Blockchain analysis is the process of inspecting, identifying, clustering, modeling and visually representing

data Data ( , ) are a collection of discrete or continuous values that convey information, describing the quantity, quality, fact, statistics, other basic units of meaning, or simply sequences of symbols that may be further interpreted for ...

on a

cryptographic Cryptography, or cryptology (from "hidden, secret"; and ''graphein'', "to write", or '' -logia'', "study", respectively), is the practice and study of techniques for secure communication in the presence of adversarial behavior. More gen ...

distributed-ledger known as a

blockchain The blockchain is a distributed ledger with growing lists of Record (computer science), records (''blocks'') that are securely linked together via Cryptographic hash function, cryptographic hashes. Each block contains a cryptographic hash of th ...

. 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; Currency symbol, sign: ₿) is the first Decentralized application, decentralized cryptocurrency. Based on a free-market ideology, bitcoin was invented in 2008 when an unknown entity published a white paper under ...

and

Ethereum Ethereum is a decentralized blockchain with smart contract functionality. Ether (abbreviation: ETH) is the native cryptocurrency of the platform. Among cryptocurrencies, ether is second only to bitcoin in market capitalization. It is open-s ...

is typically conducted by private companies like Arkham Intelligence, Chainalysis, TRM Labs, Elliptic, Nansen, Blockpliance, Elementus, Dune Analytics, CryptoQuant, and Ormi Labs.

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 an island country and city-state in Southeast Asia. The country's territory comprises one main island, 63 satellite islands and islets, and one outlying islet. It is about one degree ...

Japan Japan is an island country in East Asia. Located in the Pacific Ocean off the northeast coast of the Asia, Asian mainland, it is bordered on the west by the Sea of Japan and extends from the Sea of Okhotsk in the north to the East China Sea ...

, and the

United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...

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 laun ...

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 within the United States Department of the Treasury that collects and analyzes information about financial transactions to combat domestic and international money laundering, terrori ...

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

. This is how criminals are being caught moving illicit funds using various cryptocurrencies.

Law enforcement and blockchain surveillance

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

bitcoin Bitcoin (abbreviation: BTC; Currency symbol, sign: ₿) is the first Decentralized application, decentralized cryptocurrency. Based on a free-market ideology, bitcoin was invented in 2008 when an unknown entity published a white paper under ...

transactions uncovered a link between major cryptocurrency exchange BTC-e and

Fancy Bear Fancy Bear is a Russian cyber espionage group. American cybersecurity firm CrowdStrike has stated with a medium level of confidence that it is associated with the Russian military intelligence agency GRU. The UK's Foreign and Commonwealth Offic ...

. 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 U.S. government that oversees the domestic enforcement of federal laws and the administration of justice. It is equ ...

used blockchain analysis to recover most of the ransom from the Colonial Pipeline ransomware attack. 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 Asian trade routes active from the second century BCE until the mid-15th century. Spanning over , it played a central role in facilitating economic, cultural, political, and religious interactions between the ...

dark web marketplace.

References

{{Reflist Blockchains