Table of Contents
While growth in the cryptocurrency market has repeatedly exceeded expectations, concerns continue to linger over its pseudonymous nature, the lack of accountability and transparency, and the ease of conducting illicit transactions on blockchains.
According to Ulisse Dell’Orto, managing director APJ (Asia Pacific & Japan) at Chainalysis, the identification of illicit activities on blockchains could prove to be a crucial step towards mainstream adoption.
Chainalysis conducts data-driven investigations into stolen funds, ransomware attacks, and other forms of blockchain misbehavior including wash trading via NFTs and money laundering on DeFi protocols.
It does this by mapping the different stakeholders on-chain which could be individuals or services (transacting on-chain), Dell’Orto explained, in a conversation with Blockhead.
“In the case of an illicit activity, for example, a terrorist financing operation, it’s connected to the illicit activity part. Through the mapping of services on-chain, we can determine which ones are licit or illicit. We also make analysis of both direct and indirect exposure to these services.”
It then offers this information to cryptocurrency exchanges or regulators. “For example, a law enforcement agency can send a subpoena for information to a cryptocurrency exchange, and then the exchange, based on the request, can decide whether to share that information,” Dell’Orto said.
“Chainalysis does not collect any kind of information whether directly or indirectly for our customers. We only map services”, he emphasised.
According to a recent report by the company, cybercriminals laundered at least US$8.6 billion in cryptocurrencies in 2021 – a 30% jump in money laundering activity from the year before. Decentralised protocols received 17% of crypto sent by illicit addresses last year, up from 2% in 2020.
Despite the increase in money laundering activities, Dell’Orto pointed out that the amount of illicit transactions, as a fraction of overall activity on-chain, has decreased.
“We’ve seen an all time high growth in terms of illicit activity on-chain – $14 billion this year. But if we look at the numbers more closely, the percentage of illicit activities with respect to the overall number of cryptocurrency in terms of dollar value is 0.15%. That means that only 0.15% of the transactions happening on chain on a daily basis are connected to illicit activities. This is very important data because it shows that it’s actually just a minority of transactions.”
Bullish on DeFi
Dell’Orto is nevertheless bullish on DeFi, citing the emergence of transaction monitoring solutions as a possible catalyst for increased security on DeFi protocols.
“DeFi has seen tremendous growth. We’re talking about over $200 billion locked in DeFi smart contracts. That number will go up to $1 trillion within the next 12 to 18 months, probably to trillions within the next 24 months.”
“When you have a new technology, a new trend, there will be several disruptions during its infancy. We’re seeing what we used to see a couple of years ago when a lot of exchanges were getting hacked because they probably didn’t have the right security measures in place or transaction monitoring solutions like Chainalysis. What’s happening now is that DeFi protocols are becoming more sophisticated – focusing on security and tackling this issue.”
DeFi is “definitely the future of finance”, Dell’Orto said, adding, “It can actually help traditional financial institutions to become more innovative.”
Mainstream crypto adoption hinges on regulation
While some may wish to see cryptocurrencies remain as an anti-establishment revolt, Dell’Orto argues that institutional investment is key to the mainstream adoption of cryptocurrencies. And the best way to attract that capital, he believes, is through regulation and enforcement.
“One misconception that we see in the industry is that regulation disrupts and limits the growth of cryptocurrency. That’s true in the short run, but it’s absolutely necessary in the long run. The reason is because different jurisdictions and the industry in general need to attract institutional investors in order for cryptocurrencies to become even more mainstream and grow further.”
Dell’Orto also expects that blockchain data analysis firms like Chainalysis will be able to help regulators construct their policies and understand what the boundaries are when it comes to transaction monitoring on-chain.
“It creates confidence in the space. The fact that you’re able to trace transactions like you could never do in the fiat world definitely helps banks become more comfortable with the industry. It’s also for regulators to define the right policies for the growth of the industry”.
It’s a common sentiment in the crypto community that the decentralised web should not be dependent on regulators and institutions. But according to Dell’Orto, regulation will be crucial for Web 3.0 to succeed, particularly in relation to transparency, traceability, and security.
“That’s one of the criticisms that Chainalysis had, especially at the beginning when people thought that tracing transactions would go against the nature of blockchain or cryptocurrencies. We have to be real here. Institutional players will not invest in the industry unless there is better transparency and traceability, which is what a lot of these protocols are working on today.”
Founded in 2014, Chainalysis is a blockchain analytics firm providing data, software, services, and research to government agencies, exchanges, financial institutions, and insurance and cybersecurity companies in over 60 countries. Its customers include the UN Office on Drugs and Crime, financial institutions like Barclays, and cryptocurrency businesses like Gemini and Bitpay.
