Navigating Crypto Risks: The Critical Role of Chainalysis in Asset Protection

Navigating Crypto Risks: The Critical Role of Chainalysis in Asset Protection

Seth Nielson

Apr 12, 2023

Motivation

Cryptocurrency has undergone a meteoric rise in recent years because of the fantastic advantages it offers. These include avoiding third-party fund seizure, taxation, tracking, charging, charge backs, and storage risk(more on this later). To focus on the most popular cryptocurrency for example, Bitcoin has increased in value by 62% so far this year. More and more individuals are ascribing value to the convenience and anonymity that Bitcoin provides, and it now accounts for 1.378 trillion dollars, a major portion of the global economy. The value of cryptocurrency cannot be understated.

Unfortunately, with all valued goods, there are those who wish to obtain it nefariously. Bitcoin, being excellent at maintaining anonymity for the benign users, also excels at maintaining anonymity for its nefarious ones. According to Bloom Berg Law, Crypto theft in 2022 stole an aggregate of 3.7 billion dollars in funds. Moreover, these stolen funds were not exclusively from wealthy individuals. Rather, hospitals, schools, prisons, and other facilities of wellbeing may be targeted due to their paramount contributions to society that cannot be delayed. Putting people’s physical wellbeing or day to day life at risk forces faster responses, and payments, from victims.

Not only does the existence of nefarious ransomware increase the prevalence of cryptocurrency usage, but also terrorist groups and illegal markets heavily utilize cryptocurrency to conduct deals through the dark net. While cryptocurrency offers users a new height of privacy and convenience, there is a way to increase safety medium for the common user.

Chainalysis

Blockchain, and more specifically Bitcoin, operates through the tracking of transactions that occur via a big list called a Ledger. This list of transactions can be analyzed to determine who sent money to whom at any point in time. By 2024, over 980 million transactions have transpired from over 460 million addresses. Manually analyzing such a large list of sends and receives is impossible for a human. The tool Chainalysis Reactor allows a human to narrow that massive list down to just the sends and receives associated with a target address, or group of addresses, making the process of blockchain transfer analysis much easier.

This allows knowledge to be gained by an exchange about a target address for a transfer before the transfer is authorized, thereby decreasing the chances that an adversary gains control of your funds. Chainalysis publishes important information about which addresses are associated with fraudulent enterprises, terrorist actions, and darknet purchases. Analysts working at exchanges can use this information to verify transfers to known addresses to ensure that funds are not used illegally and identify illegal actors.

Popular exchanges such as binance, coinbase, kraken, and crypto.com maintain information about the clients’ accounts used to exchange currency with crypto. Combining information about illegal monetary transfers from certain addresses and the actual people associated with those addresses can yield real progress for law enforcement when apprehending criminals.

Figure 1. Chainalysis Reactor shows all of Chaewon (a twitter scammer) wallet’s transaction history, including on-ramps and off-ramps that could reveal Chaewon’s identity. Agents found that the Chaewon wallet transacted heavily with addresses associated with two accounts at Binance.

In the above example, all of the transactions associated with a Twitter scam was able to be traced to two accounts at the Binance exchange. Because Binance requires real identification information to register for accounts, the scam was able to be traced to a real person instead of being obfuscated by cryptocurrency.

Chainalysis has been making massive strides in improving cryptocurrency literacy and transparency to improve safety and security for all users.

Looking Forward

The tools provided by Chainalysis offer a first foray into securing cryptocurrency for the common user. Each illegal transaction that is made can be traced through the common ledger. While this offers unprecedented protection for victims of identity theft and excellent criminal tracking capabilities to law enforcement, some believe that tracing crypto currency transactions goes against the original intent of a decentralized currency. Wherein a truly decentralized currency would allow any user to perform completely untraceable transactions, the shared ledger allows transactions to be traced after they are performed. Furthermore, proper analysis of addresses and their previous transactions would allow exchanges to block nefarious transactions before they are performed.

With the onset of cryptocurrency popularity and financial dominance, the ability to analyze information and trace illegal users has become paramount in recent years. To push the boundary of efficiency, convenience, and safety, more improvements to cryptocurrency analytics must occur to allow for widespread adoption to protect its common user.

At Crimson Vista, we understand the critical importance of securing the cryptocurrency assets you've worked hard to acquire. If you fall victim to a scam, our team is here to assist in tracing your lost digital assets and, in some cases, facilitate their recovery. We also provide comprehensive guidance on protective measures against cyber theft and offer insights into how these scams operate. Our goal is to empower you with the knowledge needed to effectively shield yourself from potential threats. Whether you're an individual seeking to protect your assets or an organization tasked with safeguarding client funds, we offer the expertise and guidance necessary to enhance your security posture.