Crypto transaction volumes are still close to all-time highs, despite the crash in markets earlier in 2022. As transaction volumes continue to grow, the problem of fraud and illicit activity continues to be a problem. Recent security breaches like the $190 million Nomad bridge hack erode confidence in the cryptocurrency ecosystem, and governments have introduced strict regulations around reporting and investigating criminal activity on the blockchain.
With the recent addition of Tornado Cash to the OFAC sanctions list, it’s more important than ever for financial service companies to monitor the flow of funds on their platforms to ensure they aren’t facilitating money laundering and other illicit activities.
But how do they actually do this, given that data on most blockchains are supposed to be anonymous, or pseudonymous?
Combining public and private data layers
Most companies take a similar approach. In order to figure out whether crypto transactions coming into the platform are from criminal activity, companies need two types of data.
The first is public data from the blockchain. This shows what tokens have been transferred, and from which addresses. Companies can use this information to back-trace funds to their source to find out where the funds being deposited on their platform are coming from.
The second is private data obtained from blockchain analytics companies. This data maps addresses on the blockchain to real-world entities and suspected bad actors. There are a handful of companies that offer this data, including Elliptic, Chainalysis, and TRM labs, which charge a hefty fee for access to APIs and tools that make it easy for companies to access this data layer.
With these two types of data, compliance and risk analysts can figure out where funds are coming from, and also what entity controls the funds.
Is this data available for the general public?
Unfortunately, blockchain analytics companies tend to keep their proprietary data close to the chest, as it’s how they make most of their revenue. As an individual, there’s no easy way to figure out if an address you’re interacting with is safe or not. This will need to change when crypto payments become mainstream, but until then your best bet is to DYOR!
