Crypto Basics

Beyond Bitcoin: Tracking the Flow of Funds Across Ether, Litecoin, Bitcoin Cash, Tether, and Other Top Cryptocurrencies

Bitcoin is not the only game in town

Demand for cryptocurrencies beyond Bitcoin is growing rapidly. Ether, Litecoin, Tether, and Bitcoin Cash combined make up an astounding 42% of today’s total trading volumes among the top 10 cryptocurrencies. Many different types of currencies are filling different types of demand. The appeal of stablecoins, for instance, is their one-for-one stability. Utility tokens hold the promise of future valuable goods or services. The increasing adoption of multiple cryptocurrencies is a testament to their potential in reaching more people and their wide range of unmet needs.

But with increased adoption comes increased risk. Businesses that offer services for multiple cryptocurrencies need to understand their exposure to high risk activity accordingly if they are to meet compliance obligations. Investigators both in the private and public sectors also need to understand the threat of illicit actors behind more than just Bitcoin.

Below we outline the opportunities and risks associated with multiple cryptocurrencies, along with tips for evaluating multi-currency investigation and compliance solutions.

A growing market means increased risky activity and bad actors

Among the top 10 cryptocurrencies by trading volume in 2015, Bitcoin dominated with 86% share (according to data). That dropped to 41% in 2018 as other cryptocurrencies emerged. In fact, nearly $10 billion is traded daily across top cryptocurrencies other than Bitcoin. Businesses in this industry (such as exchanges) are continuously adding more cryptocurrencies to their offerings to meet growing demand.

To stay within regulatory guidelines, businesses must monitor for illicit activity across top cryptocurrencies. For example, scammers stole $36 million of Ether in 2018, double the previous year’s amount. An exchange should be able to identify whether these scams impacted their users while law enforcement needs the ability to track Ether activity to build a case against these scammers.

Though stablecoins are often seen as a less risky entry into cryptocurrencies, they are not immune to risky activity. For example, one of the first large stablecoins to emerge was Tether. During the 2017-2018 market rally, Tether’s ease of use for trading between cryptocurrencies also made it susceptible to activity such as “pump and dump” price manipulation schemes.

Regulatory oversight is expanding to multiple cryptocurrencies

Regulators across jurisdictions have been paying close attention to the role of multiple cryptocurrencies in emerging business models. In the US state of New York, for instance, businesses that want to offer services for a new cryptocurrency must get approval from the New York Department of Financial Services (NYDFS), the regulator that oversees cryptocurrency (or virtual currency) businesses.

Enforcement action against illicit activity involving multiple cryptocurrencies is also on the rise. For example, the US Commodities and Futures Trading Commission (CFTC) charged a New York-based investor with fraud in early 2018 for misappropriating customers’ Bitcoin and Litecoin funds. Months later, the same regulatory body went after another fraudster in Illinois for a similar $1.1 million Bitcoin and Litecoin scheme.

Cryptocurrency businesses or investigators that don’t have the necessary software to monitor exposure or track the flow of funds across multiple cryptocurrencies will fall behind their peers.

What you should look for in a solution

Leading businesses and investigators have consistently cited the following criteria when looking for the best software to monitor activity across multiple cryptocurrencies.

A comprehensive dataset for analytics

Successfully tracking activity across multiple cryptocurrencies requires really good data that maps transactions to services (i.e. exchanges, merchant services, darknet markets, terrorism financing groups, etc). This includes:

  • Total number of large services that have been “mapped” to the most addresses
  • Whether a counterparty can be identified in a large percentage of transactions
  • How long the company has been identifying patterns in the data
  • How many dedicated technical staff are employed

Real-time updates

Real-time updates help businesses better understand activity that impacts their customer base and investigators stay up-to-date on what is most relevant to their cases. Every time a user’s transaction is recorded on the blockchain, the software should update within seconds.

Extensive support

The software should be supported by a dedicated training team whose deep cryptocurrency expertise is combined with ongoing support, training for every user type, and expert investigation services for custom needs.

Recognized thought leadership

One way to validate the quality of a multi-currency software solution is to assess their published research. Research should go beyond just topline reporting and instead provide deeper insights about patterns and anomalies from the data.

A proven, trusted solution

A trusted and widely used investigation and compliance software will go a long way in building trust with regulators and solving cases. Choose a solution considered by leading institutions and government agencies to have the best accuracy, expertise, and reputation for mapping cryptocurrency activity to services.