Blockchain analysis is the process of inspecting, identifying, clustering, modeling 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 interpret ...

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 adver ...

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, ...

. 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 di ...

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 cap ...

is typically conducted by private companies like Chainalysis.

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, 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 territor ...

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 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 di ...

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

Fancy Bear Fancy Bear (also known as APT28 (by Mandiant), Pawn Storm, Sofacy Group (by Kaspersky), Sednit, Tsar Team (by FireEye) and STRONTIUM (by Microsoft)) is a Russian cyber espionage group. Cybersecurity firm CrowdStrike has said with a medium level ...

. 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 Stat ...

used blockchain analysis to recover most the of 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 mon ...

s used blockchain analysis to seize over 50,000 Bitcoin stolen from the Silk Road dark web marketplace.

References

{{Reflist Blockchains