Based on a recent report, crypto-related crimes have resulted in stolen funds of over US$4 billion in the first six months of the year 2019 alone. These illicit activities range from sophisticated hacks, phishing, viruses to exit scams, according to the Cryptocurrency Anti-Money Laundering report released by CipherTrace. 

Although cryptocurrency exchanges, wallet service providers, and other crypto-related platforms continue to employ advanced techniques and strategies to tighten their security, perpetrators remain undaunted as they continue to develop and innovate new ways to do execute their crimes, by bypassing advanced cybersecurity protocols.

Smart contracts are also facing increased adoption across industries, wherein their trustless and decentralised framework provides a fast, frictionless and secure means of transacting. However, despite their increased adoption, specific measures need to be taken to address the increasing rate of potentially illicit use in the ecosystem, to protect investors and users from the risks and downsides.

In gist, while a blockchain, by nature, provides transparency, a lot of things are muddled, which can lead to confusion and the potential for fraud.

“Right now, a blockchain’s transparency is clouded by its complexity,” says Alan Durnev, Chief Technology Officer, PARSIQ, a blockchain analytics and monitoring company. “Tools have not previously been available that allow developers to simply and quickly create automated triggers or program complex logic conditions that will act in realtime to give new insights and more advanced levels of monitoring than are currently possible.” 

Transparent, and yet obfuscated

A decentralized framework, transaction transparency, and immutable record keeping are among the significant benefits offered by blockchain technology. However, great as these are, decentralization also poses a great challenge, in terms of oversight and visibility.

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Case in point: Cryptocurrencies have become the preferred means of paying for illegal goods or money laundering. Dark web operators have accepted crypto as payment for illegal activities like drugs and illegal firearms. There are even so-called “tumbler services” dedicated to laundering money. Even unregulated exchanges can be exploited to obfuscate money trails.

The pseudo-anonymous framework that blockchains provide is, in essence, beneficial, although this can easily be exploited for unwanted activities. Criminals and terrorists have been known to use this feature to their advantage, because it is difficult, if not almost impossible, to trace identities behind transactions.

“Regardless of the source, nature and size of the cybercrime proceeds, the cryptocurrency ecosystem is used as part of the anonymisation or layering process a cash-out strategy entails. Already upon exchanging these proceeds for cryptocurrencies, the money trail becomes obfuscated,” writes Rolf van Wegberg et al, in the Journal of Financial Crime.

Why we need real-time blockchain analytics

Several measures can be used to strengthen the security and integrity of the blockchain ecosystem. More often than not, preventive measures will be better — we need the ability to monitor and analyse blockchain transactions both in a historical and real-time basis.

This means effectively keeping tabs on activities across blockchains (and here, we emphasize the need for cross-chain analysis), to have a better understanding of what really happens, both in terms of big-picture, and spotting trends in the minutest of details. As a result, this makes it possible to spot unusual transactions or activities before they reach scale.

“To date, there has been a lack of sophisticated tools that have the automation and deep analytics necessary to perform monitoring of blockchain at scale and in real-time,” says Anatoly Ressin, Co-Founder, PARSIQ. “The absence of such monitoring tools give room for unimpeded execution of criminal activities in the crypto world.”

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One potential beneficiary here would be law enforcement agencies. Analytics will provide better visibility over potentially illicit transactions. Regulators can also spot potentially fraudulent activities even before they are carried out. This also includes having the ability to trace all the players involved, even though all the obfuscation.

“The industry needs some very user-friendly tools so that you can track bitcoin transactions and see if this bitcoin address that you’re getting money from is green or black,” says Valery Vavilov, CEO of Bitfury Group.

Outside of law enforcement, real-time visibility will also enable investors to make informed data-driven decisions. According to recent reports, for instance, cryptocurrency exchanges have been artificially inflating the volume of their transactions, thus driving up arbitrage and crowding out potentially more meaningful indicators.

In June this year, Bitwise reported that “10.5 billion dollars out of the 11 billion dollars in reported daily volume (or – 95 per cent) are either fake or wash trading.” It’s a numbers game, and the positive feedback loop may be giving artificially optimistic indicators, which might not otherwise be sustainable.

Toward better mainstream acceptance

Real-time visibility and analytics will enable investors to make a better assessment of the health of the various digital assets of interest before actually making a trade or deal.

Distributed ledger technology will truly gain mainstream appeal once the community is given assurance that they have 100 per cent visibility over transactions across blockchains. “Right now, the effort and complexity associated with block explorers mean that blockchains remain opaque.

Currently available tools, like block explorers, are lacking the automation and deep analysis features necessary to perform quality monitoring of blockchain at scale and in real-time,” says PARSIQ’s Ressin, whose goal is to “give new insights and extending the level of monitoring that is currently possible.

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Cross-chain monitoring technology, automation, and deep analysis will be necessary to perform quality monitoring at scale and in real-time, in order to provide a better understanding of what goes on in the blockchain ecosystem. Actionable insights will enable us to make better decisions, prevent unwanted blockchain events, and have the ability to deep-dive into a past activity that may warrant further actions.

These monitoring tools will make blockchains safer, help reduce the volatility of cryptocurrencies, and reduce manipulation in the ecosystem. It’s another step towards encouraging more widespread adoption of the technology.

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