The power of analytics in the digital asset economy

Cryptocurrencies and other blockchain-based digital assets play an increasingly significant role in financial markets and the broader economy. They are also becoming a more frequent source of regulatory concern and criminal activities. These trends present substantial challenges for federal regulators and law enforcement alike. At the same time, for those who learn to leverage the insights these complex transactions generate, the trends also create new opportunities to perform their missions more effectively. Over the months and years to come, federal agencies will need to scale and institutionalize their early advances in understanding these transactions to keep pace with the market’s rapid growth.

Those at the forefront of tackling these issues have already discovered that specialized analytical tools can unlock tremendous insight, providing real-time visibility and investigatory focus into these often-chaotic markets. The next step forward is leveraging data analytics at greater scale to eliminate the perception of anonymity on the blockchain and bring a higher level of transparency to these marketplaces.

This report examines the types of insights that blockchain analytics can deliver. We also share steps federal agencies can take to scale their efforts and increase operational maturity. These steps can empower federal leaders to understand, regulate, and monitor these markets more effectively without inhibiting appropriate business activity and economic growth.

Traditional encryption creates opacity: One cannot perform analytics on data in an encrypted or protected state. Tokenized data, on the other hand, retains its referential integrity and statistical distribution, meaning it is ripe for analysis. Blockchain analytics offers a means to peer behind the curtain, as the use of tokenized data continues to expand.

Blockchain analytics will leverage the familiar data analytic toolsets and expand upon these capabilities. In addition to the standard analytical tasks — preparing data, running algorithms, producing reports, and generating predictions — on-chain analytics will lean heavily on a technology known as a graph database.

Law enforcement and internal investigators are already familiar with a critical capability in data analytics: Link analysis. In the global war on terror, analysts faced an urgent need to connect the dots between key players, to know who was talking to whom, to gain clarity around the scope and activities of individuals who, while networked together, sought to keep their connections invisible to prying eyes.

For bad actors to exploit blockchain technology for criminal purposes, they need to move assets between addresses or entities. Understanding how those nodes are connected represents the digital equivalent of the link analysis activities with which law enforcement and national defense are familiar with. Where counter-terror investigators used cell phone records, for example, to discover the ties between bad actors, blockchain analytics can scrutinize the activity of wallets, represented as nodes in the graph database, to achieve a similar outcome.

These same techniques can elevate the impact of investigations around money laundering and fraud, both in support of compliance and crime-fighting. The digital version of link analysis makes it possible to see where and how the money flows in detail.

Analytics offer the ability to monitor transactions and detect suspicious patterns of activity. Because cryptocurrency is not truly anonymized but rather "pseudo-anonymous," analysts can use their ability to follow illicit funds to find not just bad actions but also bad actors. While criminals may use a range of tools to disguise their illegal activity — using non-compliant exchanges to move funds or running multiple wallets to cover their tracks — analytics can peer deeply into such activity to surface a clear picture for investigators.

Regulators and their enforcement agencies are tasked to ensure that digital asset transactions comply with all relevant financial rules and regulations. Analytics is a proven tool to ensure compliance.

Regulatory decision-makers need to understand the varied activities unfolding on a blockchain and how virtual money is shared to be effective. They need accurate insights into the economic activities of nations and individuals, and analytic tools such as the graph database offer that higher level of awareness.

Regulators need a clear picture of economic activity at the macro level too. With more of that activity happening daily in virtual currency, blockchain analytics rises to the fore.

The Ukraine crisis illuminated the need for nations to be able to understand and evaluate the transfer of funds on a global scale. Along with their peers in the Defense Department and the Department of Justice, financial regulators have a vested interest in elevating their ability to parse out these global-scale economic trends. Visual analytic tools make it possible to see how money literally moves across the geographical map.

Given the scale of transactions on the blockchain, combined with the rapidly accelerating adoption of digital assets, impacted agencies cannot afford to make blockchain analytics a bespoke tool available to only a handful of specialized individuals. They should be looking instead to implement analytics at scale.

Some are already seeking to achieve this by centralizing their efforts. They're establishing crypto hubs, digital asset labs, centers of excellence, and even dedicated Offices to guide their actions. A center of excellence ensures all the needed talent is gathered in the right place and the agency's efforts are aligned across all its mission sets.

The center of excellence can also be the front door to interactions with industry players. Strong relations between agencies and industry will be essential as government looks to implement blockchain analytics at a meaningful scale. Vendors will have their finger on the pulse not only of the changing use cases — how both legitimate and illegitimate actors are putting digital currency into play — but also into emerging capabilities. