Trust in blockchains will unleash the power of crypto

The last decade has brought enor­mous growth in the adop­tion of cryp­tocur­ren­cy, from indi­vid­ual con­sumers and investors to busi­ness­es and insti­tu­tions. Begin­ning life pri­mar­i­ly as an alter­na­tive cur­ren­cy based on dig­i­tal blockchain tech­nol­o­gy, use cas­es have pro­lif­er­at­ed in more recent years, with a big vari­ety of projects now active­ly using or plan­ning to use the tech­nol­o­gy.

Blockchain is set to rev­o­lu­tionise how we live and trans­act, and trans­form a range of dif­fer­ent indus­tries, far beyond the sec­tors most in the spot­light right now, such as art and gam­ing. But such is life that when­ev­er a pow­er­ful new inno­va­tion is devel­oped to help bring about pos­i­tive changes glob­al­ly, there are peo­ple who also seek to exploit those pow­ers for nefar­i­ous means.

Crim­i­nals use cryp­tocur­ren­cies for the same rea­son that mil­lions of peo­ple use them for legit­i­mate pur­pos­es: they are instan­ta­neous, cross-bor­der and liq­uid. The 2022 Cryp­to Crime Report from Chainal­y­sis shows cryp­tocur­ren­cy-based crime hit an all-time high in 2021 when illic­it address­es received $14bn, up from $7.8bn in 2020 and $4.6bn in 2017.

With oppor­tu­ni­ties for sig­nif­i­cant rewards, cyber­crim­i­nals are becom­ing increas­ing­ly sophis­ti­cat­ed in their tech­niques, includ­ing new and unfa­mil­iar tech­nolo­gies. Scams have long been the largest seg­ment by trans­ac­tion vol­ume and rep­re­sent a sig­nif­i­cant threat to trust in the space, rob­bing vic­tims of $7.7bn worth of cryp­tocur­ren­cy in 2021 alone. With­in this grow­ing land­scape, ‘rug pulls’ have emerged as the go-to tech­nique of the decen­tralised finance (DeFi) ecosys­tem.

Rug pulls are where the devel­op­ers of a cryp­tocur­ren­cy project aban­don the token and take users’ funds with them. They account­ed for 37% of all cryp­tocur­ren­cy scam rev­enue in 2021, up from just 1% in 2020. Around $3.2bn worth of cryp­tocur­ren­cy was stolen in 2021, a 516% leap com­pared to 2020, with 72% of that stolen from DeFi pro­to­cols.

This is not sur­pris­ing giv­en the mam­moth 912% growth in DeFi trans­ac­tion vol­ume in 2021, with the incred­i­ble returns on decen­tralised tokens like Shi­ba Inu encour­ag­ing many to spec­u­late. It’s easy for those with the right tech­ni­cal skills to cre­ate new DeFi tokens and get them list­ed on exchanges, even with­out a code audit to pub­licly con­firm that the contract’s gov­er­nance rules are iron-clad and con­tain no mech­a­nisms that would allow for the devel­op­ers to make off with investors’ funds. A lack of reg­u­la­tion has left peo­ple wide open to these scams.

How­ev­er, the report by Chainal­y­sis also reveals that while cryp­tocur­ren­cy crime is grow­ing in vol­ume, it is shrink­ing as an over­all pro­por­tion of the cryp­tocur­ren­cy ecosys­tem. Trans­ac­tions involv­ing illic­it address­es rep­re­sent­ed just 0.15% of cryp­tocur­ren­cy trans­ac­tion vol­ume in 2021, near­ly 10 times low­er than in 2017. This shows sig­nif­i­cant progress is now being made.

“Though this shrink­ing pro­por­tion is part­ly due to the rapid­ly grow­ing rate of cryp­to adop­tion, it’s also because law enforcement’s abil­i­ty to com­bat cryp­to-based crime has evolved too, with the tools at their dis­pos­al improv­ing all the time,” says Michael Gron­ag­er, co-founder and CEO of Chainal­y­sis, whose cryp­tocur­ren­cy inves­ti­ga­tion and com­pli­ance solu­tions help law enforce­ment agen­cies, reg­u­la­tors and busi­ness­es as they work togeth­er to fight illic­it cryp­tocur­ren­cy activ­i­ty.

