Crowell’s Crypto Digest asked Chainalysis, Inc., the world’s first and largest blockchain analytics provider, to give us a brief overview of the transformative compliance and investigation tools they can provide to financial institutions and legal counsel. The following post was graciously prepared by the Chainalysis team. Crowell & Moring is both a user of Chainalysis tools and legal services provider to Chainalysis.
Blockchain technology is commonly described as providing a completely anonymous mechanism for transacting, which often leads to criticism that it facilitates illicit activity without accountability. However, with the right data and tools, the blockchain can provide greater transparency and traceability than is available in traditional finance. Since 2014, Chainalysis has been providing law enforcement, compliance professionals, and lawyers with the data and tools they need to manage risk and investigate suspicious activity within the cryptocurrency ecosystem.
How do we do it? Using machine learning, dedicated forensic experts, and an extensive customer network, Chainalysis continually attributes cryptocurrency addresses and transactions to real-world entities, enabling law enforcement, governments, and others to trace the flow of crypto between counterparties.
The dataset is used tactically, to identify and disrupt illicit activity, and strategically, for an intelligence function to understand emerging risks and threats. Where are ransomware attackers cashing out? How are scammers defrauding victims? Which darknet markets are growing fastest? Chainalysis’ massive collection of designated data has been used to solve some of the most high-profile cases in cryptocurrency’s history. Working with Chainalysis, government agencies have recovered over $9 billion of funds from hacks, scams, and other illicit activities facilitated by convertible virtual currency.
Blockchain analytics also power valuable compliance tools to detect and prevent money laundering and other forms of financial crime. Chainalysis’ compliance and due diligence resources are used by financial institutions and crypto-native businesses to reduce risk and illicit activity and to meet regulatory and risk-management requirements related to anti-money laundering (AML), counter-terrorism financing (CTF), and sanctions exposure. FinCEN, the Financial Action Task Force, and the Office of Foreign Assets Control (OFAC) all recommend blockchain analytics to account for the dynamic AML risks present in cryptocurrency and to screen for any possible nexus to sanctioned entities.
For that reason, Chainalysis is the blockchain analytics tool used by OFAC and many other US government and law enforcement agencies. In OFAC’s sole source letter, they write, “Chainalysis’ use by key industry, US Government, and foreign partners necessitates OFAC’s use of the same tool to be able to collaborate easily and seamlessly with these partners in investigations and anti-money laundering and terrorist finance inquiries.” Annex B of the Department of Justice’s (DOJ) June 2022 Report discusses successful examples of cross-border collaboration to disrupt crypto-currency related cybercrime. The Report specifically mentions Colonial Pipeline, AlphaBay/Hansa, BTC-e, Silk Road, NetWalker Ransomware Disruption, Hydra Market, and the Twitter Hack. Chainalysis worked with law enforcement to trace and solve each of these cases.
An investigation is only as successful as its prosecution, and a recent case out of the Northern District of Georgia, United States v. Felton, sets a precedent that blockchain analyses can be used in much the same ways as texts, emails, and other forms of electronic evidence. Increasingly, attorneys are utilizing blockchain analytics to improve outcomes for their clients, and better collaborate with law enforcement and government agencies.
Crowell has direct experience using Chainalysis data that was integral to the tracking, tracing, and ultimately seizing for a client over USD 10 million of stolen cryptocurrency. The currency flows and related data allowed Crowell to prove to the US Secret Service, DOJ, several overseas trading platforms, and ultimately a US federal court, that certain funds were stolen and must be returned to the victim of a crime. In another ongoing Crowell representation, Chainalysis data and analysts were also critical in uncovering what appears to be a large-scale cryptocurrency Ponzi scheme with a significant number of victims.