What is Blockchain Analytics?

Blockchain analytics refers to the process of analyzing data from the blockchain, as well as the third-party tools that help organizations with this task.

This article will overview the history of blockchain analytics, giving account to why it rose and where it stands today; explain the major sub-sectors of the space, including KYC, due diligence, compliance, investigation, and attribution; and detail the two common ways that organizations use blockchain analytics solutions. 

Blockchain analytics: a definition

There are actually two meanings for blockchain analytics. 

On a basic level, blockchain analytics refers to interpreting and analyzing data from the blockchain. Blockchain analytics can be accomplished through three different means:

1. blockchain explorers 
2. third-party open source tools 
3. enterprise tools
   
   

With the advent of crypto crime, blockchain analytics has become increasingly synonymous with the third category. This sector is collectively known as blockchain analytics. Blockchain analytics enterprise tools provide solutions that help businesses, law enforcement agencies, regulators, and other organizations with value-added features that simplify analysis of blockchain data. For example, some blockchain analytics solutions visualize the movement of funds, making it easier to understand illicit money trails. 

A history of blockchain analytics 

When crypto first arose in 2009 with Bitcoin, blockchain  technology was heralded for its decentralization and anonymity. While these traits appealed to users, they also made it a natural fit for criminals. Criminals could use crypto to more easily launder funds across borders and do so more quickly. For example, ransomware operators could request for the ransom to be paid in Bitcoin, or hackers could steal coins and exchange them for fiat down the line. 

To combat the rise of crypto crime, investigators had to engage in blockchain analytics. At the beginning, this process was done through blockchain explorers—the “public ledger” of a blockchain. This method was difficult. In the same way that it would be challenging to detect financial fraud through a spreadsheet, so too was it tough to discern the movement of illicit funds from a blockchain explorer.

There were third-party, open source tools that provided additional features, but these too proved insufficient for crypto investigators. The needs of blockchain analytics could only be met through paid tools, so there would be financial support to continually develop the product. Criminals, after all, were always becoming increasingly sophisticated in how they used the blockchain to evade authorities, such as through the use of coin mixers and other obfuscation strategies. 

Blockchain analytics tools are created by vendors with core competencies in two broad areas: software and cryptocurrency. With this expertise, they create solutions that make it easier for companies, law enforcement agencies, regulators, and other organizations to monitor transactions, vet retail and institutional customers, and identify and track suspected criminals. 

Popular features and capabilities of blockchain analytics tools

While blockchain analytics is the overarching category of tool, some tools only offer one or two capabilities. Below, are some of the most commonly found features of blockchain analytics tools: 

