How blockchain analytics caught Washington’s attention

The war in Ukraine has put a spotlight on the crypto data sector.

Person looking at bitcoin through a magnifying glass.

Blockchain analytics has attracted the interest of law enforcement agencies as crypto has increasingly become associated with money laundering and other crimes.

Photo: RODNAE Productions/Pexels

In warning against the use of crypto by Russian oligarchs to evade war sanctions, Senate Democrats led by Elizabeth Warren cited data tools familiar to Wall Street and Silicon Valley but still obscure in Washington circles.

The senators, in a letter to the Treasury Department, pointed to the work of Elliptic and Chainalysis, whose programs scour billions of blockchain accounts and transactions in a global hunt for illicit transactions and hidden assets.

Blockchain analytics are already well known in crypto circles and beyond. They make it possible to figure out the connections between billions of digital wallets that are otherwise only identified by a series of “meaningless” numbers, said Lance Morginn, president of Blockchain Intelligence Group, another leading blockchain analytics firm.

“If I don't know that that address was on the dark web next to a Hamas terrorism donation address, it's useless,” he told Protocol.

The Ukraine war is giving new urgency to the already brewing battle over crypto regulations. And it has turned the spotlight on blockchain analytics as a key way to unmask the inner workings of crypto, particularly the way funds and assets are moved and stored in blockchain networks designed to be transparent but quasi-anonymous.

“There has been a steady uptick in the demand for blockchain analytics services, with a particular spike in interest over the past month or so,” Chris DePow, a senior adviser for financial institution regulation and compliance at Elliptic, told Protocol.

The “potential for the use of crypto for sanctions evasion … underscored the need for the implementation of adequate crypto transaction monitoring, wallet screening, forensics and crypto service provider due diligence,” he added.

That need has long been there within crypto.

Blockchain analytics sprang from a need to crack down on bad actors in the industry’s earliest days. This became pronounced when Mt. Gox, the crypto exchange, was hacked in 2014, the year Chainalysis launched. Jonathan Levin, Chainalysis’ co-founder and CSO, said the company started out by helping Mt. Gox creditors “who were trying to understand where the funds were.”

Eventually, the field began to attract the interest of law enforcement agencies as crypto increasingly became associated with money laundering and other crimes.

The Department of Homeland Security was the first major customer of Blockchain Intelligence Group, said Morginn. It was from a DHS representative that Morginn understood a key principle in hunting for bad guys, including in crypto: “Criminals are in the business of running and law enforcement is in the business of waiting — and waiting for them to slip up.”

Crypto may be “a pseudo-anonymous space,” he added. “But mistakes happen and then they can reveal who that person is by going to a choke point.”

The arrest of Ilya Lichtenstein and Heather Morgan on charges of laundering billions of dollars, for example, was unraveled in part by tracing a transaction on the blockchain from a wallet to a service used to buy a prepaid Walmart gift card.

Crypto’s rapid growth over the past few years led to more interest from other entities. These included big banks which, Morginn said, realized “that if they don't start today, they're going to be left behind and the Coinbases are going to become the new digital banks and threaten their existing business model.”

Blockchain analytics also drew more attention with the heightened focus on regulation and the need to comply with anti-money-laundering and KYC rules.

Crypto companies “suddenly have millions of clients and their biggest operational overhead is compliance,” Charles Delingpole, CEO of ComplyAdvantage, an anti-money-laundering technology company, told Protocol. “The most high-profile challenges they face are compliance and that’s where us and other blockchain analytics companies fit in.”

And it’s a critical role, said Michael Fasanello, chief compliance officer of LVL, a banking and crypto trading company.

“Centralized exchanges are controlled chokepoints by design — yet they rely on flagging and attribution shared with them by blockchain analytics firms, investigations by their internal security teams and law enforcement using blockchain forensics tools,” he told Protocol.

Eventually, these tools helped inspire more confidence in the crypto industry.

In a December 2021 report, Gartner cited “continuing improvement of blockchain data and behavioral analytics” as one of the factors that will help “make cryptocurrency hacks much less likely than they have been in the past five years.” Gartner projected that “successful thefts of cryptocurrency funds and ransomware crypto payments will drop by 30%” by 2024.

Key players in the industry, the report said, included Chainalysis, Elliptic, TRM Labs and CipherTrace, which Mastercard acquired last year.

Jonathan Levin, co-founder and chief strategy officer of Chainalysis and Lance Morginn, co-founder and president of Blockchain Intelligence Group. Jonathan Levin (left) and Lance Morginn. Photos: Chainalysis; Blockchain Intelligence Group

The Ukraine war is keeping blockchain analytics on Washington’s agenda.

On Thursday, Chainalysis’ Levin is scheduled to testify before the Senate Banking Committee, which he said is “very interested in being able to understand the sector.”

Kristin Smith, executive director of the Blockchain Association, which is a major crypto lobby in Washington, said the recent debate over crypto is “really shining a spotlight on the work that these organizations do and how important their role is in the ecosystem.”

The hearing is expected to focus on the raging debate over whether crypto can be used to bypass sanctions. The industry’s position is that crypto isn’t a very smart way to get around financial rules, a position which has gotten a boost from key government agencies, including FinCEN and the FBI, who have said it was not practical for Russian oligarchs to use crypto to bypass sanctions because of the blockchain’s inherent transparency and traceability.

Levin affirmed that view: “For a country like Russia to move to a system like cryptocurrency, in order to move the majority of their economy onto these rails, is not something that can happen overnight.”

“If you're talking about tens of millions or hundreds of millions of dollars, that requires a level of familiarity, expertise and trust that you can remain undetected, you can remain in control of the assets,” he added.

But crypto and the technology behind it continue to evolve. Just as cybersecurity has remained a longstanding problem for the web, the fight against the use of a crypto in illicit transactions is “a cat-and-mouse game,” Levin said.

Morginn of the Blockchain Intelligence Group agreed, citing “very creative, sophisticated cryptographic users” who always come up with new tools and tactics.

“We always try to stay on top of what those are and figure out the loophole,” he said. “I mean, we didn't think a man could be on the moon 100 years ago, and it happened. So you know, I don't think anything is ever impossible.”


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