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Blockchain transaction analytics are critical for crypto companies and financial institutions that want to protect their transactions from illegal activity, minimize the risk of financial crime, and stay compliant. Analytics on blockchain transactions offer insight into how to apply financial regulations, including anti-money laundering (AML), helping to make transactions more secure and compliant.
Read on to learn more about blockchain analytics and how it works.
- The world of crypto financial regulation
- What is Blockchain Analytics?
- How does it work?
- Why is Blockchain Analytics Important?
The world of crypto financial regulation
The financial markets in which we operate are constantly changing amid geopolitical issues, exchange rates, individual stocks and many other factors. The growing number of cryptocurrencies make up one of the newest and most influential parts of global economies.
As cryptocurrency trading volume continues to grow, increasingly stringent and complex financial regulations are required, closing the gap and potentially surpassing current fiat currency financial regulations.
There are about 150 fiat currencies and 5000+ cryptocurrencies recognized by the International Monetary Fund (IMF). Regulations in the crypto world are not as developed as those governing fiat currency. In some jurisdictions, enforcement of crypto regulation can be lax. However, the increasing number of users means that there is increasing involvement of financial and government agencies.
When it comes to crypto financial regulations, the landscape varies around the world. In the UK, cryptocurrency transactions are regulated in terms of compliance with anti-money laundering laws – an extremely important practice for cryptocurrencies and financial institutions.
however, cryptocurrency is not considered legal tender in Great Britain. Bitcoin is defined as a ‘foreign currency’, so it is not illegal to trade it or other cryptocurrencies.
Some crypto asset markets are still unregulated even though governments and industry bodies are working together to create and enforce crypto market regulations.
In the United Kingdom, for example, crypto-asset trading is regulated for money laundering to counter the financing of terrorist groups, which falls under the jurisdiction and responsibility of the Financial Conduct Authority.
In contrast, regulations in the US differ, with different government authorities having different relationships with industry. FinCEN, for example, does not classify cryptocurrencies as legal tender, while the IRS views cryptocurrencies as property and has therefore issued tax guidance.
Due to the varying state of regulation and size of global crypto markets, what is needed is a technological methodology that allows traders, crypto businesses and financial institutions to capitalize on these growing markets while remaining protected and compliant. This is where blockchain analysis comes into play.
What is Blockchain Analytics?
Blockchain analytics is the process of analyzing, identifying and ‘clustering’ data on the blockchain – which is a cryptographic distributed ledger accessible to all. Blockchain analytics also models and visually represents data to identify key information about users and transactions.
This is all done to prevent illegal transactions such as money laundering and fraud. Blockchain analytics are carried out by private companies that ‘scrape’ blockchain data, which is all public. However, cryptoasset transactions made are inherently anonymous, so blockchain analytics companies help provide the data needed to match a transaction to a person or company.
This helps make cryptocurrency markets and transactions safer for everyone.
How does it work?
Blockchain analytics providers ‘scrape’ publicly available transaction data to link crypto wallets to illicit or criminal behavior.
Transactions are conducted using cryptocurrencies, a digital wallet that can send and receive payments. These are usually set up through a know-your-customer (KYC) process whereby the personal information of cryptocurrency holders is recorded and stored.
Once a cryptocurrency transaction is made, that data is on the blockchain forever. It cannot be changed or deleted. By removing these blocks, blockchain analytics link crypto transactions to illegal activities through certain markers such as cryptowallets that were previously linked to illegal transactions like drug trafficking or terrorist financing. In this way, the wallet or transaction is flagged and given a ‘risk rating’.
When a crypto business or financial institution works with a blockchain analytics provider, every transaction they undertake can be reviewed to provide a risk score for the crypto wallet in question.
If further investigation is required, the blockchain analytics provider can forward this type of information and analysis to relevant law enforcement authorities, who can link the identity to the anonymous wallet, via a Suspicious Activity Report (SAR). Since the transaction data in the wallet represents all transactions in which a particular cryptocurrency was used, it creates an end-to-end trail.
The wallet is tagged with a ‘typology’ by the analytics provider, linking it to specific illicit activity that will be flagged in future transactions. The provider will also create ‘heuristics’ that group data on transaction wallets with similar typologies.
When multiple wallets are owned by the same person, it helps to determine whether transactions carried out by different wallets actually come from the same place.
Collecting data on illicit transaction identifiers is a continuous process. Blockchain analytics is a key line of defense for creating a fair and legal crypto environment, helping to detect the source and destination of illicit funds.
Why is Blockchain Analytics Important?
All organizations working in the cryptoasset market, whether they are crypto businesses or financial institutions, must remain compliant. Blockchain analytics providers can help these financial institutions continue their compliance efforts.
Through blockchain analytics, compliance departments can identify fraudulent or illegal activity, protect themselves from risk, and work to create greater trust and transparency within the system to maximize opportunities for growth and profitability.
Tracking cryptoasset and wallet transactions using blockchain analytics now extends far beyond just Bitcoin, enabling data scraping across multiple cryptocurrencies and other digital assets such as tokens. Insight into the risk of cryptoassets offers visibility and better response time for traders, companies and institutions. This means you can inform and support your decision-making with immutable and actionable blockchain analytics data.
Learn more about Blockchain Analytics today
To explore the world of blockchain analytics further, check out our in-depth resource ‘Blockchain Analytics and Analysis – Staying Secure and Compliant with Cryptocurrency’.
In our resource, you can learn more about how blockchain analytics works, as well as some of the use cases. Learn how to identify terrorist financing or illegal trade using the technology, which companies benefit from it, and what the future of blockchain analytics looks like.
If you want to learn more from our very detailed resource, just click on the link below.
