Successfully operating a crypto business requires tools that help your organization monitor transactions, identify potentially suspicious activity, and address it appropriately. The ability to track and trace funds is no longer a nice-to-have. Blockchain analysis platforms harness the inherent transparency of blockchains to offer these services to cryptocurrency businesses and financial institutions. Some blockchain analysis firms support government entities — choosing one of these means you’ll have access to many of the same core data sets as the agencies that regulate your platform.
The best solutions help to demystify the world of cryptocurrency and provide visibility into transactions, but the data that blockchain analysis tools provide can vary significantly. If you’re considering investing in this technology, read on to learn about the use cases, their ideal tool sets, and how to evaluate your options.
Cryptocurrency businesses: monitoring transactions for risk management
Though cryptocurrency presents exciting opportunities for revenue growth, it also introduces the risk of enabling illicit activity unwittingly. As is the case with transacting fiat currency, businesses have an obligation to understand the potential risk this product offering poses. Crypto businesses need to follow regulations mandated by the jurisdiction in which they operate. Failure to do so could lead to hefty fines and other negative consequences — including, but not limited to, loss of license.
With mounting media coverage of each crypto scandal, managing risk is key to building trust with new and existing users. Building this trust requires adherence to international anti-money laundering regulations. These include Know Your Customer (KYC) requirements, transaction monitoring, filing suspicious transaction reports, and recordkeeping. Blockchain analysis tools can give businesses some of the key information they need to do so effectively.
A good blockchain analysis platform should enable real-time detection and identification of potential high-risk crypto activity and provide a holistic view of organization and user risk through intuitive dashboards. It should allow compliance teams to customize alerts to fit their risk-based approach and provide case management for easy reporting and collaboration with peers and regulators.
Investigative teams in crypto businesses do everything from setting compliance policies and processes to monitoring transactions, handling escalations, and more. Whether your organization’s investigative team is large or small, blockchain analysis tools can help by taking the heavy lifting out of transaction monitoring.
The best tools should provide monitoring capabilities in an easy-to-use interface, backed by industry intelligence and a real-time API. They should reduce manual workflows, help you identify potentially suspicious activity by detecting patterns, and facilitate safe interaction with blockchain technologies like DeFi. These platforms should provide the ability to configure real-time alerts based on your organization’s anti-money laundering (AML) policies, too. Transaction monitoring also helps crypto businesses comply with the Travel Rule. As part of performing customer due diligence, when a transaction exceeds a certain value threshold — which can vary by country — cryptocurrency businesses must identify the originators and beneficiaries of these transactions.
Because illicit blockchain activity is growing as the overall market grows, a large investigative team would want a way to trace funds, too. Some private sector organizations prefer to use the same investigative tools as law enforcement, so that they can leverage similar data sets. The best solutions help both government agencies and private institutions trace and understand blockchain transactions by providing real-time cryptocurrency intelligence, allowing them to map addresses to named services, detect illicit activity as it happens, and build cases.
What to evaluate when choosing a blockchain analysis tool
How good is the underlying data?
When seeking a blockchain analysis solution, it’s important to choose one with substantial depth, breadth, and quality of coverage along with connections to real-world entities — if the data is wrong, it doesn’t matter what other functionality the tool possesses.
Making sense of the blockchain poses a similar challenge to the one web2 search companies had to solve. They chose to create an immense knowledge graph that added context, metadata, and connection to the underlying indexed pages. Capable firms in the web3 space have extended that concept and created a blockchain knowledge graph as a foundational technology.
When it comes to on-chain data, the more extensive and reliable the knowledge graph, the better the outcomes. For instance, as of January 2023, Chainalysis has mapped $24+ trillion in received value across more than a billion individual addresses. Those numbers are hard to put into perspective, but they’re critical for anyone needing to get a clear picture of the crypto ecosystem.
Beyond data collection, blockchain analysis tools must curate context and real-world connections for on-chain data, requiring them to have multiple mechanisms in place.
First, these tools need to ingest public ledger data from different networks in such a way that the uniqueness of each network is considered and handled. Second, humans must be involved in the curation process. That can come in the form of a healthy community of customers who add their own deep insights, and dedicated forensic experts, who continually scrub dark- and clear-net sources for open-source intelligence (OSINT) to reflect in the data. Last, pattern recognition, heuristics, and machine learning models contribute to significant automation. Combining all three creates immensely rich metadata and context that can be connected to chain data.
Does the tool offer continuous monitoring?
Continuous monitoring is a must-have for compliance. Crypto businesses need tools that holistically monitor all transactions and offer real-time intelligence on the source or destination of their funds.
In addition, illicit activity poses huge compliance risks for crypto businesses. The U.S. Treasury’s Office of Foreign Assets Control (OFAC) maintains a list of sanctioned entities based on their cryptocurrency addresses. Effective blockchain analysis tools continuously monitor the list and will send customers alerts when new addresses are added. These tools will also surface risks on old transactions when one of the addresses involved has been sanctioned or tied to criminal activity.
Given the scenarios explained above, effective continuous monitoring in a blockchain analysis tool should include automatic alerts and customized alert thresholds. Tools with these offerings remove tedious manual work from investigations so that teams can both monitor incoming suspicious activity and investigate historical transactions when new information flags them as potentially problematic.
Direct versus indirect exposure
When it comes to analyzing transactions on the blockchain, the most reliable way to assess risk is by reviewing the addresses with which a particular wallet has transacted. If the majority of addresses can be tied to illicit activity, that wallet carries more risk. This is known as exposure. A blockchain analysis tool should aggregate this information for individual cryptocurrency addresses, wallets, and services, and share it in a visual format like charts.
But, what happens when transaction review isn’t as straightforward? Many criminals try to obfuscate illicit activity by transacting through intermediary addresses before their final destination. Anyone interacting with the target address is placed in a position of indirect exposure.
Without access to tools that reveal indirect exposure, you can’t mitigate organizational risk. It’s not sufficient to analyze direct counterparties without reviewing their exposure as well. Platforms that assess indirect exposure help to identify potentially suspicious activity to compliance teams.
What DeFi coverage does the platform provide?
DeFi presents endless opportunities for organizations, but they often lack the visibility needed to prevent transfers or funds commingling with potentially risky addresses or entities. Gaining that visibility requires the right tools to review, analyze, and investigate complex smart contract transactions. A blockchain analysis tool should create clarity and transparency by tracing and reviewing every type of smart contract interaction.
With these tools, you should be able to track:
- Risks associated with a transaction or address
- All of an asset’s history
- Where the money resides now
- Who is involved in the transaction (including counterparties)
- Information that would identify a perpetrator in an illicit activity
These tools should also help you create visualizations to more easily assimilate information and analyze the flow of funds. The bottom line: a good blockchain analysis tool will help you rapidly assess and investigate the complex world of smart contracts, NFTs, chain hopping, and sophisticated protocols.
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This material is for informational purposes only, and is not intended to provide legal, tax, financial, or investment advice. Recipients should consult their own advisors before making these types of decisions. Chainalysis has no responsibility or liability for any decision made or any other acts or omissions in connection with Recipient’s use of this material.