Blockchain analytics tools are a valuable resource for law enforcement agencies in investigating and tracking cybercrime activities. These tools can be used for :
2022 witnessed some of the biggest crypto hacks that resulted in a major meltdown of the decentralised finance ecosystem. The story is no different in 2023 as multiple ransomwares and hacks are causing great trouble to the investors whether institutional or retail. Amidst this, regulators and law enforcements have stepped up their efforts in order to make crypto a compliant, and safe space for everyone.
The law enforcement agencies are leveraging the inherent blockchain technology to be a step ahead of the perpetrators and track and trace the flow of funds. This blog goes into the depth of the importance of a collaborative approach between law enforcement agencies and blockchain data to solve crypto crime and crypto enabled crime.
Blockchain technology has shown promise in this area and is being explored by many as a potential solution to the problem of money laundering. The technology offers a new and innovative approach to AML, which can overcome the challenges faced by compliance teams and improve the overall efficiency of the AML process.
Blockchain technology and cryptocurrencies have opened up new opportunities for economic growth and development. However, the pseudo-anonymous nature of crypto transactions also appeals to cybercriminals exploiting it for money laundering, terrorism financing, and other illegal activities. Law enforcement agencies are now turning to blockchain analytics solutions to unlock the power of blockchain data for investigations, compliance, and policymaking.
Blockchain analysis platforms use advanced statistical modelling, AI, and data science techniques to de-anonymize blockchain activity and provide actionable insights. By piecing together multiple data points from the public blockchain, transactions can be attributed to known entities. This gives regulators and LEA visibility into the following key areas:
One of the foremost challenges in investigating crypto-related crimes is that blockchain transactions happen in real-time, often crossing multiple jurisdictions within minutes. This high velocity demands equally agile monitoring and response capabilities.
With real-time tracking and alerts on suspicious transactions, blockchain analytics enables rapid incident response. The ability to trace funds mid-transaction instead of after the fact is a gamechanger for freezing assets before they disappear. Some real-world examples include:
Blockchain forensics empowers law enforcement with concrete, actionable intelligence to respond swiftly to crimes-in-progress.
For example, an individual’s various personal, business, and darknet wallets can be linked together to build a comprehensive picture of all associated transactions and counterparties. This can unveil connections to scams, ransomware, illicit markets, money laundering, and more that may otherwise go undetected. Robust attribution also aids international cooperation and information sharing between agencies, helping connect the dots across jurisdictions.
Advanced analytics techniques can identify clusters of related wallets controlled by a common entity. Transaction graph visualisation then illustrates the relationships between wallets and clusters.
This enables intuitive exploration of transaction flows between identified entities. Investigators can visualise transaction trails to pinpoint activity of interest. Anomalous transaction patterns also become evident through transaction clustering, aiding detection of money laundering typologies and other suspicious activity.
Mapping known clusters further reveals connections to unknown wallets that likely belong to the same entity. Examining transactional relationships around a seed cluster enables expanding investigations to identify additional wallets associated with an illicit actor. This “cluster propagation” can unravel the full network of wallets controlled by a criminal organisation.
Blockchain analytics offers the most comprehensive view when combined with intelligence from other sources like OSINT. Gathering corroborating evidence from the open web helps confirm attribution and connect on-chain activities to real-world entities.
Some examples of OSINT data include:
Bringing together on-chain and off-chain intelligence paints a more complete picture of entities under investigation. It also strengthens the evidentiary base for prosecution.
With blockchain forensics, law enforcement can:
Thorough tracing of cryptocurrency flows is invaluable for recovering criminally-derived assets. It also paves the way for forfeitures and financial penalties.
Beyond investigations, blockchain data offers valuable intelligence for policy initiatives around cryptocurrency. Analytics can identify vulnerabilities in existing frameworks and quantify risks. By analysing blockchain data, policymakers can gauge the effectiveness of existing regulations and make informed decisions about potential policy changes. The impact assessment allows them to understand the consequences of regulatory actions on the crypto market and its participants. For instance, analytics can quantify metrics like:
Data-driven feedback is invaluable for fine-tuning policies and regulations to close loopholes and maximise impact. In 2023, the European Union conducted a comprehensive impact assessment of its crypto-related regulations. The assessment relied heavily on blockchain analytics data to evaluate the impact of their policies on market dynamics, investor behaviour, and financial stability. This data-driven approach helps policymakers strike a balance between fostering innovation and safeguarding against potential risks.
An aggregated view across billions of transactions provides a macro perspective on cryptocurrency usage trends. Identifying overall shifts can inform policy priorities and allocation of regulatory resources. Some examples of industry-level metrics include:
Macro-level tracking provides crucial context for evaluating regulatory priorities and framing guidance.
Blockchain data can help law enforcement agencies (LEAs) in risk management and compliance by providing accurate data and visualisations in real-time. Blockchain analytics tools can be used to improve domain awareness, identify and stop threat actors on blockchains, and spot and solve blockchain-based crimes proactively. For regulated entities like banks and VASPs, blockchain analytics is a powerful tool for risk management and compliance. Use cases include:
Some risk assessment applications include:
Robust risk assessment is a prerequisite for appropriate risk-based customer due diligence. Ongoing monitoring should also align with the risk rating of customers and accounts.
Analytics automates identification of suspicious transactions and activity that warrant further review. This provides efficiencies over manual monitoring and minimises false positives. Red flags triggering alerts include:
Effective monitoring requires blending blockchain analytics with internal AML systems and processes. Analytics enhances existing transaction monitoring programs to more reliably detect money laundering risks.
