Cryptocurrencies and other blockchain-based digital assets are playing an increasingly central role in financial markets. They are also becoming a more frequent source of regulatory concerns, as well as criminal activity.
This summer, the Department of Justice announced enforcement action in cryptocurrency fraud cases involving more than $100 million in expected losses. The cases included a fraudulent investment fund trading on cryptocurrency exchanges, a global Ponzi scheme involving the sale of unregistered crypto securities, and a fraudulent initial crypto…
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Cryptocurrencies and other blockchain-based digital assets are playing an increasingly central role in financial markets. They are also becoming a more frequent source of regulatory concerns, as well as criminal activity.
This summer, the Department of Justice announced enforcement action in cryptocurrency fraud cases involving more than $100 million in expected losses. The cases included a fraudulent investment fund traded on cryptocurrency exchanges, a global Ponzi scheme involving the sale of unregistered crypto securities, and a fraudulent initial offering of cryptocurrency coins.
For federal agencies, blockchain analysis offers a roadmap for navigating this increasingly dangerous landscape. Specialized analytical tools provide real-time visibility into these often chaotic markets, shattering the myth of blockchain anonymity and bringing a higher level of transparency to supposedly secret transactions.
In fact, some high-level regulators are pushing for the use of analytics to help manage potential criminal activity associated with digital assets. The New York State Department of Financial Services, for example, recently issued guidelines encouraging virtual currency companies to use blockchain analytics to help set controls and meet compliance requirements. in the fight against money laundering and sanctions.
Why blockchain analysis?
The volume and complexity make it nearly impossible for human operators to unravel the deeply intertwined threads of activity on a blockchain. Where the human eye cannot capture the scale and complexity of transactions, analytics can paint a clear and definitive picture.
Machine-scale analysis is perfectly suited to drill down, organize data, and present intelligible insights. Data analytics tools help dig deeper into the complex network of transactions in a distributed ledger: highlighting the jumps between transactions and identifying the relationships between the thousands of potential exchanges.
Top Federal Use Cases
The following four key use cases illustrate the power of blockchain analytics in the federal sector:
Track and Trace: Law enforcement and internal investigators are already familiar with a key feature in the field of data analysis: “link analysis”. In the Global War on Terror, analysts used this technique to connect the dots between key players, to clarify the scope and activities of individuals who sought to keep their ties invisible to prying eyes.
For malicious actors to exploit blockchain technology for criminal purposes, they need to move assets between addresses or entities. Understanding how these nodes are connected is the numerical equivalent of link analysis. Where counter-terrorism investigators have used cell phone records to uncover connections between bad actors, blockchain analysis can examine wallet activity to achieve the same goal.
Identify bad actors: These same techniques can be used in money laundering and fraud investigations, allowing investigators to see in detail where and how money is flowing.
Analytics provide the ability to monitor transactions and detect suspicious activity patterns. Because cryptocurrency is not truly anonymized, but rather “pseudo-anonymous”, analysts can use their ability to track illicit funds to find not only bad “stocks”, but also bad “actors”.
Ensure compliance: Regulatory decision makers need to understand the various activities that take place on a blockchain and how virtual money is shared. They need accurate information about the economic activities of nations and individuals. Analytics tools provide this higher level of awareness.
With every piece of information coded, validated, and stored, analytics provides the means to ensure compliance and track potentially harmful activity. Given the rapid pace of cryptocurrency adoption, analytics will be needed to better understand where and how money is flowing. For regulators, the analysis will build trust in the system, ensuring that all participants in the digital asset ecosystem operate in accordance with existing laws.
Assessment of global trends and transfers: Regulators need a clear picture of economic activity at the macro level. The Ukraine crisis, for example, highlighted the need for nations to understand and assess global remittances.
Along with their peers in the Department of Defense and the Department of Justice, financial regulators have every interest in increasing their ability to analyze these economic trends on a global scale. Analytical tools allow you to literally see how money moves across the map.
Blockchain represents a fundamental shift in the foundations of economic activity and will play a key role in supporting both law enforcement and regulators, enabling better understanding, better decision-making, and ultimately account, more effective actions for those impacted by the growing adoption of digital assets.
Rupal Lamorena is Managing Director, Financial Regulatory Agency Account Manager and Alejandro Lira Volpi is Managing Director, Financial Services Strategy Manager at Accenture Federal Services. They are the authors ofFollow the Digital Money: A Federal Guide to the Power of Analytics in the Digital Asset Economy.”
