Blockchain analysis is the process of inspecting, identifying, clustering,

modeling A model is an informative representation of an object, person or system. The term originally denoted the plans of a building in late 16th-century English, and derived via French and Italian ultimately from Latin ''modulus'', a measure. Models c ...

and visually representing

data In the pursuit of knowledge, data (; ) is a collection of discrete values that convey information, describing quantity, quality, fact, statistics, other basic units of meaning, or simply sequences of symbols that may be further interpreted ...

on a

cryptographic Cryptography, or cryptology (from grc, , translit=kryptós "hidden, secret"; and ''graphein'', "to write", or '' -logia'', "study", respectively), is the practice and study of techniques for secure communication in the presence of adve ...

distributed-ledger known as a

blockchain A blockchain is a type of distributed ledger technology (DLT) that consists of growing lists of records, called ''blocks'', that are securely linked together using cryptography. Each block contains a cryptographic hash of the previous block, a ...

. The goal of blockchain analysis is to discover useful information about different actors transacting in cryptocurrency. Analysis of public blockchains such as

Bitcoin Bitcoin ( abbreviation: BTC; sign: ₿) is a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network. Bitcoin transactions are verified by network nodes through cryptography and recorded in a public distr ...

and

Ethereum Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether (Abbreviation: ETH; sign: Ξ) is the native cryptocurrency of the platform. Among cryptocurrencies, ether is second only to bitcoin in market capita ...

is typically conducted by private companies like

Chainalysis Chainalysis is an American blockchain analysis firm headquartered in New York City. The company was co-founded by Michael Gronager and Jonathan Levin in 2014. Its customers have included the United States's Federal Bureau of Investigation, Drug ...

Cryptocurrency exchanges

Cryptocurrency exchange A cryptocurrency exchange, or a digital currency exchange (DCE), is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies. Exchanges may acce ...

s are often required by law to address the source of funds for crypto traders. For example,

Singapore Singapore (), officially the Republic of Singapore, is a sovereign island country and city-state in maritime Southeast Asia. It lies about one degree of latitude () north of the equator, off the southern tip of the Malay Peninsula, borde ...

Japan Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the north ...

, and the

USA The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...

have all passed laws that require exchanges to track the source of the crypto funds. In the United States, the

Bank Secrecy Act The Bank Secrecy Act of 1970 (BSA), also known as the Currency and Foreign Transactions Reporting Act, is a U.S. law requiring financial institutions in the United States to assist U.S. government agencies in detecting and preventing money laund ...

requires cryptocurrency businesses to implement know-your-customer and anti-money laundering programs, including registering with

FinCEN The Financial Crimes Enforcement Network (FinCEN) is a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terr ...

as a money service business. Blockchain analysis enables law enforcement to trace cryptocurrencies back to individuals wallets on exchanges, which can then be subpoened for information on criminal actors.

Method

Because blockchains are typically public, anyone can view the contents of transactions by querying a node or block explorer site (such as Etherscan.io). By using common-spend clustering algorithms, it is possible to map the transactions of certain entities on the

. This is how criminals have been caught moving illicit funds using various cryptocurrencies.

Law enforcement

Blockchain analysis has helped produce evidence in several high interest cases. In 2018, an analysis of

bitcoin Bitcoin ( abbreviation: BTC; sign: ₿) is a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network. Bitcoin transactions are verified by network nodes through cryptography and recorded in a public distr ...

transactions uncovered a link between major cryptocurrency exchange

BTC-e BTC-e was a cryptocurrency trading platform primarily targeting Russian auditory with servers located in USA - until the U.S. government seized their website and all funds in 2017. It was founded in July 2011 by Alexander Vinnik and Aleksandr ...

and Fancy Bear. In 2019, a major website hosting child sexual abuse material was taken down by law enforcement using blockchain analysis techniques. In 2021, the

US Department of Justice The United States Department of Justice (DOJ), also known as the Justice Department, is a federal executive department of the United States government tasked with the enforcement of federal law and administration of justice in the United State ...

used blockchain analysis to recover most the of ransom from the

Colonial Pipeline ransomware attack On May 7, 2021, Colonial Pipeline, an American oil pipeline system that originates in Houston, Texas, and carries gasoline and jet fuel mainly to the Southeastern United States, suffered a ransomware cyberattack that impacted computerized e ...

. In 2022,

IRS Criminal Investigation Internal Revenue Service, Criminal Investigation (IRS-CI) is the United States federal law enforcement agency responsible for investigating potential criminal violations of the U.S. Internal Revenue Code and related financial crimes, such as mone ...

s used blockchain analysis to seize over 50,000 Bitcoin stolen from the

Silk Road The Silk Road () was a network of Eurasian trade routes active from the second century BCE until the mid-15th century. Spanning over 6,400 kilometers (4,000 miles), it played a central role in facilitating economic, cultural, political, and reli ...

dark web marketplace.

References

{{Reflist Blockchains