“Law enforce­ment agen­cies also not only have more and more resources, as well as expe­ri­ence, to han­dle cas­es involv­ing cryp­tocur­ren­cies, but they have been increas­ing­ly able to seize illic­it­ly obtained cryp­tocur­ren­cy. In Novem­ber 2021, the IRS Crim­i­nal Inves­ti­ga­tions announced it had seized over $3.5bn worth of cryp­tocur­ren­cy in 2021, all from non-tax inves­ti­ga­tions, rep­re­sent­ing 93% of all funds seized by the divi­sion dur­ing that time.”

The abil­i­ty to track and recov­er assets is cru­cial as it destroys the finan­cial incen­tive to car­ry out fur­ther attacks. Oth­er exam­ples include $56m seized by the Depart­ment of Jus­tice in a cryp­tocur­ren­cy scam inves­ti­ga­tion and $2.3m from the ran­somware group behind the Colo­nial Pipeline attack.

Yet despite the clear progress, there is still a long way to go in fight­ing illic­it cryp­tocur­ren­cy activ­i­ty. Crim­i­nal abuse of cryp­tocur­ren­cy cre­ates huge imped­i­ments for con­tin­ued adop­tion of this rev­o­lu­tion­ary tech­nol­o­gy, height­ens the like­li­hood of restric­tions being imposed by gov­ern­ments, and, worst of all, vic­timis­es many inno­cent peo­ple around the world.

One of the most com­mon mis­con­cep­tions about cryp­tocur­ren­cy is that it is total­ly anony­mous and untrace­able, when in fact the oppo­site is true: cryp­tocur­ren­cies present unprece­dent­ed trans­paren­cy. They are the first glob­al pay­ment sys­tems out­side of any organisation’s con­trol and their blockchains cre­ate pub­lic, per­ma­nent records of trans­ac­tions. The chal­lenge is that the pub­lic blockchain ledger is very dif­fi­cult to inter­pret, dri­ving a need for bet­ter blockchain analy­sis.

“That’s where we come in,” says Gron­ag­er. “At its core, Chainal­y­sis is a data plat­form. Our data links cryp­tocur­ren­cy trans­ac­tions with their real-world ser­vices.” Chainal­y­sis pro­vides this data, as well as soft­ware, ser­vices and research, to gov­ern­ment agen­cies, exchanges, finan­cial insti­tu­tions and insur­ance and cyber­se­cu­ri­ty com­pa­nies in over 70 coun­tries. See­ing which real-world enti­ties trans­act with each oth­er enables the organ­i­sa­tions to work togeth­er to solve the world’s most high-pro­file crim­i­nal cas­es and grow con­sumer access to cryp­tocur­ren­cy safe­ly.

For exam­ple, Chanaly­sis can show that a giv­en trans­ac­tion took place between two dif­fer­ent cryp­tocur­ren­cy exchanges, or between a cryp­tocur­ren­cy exchange and an illic­it enti­ty, such as a sanc­tioned indi­vid­ual or organ­i­sa­tion. With blockchain analy­sis tools and KYC infor­ma­tion, law enforce­ment can gain trans­paren­cy into blockchain activ­i­ty in ways not pos­si­ble in tra­di­tion­al finance. Like­wise, with trans­ac­tion mon­i­tor­ing, cryp­tocur­ren­cy exchanges and finan­cial insti­tu­tions can flag high-risk activ­i­ty and ful­fil their reg­u­la­to­ry oblig­a­tions to then report them.

“By work­ing from the same Chainal­y­sis blockchain data, our pub­lic and pri­vate sec­tor cus­tomers can col­lab­o­rate more effi­cient­ly when inves­ti­gat­ing illic­it activ­i­ty,” Gron­ag­er adds. “Our mis­sion is to build trust in blockchains to pro­mote more finan­cial free­dom with less risk. We believe trans­paren­cy is crit­i­cal to weed­ing out bad actors and build­ing this trust in blockchains, which will ulti­mate­ly pave the way for more main­stream adop­tion of trans­for­ma­tive cryp­tocur­ren­cies.”

For more infor­ma­tion, vis­it chainalysis.com

Pro­mot­ed by Chainal­y­sis