The dangers of blockchain analysis – POLITICO

With help from Sam Sutton

In recent weeks I have written about “analysis on the chain“ of cryptocurrency, and what it can and cannot tell regulators about the mechanics behind the crypto financial crisis.

Analysis is an important part of the crypto industry. In theory, the shared public blockchain behind each cryptocurrency should give the system more transparency than traditional finance, and companies are looking for important information on how currencies flow. In practice, however, this data can only tell you so much, and even experts are often forced to rely on guesswork to fill in their understanding of what really happened.

The courts are now on a crash course in the frontiers of chain analysis, thanks to the DFinity Foundation, a Swiss non-profit organization working on a blockchain network called Internet Computer.

Last week, Dfinity sued the New York Times and Arkham Intelligence, a cryptocurrency research firm in the southern district of New York, alleging defamation and unfair commercial practices related to a June 2021 Times article about a crash in the price of blockchain tokens.

The complaint alleges a conspiracy – helped behind the scenes by an unnamed “uber-rich” party – to orchestrate misleading coverage of the Internet computer project. The alleged goal was to suggest that insiders earned as the price of the tokens fell, while average investors were left with their luggage.

According to the complaint, the Times article was based on Arkham’s misleading analysis of the project’s blockchain records.

Among the arresting details, the complainant claims that the authors of the insulting Arkham report have fled from Austin to London, where they “live – frat boy style – in a huge mansion.” It also quotes a website called “CryptoLeaks.Info” which claims to show people associated with Arkham who make incriminating confessions in undercover video footage.

The Times stands by its story. “We are confident in the accuracy of our reporting and plan to defend ourselves vigorously on this matter,” said Times spokeswoman Danielle Rhoades Ha. Arkham did not respond to a request for comment.

Corporate intrigue and private intelligence setup are nothing new in the financial world. But at the heart of the complaint is the allegation that the defendants misinterpreted the public on-chain data in a way that was detrimental to Dfinity.

Both sides seem to agree on the mere facts of what the analysis showed: That Tokens distributed by Dfinity to a small group of addresses were then quickly moved to addresses linked to crypto exchanges. The question is what it is meant. According to the complaint, the defendant erroneously insinuated that these movements involved large-scale sale of tokens by insiders. The complaint provides an alternative explanation: that the tokens were moved to wallets on stock exchanges for storage.

(There is also disagreement as to whether the Internet Computer Token qualifies as a security, an area for regulatory ambiguity too many blockchain tokens.)

Whether or not this particular case goes to trial, it is a sign that the courts will have to start fighting with the new discipline of chain analysis, as well as what can and cannot be fairly assumed from it.

Yesterday we linked to and essay by the University of Chicago Prof. Anthony Lee Zhang on the ways in which blockchains rob themselves of the role of contract enforcement by the state. The good news for the courts is that if this case is any indication, there will be enough second-order quarrels about what exactly happened at the chain to keep them in business for a long time to come.

Cryptocurrency Exchange Coinbase has quietly sold blockchain analysis and geospatial tools to the Immigration and Customs Enforcement Agency, throwing even more cold water on libertarian claims about the usefulness of crypto to avoid government oversight.

While Coinbase’s pressure to build relationships with federal law enforcement has been extensively covered, the cryptocurrency 63-page contract ICE provides “historical geospatial data” in addition to software tools that help break through the maze of blockchain-based transactions that can be used by criminals to hide illegal payments. The existence of the contract was first reported by The concept.

Coinbase CEO Brian Armstrong has been a vocal critic of government-led attempts to monitor and restrict crypto transactions in the past. In February, at the height of a truck driver protest that blocked downtown Ottawa and paralyzed trade between the United States and Canada, Armstrong encouraged people to transfer cryptocurrencies to self-powered digital wallets if they were worried that the Canadian government would freeze their accounts.

Coinbase spokeswoman Caryn Leahy said in an email that the firm provides law enforcement and financial institutions with “streamlined access to publicly available data” but does not share “internal or customer data”, and that Coinbase is “committed to protecting our customers’ information in a decentralized spirit” in which crypto was founded. “

– Sam Sutton

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