Chainalysis: Data and Smart Regulation Critical

The year 2022 was one of the most tumultuous in the cryptocurrency industry’s brief history.

It was a record year for another reason, too, as illicit crypto transactions hit a second consecutive all-time high, reaching $20.6 billion, compared to the sector’s previous high of $18.1 billion in 2021.

But it’s not all bad news, said Kim Grauer, head of research at blockchain intelligence and data platform Chainalysis, in a conversation with PYMNTS’ Karen Webster, noting that among the many different types of illicit activity being tracked, such as ransomware, scamming and hacking, it was actually sanctioning which represented 2022’s biggest illicit transaction category.

The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) “started designating major international services as sanctioned entities, and so billions of dollars in transactions received by those platforms post-designation are now tracked as illicit funds, a full 43%,” Grauer said. “What we’re seeing and what’s important to note is that most of the other crypto crime categories were actually in decline last year.”

It was her firm, Chainalysis, that put together the “2023 Crypto Crime Report,” covering in depth the digital asset industry’s illicit transactions.

“We’re dealing with, ‘How do we think about the activity of a sanctioned entity that is still operating in a jurisdiction where they don’t care about sanctions?’” Grauer said.

For example, OFAC sanctioned crypto exchange Garantex in April 2022, but as a Russia-based business, the platform has been able to continue operating.

Read more: Bad News for Fraudsters as US Boosts Crypto-Crime Toolkit

She emphasized that consumer protection is a big part of the crypto conversation, and there are several different dimensions around how to best enact those protections.

“With scamming, there’s a history of regulations that have proven to protect consumers … and there’s also technological solutions that can exploit the transparency of blockchains and alert consumers in a way that’s not available in traditional finance,” Grauer said.

“Scammers aren’t going to go away. Where there’s an opportunity for investment, someone will exploit that — it’s a fact of our world, and it exists in traditional finance too.”

She noted that consumer protection is only becoming more pertinent this year as broader crypto market integrity issues continue to rear their head.

“Can we trust major services to manage large amounts of funds when we’ve seen fraud and bad collateral for loans lead to bankruptcy?” Grauer said. “I think regulations will be a big part of that conversation.”

She highlighted that the “2023 Crypto Crime Report” found that many scams are undertaken by serial scammers, “so if you go after one scam, you can actually have a greater impact on taking down bigger scam networks.”

Having Data Is Crucial

As a blockchain intelligence platform, Chainalysis collects a lot of valuable and relevant on-chain and contextual data.

“Triaging all this information is what our product does,” Grauer said. “This is an international platform. … There’s a lot of collaboration that happens.”

Talking about some of the pitfalls of initial coin offerings (ICOs), which saw over 1 million new tokens brought to market in just the past year alone, Grauer said illicit pump-and-dump schemes are a function of anyone being able to participate in the crypto ecosystem.

“But the flip side of that is that we can go into the system and quickly identify the liquidity providers who are serially [pumping and dumping tokens],” she said. “It’s relatively easy to look at all of the data at scale, and that can present solutions.”

She underscored that Chainalysis is “very interested” in being at the forefront of making market integrity metrics more actionable.

The crypto industry has historically battled the ongoing perception that it serves as a haven for money laundering and other illicit activities around the globe, and Grauer said the industry has “certainly had a reckoning” over the past year.

“There’s now fewer and fewer exchanges that are available off-ramps for these illicit funds,” she said. “We saw a massive cleanup effort among many major exchanges to prioritize their compliance programs over the past year or two … and I think OFAC has really tapped into that by cutting off the money laundering off-ramps, forcing criminals to change their behaviors.”

North Korea-linked hackers alone made off with $1.7 billion of ill-gotten funds in 2022, and most experts agree the government is using the stolen money to fund its nuclear weapons programs.

As for how Grauer views the global regulatory landscape and the role state actors can play?

“I would first caveat by saying there’s a wide variety of levels we see with regulators around the world in terms of first dipping their toes into crypto and being eager to learn, versus real experts who live in the data and are very, very well versed in blockchain analytics,” she said.

The biggest pushback Grauer said she tends to get is that regulators “just don’t buy” that crypto has other use cases beyond enabling illicit activities.

“They say, ‘I don’t see the benefit; it’s only used by criminals,’ and that’s why we put out our geography and crime reports to show the real reasons people are using it — that it’s something you can transact internationally and instantaneously, and that a lot of these financial crimes are really very prevalent in traditional markets too.”

When asked what she’s looking forward to most, Grauer said it’s taking care of the low-hanging fruit.

“There’s a lot of cybersecurity cleanup that can be done,” she said, “and it’s really just a matter of adopting good cyber hygiene.”