Digital Assets Fund II.

The operation follows its forerunner Digital Assets Fund I, which raised $50 million from investors in November. The amount has been reportedly collected from just two investors and was to invest mainly in Bitcoin.

The $50 million fundraise in November came after a quadrupling in NYDIG clients. The firm offers investment, brokerage, treasury, and technology solutions for Bitcoin to its institutional allocators, corporations, investment advisors, etc.

Another Publicly-Owned Company to Own a Big Pile of Bitcoin

As CryptoPotato recently reported, less than two months ago, asset manager Stone Ridge bought 10,000 bitcoins worth about $115 million through its subsidiary NYDIG. The new digital assets-oriented investment was reportedly to serve as a primary treasury reserve asset for the company.

Co-Founder and CEO of NYDIG, Robert Gutmann, said that considering that Bitcoin switches to a mainly institutionally-owned asset, “the company has a better position than ever” to be the leading provider of BTC solutions to a variety of banks, corporations, and institutions.

Speaking on the Bitcoin investment, Gutmann also said that the NYDIG is proud to facilitate one of the largest commitments of treasury assets to the cryptocurrency to that date. He added that he sees demand for the company’s full suite of corporate treasury and investment solutions accelerating.

In another significant recent Bitcoin purchase in October, Jack Dorsey’s Square reportedly bought $50 million worth of the most influential and valuable digital asset right now. Thus, it became the second publicly-traded company to do so in recent months after MicroStrategy.

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Source: https://cryptopotato.com/cryptocurrency-asset-management-provider-nydig-raises-100m-from-a-single-investor/

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Blockchain

TrustToken and Syscoin Partner on a Stablecoin Bridge

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Decentralized marketplace and e-commerce protocol Syscoin has partnered with the stablecoin platform TrustToken.

The goal of the collaboration is to speed up payments and to provide further solutions to Ethereum’s blockchain. It also means that the five stablecoins of TrustToken, namely TUSD, TGBP, THKD, TCAD, and TAUD, will run on Syscoin’s blockchain and be available for users.

A Collaboration Between Syscoin and TrustToken

According to a release shared with CryptoPotato, the popular decentralized marketplace and e-commerce protocol Syscoin has teamed up with stablecoin platform TrustToken.

Right off the bat, this means that the stablecoins provided by the platform will now run on Syscoin’s blockchain as well. These are TUSD, TGBP, THKD, TCAD, and TAUD.

Stablecoins have grown in popularity over the past few months, mainly because of the DeFi boom, where they are used to enable staking, liquidity provision, and so forth. However, there was also an obvious challenge with all of it – scaling. Supposedly, Syscoin is intended to help with that. Using Z-DAG (Zero Confirmation Directed Acyclic Graph), the protocol claims to be able to settle transactions in less than 10 seconds with comparatively low fees.

The partnership will also enable users to mine two cryptocurrencies at the same time – SYS and BTC.

Distribution of the Roles

While Syscoin’s task would be scalability, TrustToken comes in for the stablecoin part. It’s a platform that aims at an open financial system through a selection of stablecoins.

The stablecoins it offers are collateralized, and it has also partnered with Chainlink, as well as other protocols.

The overall partnership is aimed at creating a solution for scalable and secure token payments at a lower risk interoperability with Ethereum’s network. It should make TrustToken’s stablecoins function quicker and cheaper following the enabling of the bridge.

Speaking on the matter was Syscoin’s Foundation Chairman Jag Sidhu, who said:

“Digital assets have growing needs for better usability, robust decentralized security, and a scalable way of ensuring every transaction complies with regulations. Syscoin uniquely aligns with all of these requirements. We look forward to TrustToken’s family of stablecoins becoming future-proof and gaining significant advantage with Syscoin.”

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Source: https://cryptopotato.com/trusttoken-and-syscoin-partner-on-a-stablecoin-bridge/

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