Follow the Digital Money: 4 Federal Use Cases for Blockchain Analytics

Cryptocurrencies and other blockchain-based digital assets play an increasingly central role in financial markets. They are also becoming a more frequent source of regulatory concern, as well as criminal activity.

This summer, the Justice Department announced enforcement actions in cryptocurrency fraud cases involving over $100 million in intended losses. The cases included a fraudulent investment fund that traded on cryptocurrency exchanges, a global Ponzi scheme involving the sale of unregistered crypto-securities, and a fraudulent initial offering of crypto-coins.

For federal agencies, blockchain analytics offers a road map for navigating this increasingly dangerous landscape. Specialized analytical tools provide real-time visibility into these often chaotic markets, exploding the myth of anonymity on the blockchain and providing a higher level of transparency to supposedly secret transactions.

In fact, some high-level regulators are pushing for the use of analytics to help deal with potential criminal activity related to digital assets. The New York State Department of Financial Services, for example, recently issued guidance encouraging virtual currency firms to use blockchain analytics to help set controls and meet anti-money laundering and sanctions-related compliance requirements.

Why Blockchain Analytics?

Volume and intricacies make it nearly impossible for human operators to untangle the deeply interwoven threads of activity on a blockchain. Where the human eye cannot possibly explain the scale and complexity of transactions, analytics can paint a clear and definitive picture.

Machine-scale analytics are perfectly suited to drill down, organize the data and present understandable insights. Data analysis tools make it possible to go deep into the complex web of transactions in a distributed ledger: see the jumps between transactions and identify the relationships between potentially thousands of exchanges.

Top Federal Use Cases

The following four key use cases illustrate the power of blockchain analytics in the federal sector:

Tracking and tracing: Law enforcement and internal investigators are already familiar with a key feature of data analytics: “Link Analysis.” In the global war on terror, analysts used this technique to connect the dots between key players, to gain clarity on the scope and activities of individuals who sought to keep their connections invisible to prying eyes.

In order for bad actors to exploit blockchain technology for criminal purposes, they must move assets between addresses or devices. Understanding how these nodes are connected represents the digital equivalent of link analysis. Where counterterrorism investigators used cell phone records to discover the ties between bad actors, blockchain analytics can scrutinize the activity of wallets to achieve the same goal.

Identify bad actors: The same techniques can be used in investigations into money laundering and fraud, so that investigators can see in detail where and how the money flows.

Analytics offers the ability to monitor transactions and detect suspicious patterns of activity. Because cryptocurrency is not truly anonymized, but rather “pseudo-anonymous,” analysts can use their ability to track illicit funds to find not only bad “actions,” but also bad “actors.”

Ensure compliance: Regulatory policy makers need to understand the varied activities that take place on a blockchain and how virtual money is shared. They need accurate insight into the economic activities of nations and individuals. Analysis tools provide the higher level of awareness.

With every piece of information coded, validated and stored, analytics offer the means to ensure compliance and track potentially nefarious activity. Given the rapid pace of cryptocurrency adoption, analytics will be necessary to drive a deeper understanding of where and how money flows. For regulators, analytics will build trust in the system, ensuring that all participants in the digital asset ecosystem operate in compliance with existing laws.

Evaluation of global trends and transfers: Regulators need a clear picture of economic activity at the macro level. The Ukraine crisis, for example, highlighted the need for nations to be able to understand and evaluate the transfer of funds on a global scale.

Along with their peers in the Department of Defense and the Department of Justice, financial regulators have a vested interest in increasing their ability to analyze these global economic trends. Analytics tools make it possible to literally see how money moves across the geographic map.

Blockchain represents a fundamental shift in the foundations of economic activity and will play a key role in supporting both law enforcement and regulators, in driving deeper insights, better decision-making and ultimately more effective actions for those affected by the growing use of digital assets.

Rupal Lamorena is Managing Director, Financial Regulatory Agency Account Manager and Alejandro Lira Volpi is Managing Director, Financial Services Strategy Manager at Accenture Federal Services. They are the authors of “Follow Digital Money: A Federal Guide to the Power of Analytics in the Digital Asset Economy.”