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Blockchain analysis

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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.[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 public by design, anyone can view the entire history of transactions by querying a node or a block explorer site (such as Etherscan.io). Although the transactions are public, the addresses within them are pseudonymous. That means the actual owners of the digital assets are unknown. On top of that, since creating new addresses has no cost, the addresses may be used only once. So that the a wallet will hold different addresses for each transaction.[7] By using common-spend clustering algorithms, it is possible to map the transactions of certain entities on the blockchain.[8] This is how criminals have been caught moving illicit funds using various cryptocurrencies.[9]

Common-Spend Clustering

In order to send a certain amount of funds, one must refer to a list of incoming transactions of his that cover the amount he wishes to transfer. More specifically, refer the addresses owned by him that has received those funds. This is the mechanism of the blockchain that ensures one has the sufficient balance to perform the transaction. By doing so, all the addresses used to cover the transaction will be linked together as owned by the same wallet. All this is usually done automatically by the wallet software without the choice of the user.

Linking together all the input addresses to the same wallet is an example of clustering using the common-spend. Since the cluster is owned by a single entity, the activity of all its addresses can be treated as one, and thus tie together seemingly unrelated transactions.

Follow The Money

Since each transaction is in essence a link between previous incoming funds to a new desired address, the blockchain itself is a very large network of connections that are all public but pseudonymous. One of the most common ways to incriminate money transfers over the blockchain is by following the money back through the blockchain and finding evidence for illicit activity in one or more of its sources.[10]

This technique became highly effective for law enforcment ever since Know Your Customer protocols have been established in most cryptocurrency exchanges. Due to KYC protocols many of the transactions on the blockchain are labeled with personal identifying information. This raises the chances that following the money will lead to an actual persons and take the investigation off from the blockchain. [11]

Law enforcement and blockchain surveillance

Blockchain analysis has helped produce evidence in several high interest cases.[12] In 2018, an analysis of bitcoin transactions uncovered a link between major cryptocurrency exchange BTC-e and Fancy Bear.[13] In 2019, a major website hosting child sexual abuse material was taken down by law enforcement using blockchain analysis techniques.[14]

In 2021, the US Department of Justice used blockchain analysis to recover most of the ransom from the Colonial Pipeline ransomware attack.[15][16] In 2022, IRS Criminal Investigations used blockchain analysis to seize over 50,000 bitcoin stolen from the Silk Road dark web marketplace.[17][18]

References

  1. ^ Meiklejohn, Sarah; Pomarole, Marjori; Jordan, Grant; Levchenko, Kirill; McCoy, Damon; Voelker, Geoffrey M.; Savage, Stefan (23 October 2013). "A fistful of bitcoins". Proceedings of the 2013 conference on Internet measurement conference. Imc '13. pp. 127–140. doi:10.1145/2504730.2504747. ISBN 9781450319539. S2CID 2224198.
  2. ^ Sarah, Kappos, George Yousaf, Haaroon Maller, Mary Meiklejohn (2018-05-08). An Empirical Analysis of Anonymity in Zcash. OCLC 1106297947.{{cite book}}: CS1 maint: multiple names: authors list (link)
  3. ^ Greenberg, Andy (2022). Tracers in the Dark: The Global Hunt for the Crime Lords of Cryptocurrency. Doubleday. ISBN 978-0593663677.
  4. ^ Team, Chainalysis (2021-10-26). "Cryptocurrency Regulation: How Governments Around the World Regulate Crypto". Chainalysis. Retrieved 2023-01-05.
  5. ^ PricewaterhouseCoopers. "Carving up crypto: Regulators begin to find their footing". PwC. Retrieved 2019-05-28.
  6. ^ "Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies | FinCEN.gov". www.fincen.gov. Retrieved 2023-01-05.
  7. ^ "Crypto Wallet Addresses: What They Are and How to Create One [2023] | BitPay". BitPay Blog. 2023-02-02. Retrieved 2023-10-24.
  8. ^ Spagnuolo, Michele; Maggi, Federico; Zanero, Stefano (2014). "BitIodine: Extracting Intelligence from the Bitcoin Network". Financial Cryptography and Data Security. Lecture Notes in Computer Science. 8437: 457–468. doi:10.1007/978-3-662-45472-5_29. hdl:11311/881385. ISBN 978-3-662-45471-8. S2CID 4643437.
  9. ^ Yakowicz, Will (2018-01-09). "Startups Helping the FBI Catch Bitcoin Criminals". Inc.com. Retrieved 2019-05-29.
  10. ^ Elliptic. "What is... Blockchain Analytics?". www.elliptic.co. Retrieved 2023-10-25.
  11. ^ "Crypto KYC/AML in the US and Around the Globe | Lightico". https://www.lightico.com/. Retrieved 2023-10-25. {{cite web}}: External link in |website= (help)
  12. ^ 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.
  13. ^ "Bitcoin Suspect Could Shed Light on Russian Mueller Targets". Bloomberg.com. 4 September 2018.
  14. ^ Newman, Lily Hay. "How a Bitcoin Trail Led to a Massive Dark Web Child-Porn Site Takedown". Wired.
  15. ^ 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". Reuters. Retrieved 2023-01-05.
  16. ^ Team, Chainalysis (2022-02-10). "Chainalysis In Action: How FBI Investigators Traced DarkSide's Funds Following the Colonial Pipeline Ransomware Attack". Chainalysis. Retrieved 2023-01-05.
  17. ^ Greenberg, Andy. "IRS Seizes Another Silk Road Hacker's $3.36 Billion Bitcoin Stash". Wired. ISSN 1059-1028. Retrieved 2023-01-05.
  18. ^ "U.S. Attorney Announces Historic $3.36 Billion Cryptocurrency Seizure And Conviction In Connection With Silk Road Dark Web Fraud". www.justice.gov. 2022-11-07. Retrieved 2023-01-05.
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