Blockchain analysis explained

Blockchain analysis is the process of inspecting, identifying, clustering, modeling and visually representing data on a cryptographic distributed-ledger known as a blockchain.[1] [2] The goal of blockchain analysis is to discover useful information about different actors transacting in cryptocurrency. Analysis of public blockchains such as Bitcoin and Ethereum is typically conducted by private companies like Chainalysis, TRM Labs, Elliptic, Nansen, CipherTrace, Elementus, Dune Analytics, CryptoQuant, and Ormi Labs.[3]

Cryptocurrency exchanges

Cryptocurrency exchanges are often required by law to address the source of funds for crypto traders. For example, Singapore, Japan, and the United States have all passed laws that require exchanges to track the source of the crypto funds.[4] [5] In the United States, the Bank Secrecy Act requires cryptocurrency businesses to implement know-your-customer and anti-money laundering programs, including registering with FinCEN as a money service business.[6]

Blockchain analysis enables law enforcement to trace cryptocurrencies back to individuals wallets on exchanges, which can then be subpoenaed for information on criminal actors.

Method

Because blockchains are typically public, anyone can view the contents of transactions by querying a node or block explorer site (such as Etherscan.io). By using common-spend clustering algorithms, it is possible to map the transactions of certain entities on the blockchain.[7] This is how criminals have been caught moving illicit funds using various cryptocurrencies.[8]

Law enforcement and blockchain surveillance

Blockchain analysis has helped produce evidence in several high interest cases.[9] In 2018, an analysis of bitcoin transactions uncovered a link between major cryptocurrency exchange BTC-e and Fancy Bear.[10] In 2019, a major website hosting child sexual abuse material was taken down by law enforcement using blockchain analysis techniques.[11]

In 2021, the US Department of Justice used blockchain analysis to recover most of the ransom from the Colonial Pipeline ransomware attack.[12] [13] In 2022, IRS Criminal Investigations used blockchain analysis to seize over 50,000 bitcoin stolen from the Silk Road dark web marketplace.[14] [15]

Notes and References

  1. Book: Meiklejohn . Sarah . Pomarole . Marjori . Jordan . Grant . Levchenko . Kirill . McCoy . Damon . Voelker . Geoffrey M. . Savage . Stefan . Proceedings of the 2013 conference on Internet measurement conference . A fistful of bitcoins . 23 October 2013 . https://dl.acm.org/doi/10.1145/2504730.2504747 . Imc '13 . 127–140 . 10.1145/2504730.2504747 . 9781450319539 . 2224198.
  2. Book: Sarah, Kappos, George Yousaf, Haaroon Maller, Mary Meiklejohn . An Empirical Analysis of Anonymity in Zcash . 2018-05-08 . 1106297947.
  3. Book: Greenberg, Andy . Tracers in the Dark: The Global Hunt for the Crime Lords of Cryptocurrency . Doubleday . 2022 . 978-0593663677.
  4. Web site: Team . Chainalysis . 2021-10-26 . Cryptocurrency Regulation: How Governments Around the World Regulate Crypto . 2023-01-05 . Chainalysis . en-US.
  5. Web site: Carving up crypto: Regulators begin to find their footing. PricewaterhouseCoopers. PwC. 2019-05-28.
  6. Web site: Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies FinCEN.gov . 2023-01-05 . www.fincen.gov.
  7. Spagnuolo . Michele . Maggi . Federico . Zanero . Stefano . BitIodine: Extracting Intelligence from the Bitcoin Network . Financial Cryptography and Data Security . Lecture Notes in Computer Science . 2014 . 8437 . 457–468 . 10.1007/978-3-662-45472-5_29 . 11311/881385 . 978-3-662-45471-8 . 4643437 . free .
  8. Web site: Startups Helping the FBI Catch Bitcoin Criminals. Yakowicz. Will. 2018-01-09. Inc.com. 2019-05-29.
  9. Alden Pelker . C. . B. Brown . Christopher . M. Tucker . Richard . 2021 . Using Blockchain Analysis from Investigation to Trial . Department of Justice Journal of Federal Law and Practice . 69 . 3 . 59–100.
  10. News: Bitcoin Suspect Could Shed Light on Russian Mueller Targets. Bloomberg.com. 4 September 2018.
  11. How a Bitcoin Trail Led to a Massive Dark Web Child-Porn Site Takedown. Wired. Newman. Lily Hay.
  12. News: Bing . Christopher . Menn . Joseph . Lynch . Sarah N. . Bing . Christopher . 2021-06-08 . U.S. seizes $2.3 mln in bitcoin paid to Colonial Pipeline hackers . en . Reuters . 2023-01-05.
  13. Web site: Team . Chainalysis . 2022-02-10 . Chainalysis In Action: How FBI Investigators Traced DarkSide's Funds Following the Colonial Pipeline Ransomware Attack . 2023-01-05 . Chainalysis . en-US.
  14. Greenberg . Andy . IRS Seizes Another Silk Road Hacker's $3.36 Billion Bitcoin Stash . en-US . Wired . 2023-01-05 . 1059-1028.
  15. Web site: 2022-11-07 . U.S. Attorney Announces Historic $3.36 Billion Cryptocurrency Seizure And Conviction In Connection With Silk Road Dark Web Fraud . 2023-01-05 . www.justice.gov . en.

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