• Know Your Customer (KYC) - Every person who has signed up for a bank has gone through a KYC process. Crypto companies are also employing KYC solutions to better understand the risk profile of their retail customers. This process may be composed of multiple steps. Customer applications may be automatically cross-referenced against existing blacklists. Their documents may be verified for any signs of fraud or forgery. Certain types of customers, such as politically exposed persons (PEPs) or high net worth individuals (HNWIs), may be subject to additional steps that require additional screening. Based on the KYC, some applicants may be outright banned, while others will be monitored based on their level of risk. 
• Due diligence and Know Your Blockchain Business (KYBB) - It’s not only retail customers that are deserving of scrutiny. Institutional customers or partners also represent a significant level of risk. For example, if one has previously funneled funds to terrorist organizations, doing business with them may make your business complicit in this illicit trail. Businesses thus need to conduct due diligence on enterprises they work with. While this can be done manually, the sheer amount of crypto businesses operating today makes this impractical. Businesses therefore usually adopt a blockchain analytics solution that focuses on due diligence, often referred to as KYBB. Like KYC, these solutions give a risk assessment on potential customers and partners, so businesses can take appropriate action.
• Compliance and regulation - Cryptocurrency regulation is rapidly advancing throughout the world. There are many jurisdictions with different regulations relating to digital assets, especially with regard to anti-money laundering (AML) or counter-terrorism financing (CFT). It is important for businesses to comply with AML, CFT and other regulatory requirements or they face the possibility of financial penalties and other punishments. Blockchain analytics simplifies this task. This area of compliance may involve screening customers and transactions for possible links to terrorist organizations and other sanctioned entities. It may also involve monitoring transactions for behavior consistent with money laundering or other illegal activities. With the right tool, businesses can stay on the right side of regulatory law. 
• Investigation - Upon the occurrence of a crime, crypto investigators must launch an investigation, which involves a variety of stakeholders. Investigation typically begins with blockchain data. Crypto investigators will follow the money trail with the aim of identifying who was involved in a crime, what they did, and where the funds went. To serve this goal, blockchain analytics can visualize the movement of funds, creating a more intuitive dashboard for crypto investigators to analyze. Such dashboards can be shared with other stakeholders in the investigation and used to launch enforcement action. For example, if they determine that illicit funds went to a certain exchange, law enforcement can freeze the funds or recover them for victims. 
• Attribution - Apart from the initial evidence gathering, blockchain analytics also plays a crucial role in the end game of any investigation: attribution. This term refers to the process of linking accounts or wallets, which are pseudonymous, to real world suspects. This linking is crucial. With attribution, investigators and prosecutors can arrest suspects, hold them in prison, charge them with different crimes, and convict and sentence them for their crimes. While one would assume that attribution is a natural extension of any blockchain analytics solution, this is not always the case. Some are not transparent about how their technology works, making it difficult for investigators to use in the legal process. Judges cannot accept evidence from blockchain analytics solutions that are not open about how they operate. 

Approaches to choosing a blockchain analytics solution 

There are two general approaches to selecting a blockchain analytics solution:

1. The blockchain analytics stack - In the same way that companies can have a marketing stack composed of different solutions, many in crypto elect to build a blockchain analytics stack. They get their KYC solution from one provider, their compliance from another, and their investigation from still a different partner. 
   
   The upside to this approach is flexibility. The downside is the administrative work involved. For each solution, businesses will have to go through separate procurement, training, and customer support processes. This effort can be draining. Imagine asking your employees to learn the nuances of five different solutions in blockchain analytics, each with its own training and development.
   
   There is also the problem of compatibility. Just because the business chooses them as part of their blockchain analytics stack does not mean they will work seamlessly with one another. For example, the KYC product may flag a product as high risk, but this information is not passed on to the product responsible for monitoring, leading to the customer committing money laundering through the platform.
   
   The blockchain analytics stack often results in a Frankensteined mess of solutions that create more problems than they solve.
   
   
2. The end-to-end solution - Many platforms position themselves as all-encompassing blockchain analytics solutions. The danger here is that this is only lip service. The business will obtain the solution only to find out that a crucial module, such as due diligence, is missing.
   
   If a business does its vetting process thoroughly and avails of a product that is truly comprehensive, there are multiple benefits. The first is operational simplicity. The business will only have to train on one product, interact with one team for customer support, and go through a learning curve once.
   
   Another major benefit is compatibility. Since all the modules are built under the same umbrella, they will work seamlessly together. Businesses can choose KYC, due diligence, compliance, investigation or attribution modules with the full confidence they will integrate thoughtfully with one another.
   
   Merkle Science is the leading end-to-end blockchain analytics tool Our product catalog includes four products: 
   
   

1. compliance solution Compass
2. investigation and attribution solution Tracker
3. due diligence solution KYBB
4. and even training service Institute 
   
   With Merkle Science, businesses benefit from a one-stop shop through which they can address all their needs in blockchain analytics. 

The future of blockchain analytics 

Blockchain analytics will arguably always be one of the fastest growing areas of tech due to the nature of crypto crime. Criminals are always developing new techniques to steal, launder, and evade authorities. 

Blockchain analytics must grow in response, so that these solutions will have the same effectiveness for crypto investigators. Businesses that want the latest technologies should stick with an end-to-end company like Merkle Science. With our product suite, crypto investigators will gain the advantage that matters the most in any cat-and-mouse-style game: They will remain one step ahead.  

For a free demo on any Merkle Science product, contact us today.