Regulators can leverage blockchain analytics tools to identify unauthorised VASPs, review licence applications, and enforce regulations. Blockchain analytical firms can assist government agencies and insolvency practitioners handle, store, realise, and monitor seized assets using blockchain data. These services help regulators ensure that financial institutions and cryptocurrencies are complying with regulations and that criminals are brought to justice.
Firms can screen customers and transactions against databases of prohibited wallet addresses and virtual asset service providers connected to sanctioned persons or jurisdictions. Ongoing monitoring also detects incoming or outgoing transfers to sanctioned addresses.
LEAs can visually map out the flow of transactions among illicit actors, revealing hidden patterns and connections that might otherwise go unnoticed. These visual representations aid investigators in comprehending complex criminal networks, leading to better-targeted interventions. Blockchain forensic tools can be used to screen for crypto transaction risk, identify high-risk customers, improve SARs submissions, and block risky transactions.
Blockchain data can help law enforcement agencies (LEAs) and regulators enforce Travel Rule protocols for Virtual Asset Service Providers (VASPs). The Travel Rule is a term used to refer to FATF Recommendation 16, which covers measures to combat money laundering and terrorism financing (ML/TF). It requires financial institutions engaged in VA transfers and crypto companies, collectively referred to as VASPs, to obtain "required and accurate originator information, and required beneficiary information" and share it with counterparty VASPs or financial institutions during or before the transaction.
Analytics helps regulators gauge the scale of virtual asset use, associated risks, and existing regulatory coverage. This intelligence informs national risk assessments on cryptocurrency adoption. Metrics quantified through blockchain analysis include:
Risk modelling based on hard blockchain data provides realistic assessments of crypto crime and illicit finance risks.
Advanced analytics techniques can score entities based on the risk of associated wallets and transactions. This aids prioritising higher risk entities for compliance examinations. Risk indicators include:
Focusing oversight on the riskiest entities enables more effective utilisation of supervisory resources.
Analytics enables continuous monitoring of licensed exchanges and VASPs for changes in risk profile. Ongoing tracking helps assess effectiveness of implemented controls.
One of the challenges for regulators is identifying unregistered VASPs in the absence of customer and KYC information. Analytics provides visibility by analysing transaction patterns to identify services executing transactions on behalf of others.
One of the challenges for regulators is identifying unregistered VASPs in the absence of customer and KYC information. Analytics provides visibility by analysing transaction patterns to identify services executing transactions on behalf of others.
Where exchanges are licensed, outliers exhibiting potential unregistered VASP activity can be flagged for investigation. Transaction graph visualisation also aids tracing flows from regulated entities to spot handoffs to unlicensed VASPs. This helps close loopholes in the licensing regime.
Regulators need concrete evidence trails to take enforcement actions against non-compliant players. Blockchain analytics provides this audit trail by reconstructing detailed transaction histories including dates, counterparties, and fund flows. Analytics also supports investigations and sanctions against ransomware groups by identifying associated infrastructure for designations.
Analytics provides a definitive transaction audit trail to establish potential violations by VASPs and support enforcement actions. Key applications include:
Essentially analytics can either validate or disprove claims made by regulated entities around transaction monitoring, risk management and compliance. Hard blockchain data makes it more difficult to hide gaps. By benchmarking regulated entities against the risk exposure patterns visible via blockchain analytics, regulators can take informed supervisory actions ranging from warnings to penalties or loss of licence. The immutability and transparency of blockchain transactions provides regulators an objective and accurate basis for evaluating adherence to anti-money laundering rules and policies.
Blockchain analytics helps regulators conduct rigorous evaluations of new licence applications by VASPs such as exchanges. When reviewing applications, regulators can leverage analytics to:
ssentially, analytics augments due diligence validation during licensing with a deep transactional risk profile of the applicant business, founders and initial funding sources.
The UK’s FCA requires crypto asset addresses of beneficial owners be submitted with applications for AML registration. Analytics enables comprehensive vetting of these associated addresses.
Ongoing monitoring of licensees further ensures continued adherence to expected transaction profiles following award of registration/licence.
Blockchain technology and distributed ledger solutions provide extensive data on virtual currency transactions across public blockchains and permissioned blockchain networks. By leveraging Artificial intelligence and advanced analytics, blockchain applications can unlock valuable insights from transaction patterns, smart contracts, wallet address, and other on-chain data points, without exposing personal information or compromising personal data.
Regulatory bodies and law enforcement agencies are increasingly turning to blockchain analytics platforms to aid forensic investigations into cryptocurrency crimes, illicit transactions, money laundering risks, and other anti-financial crime objectives. However, proper safeguards must be instituted to prevent abuse of blockchain data, ensure legitimacy of analytical models, and protect the broader blockchain ecosystem supporting innovation in the financial services sector. Responsible blockchain analytics reconciles the promises of greater transparency for regulators with the right to privacy for individuals.
As cryptocurrency oversight continues maturing, blockchain analytics is fast becoming indispensable. Blockchain forensics provides transparency into an otherwise opaque ecosystem, arming agencies with intelligence to combat crypto enabled crimes. For regulated businesses, analytics unlocks risk intelligence and standards for ensuring compliance. As adoption accelerates, blockchain analytics will likely emerge as a central pillar of crypto asset monitoring and regulation.
Regulators too are increasingly recognizing the value of combining blockchain data with traditional supervisory tools for a more complete view of risk exposures. Mandating periodic blockchain analytics reporting as part of compliance further strengthens oversight of the ecosystem. Stay connected with us for the latest insights and updates on crypto compliance and regulation by subscribing to our newsletter and blogs.
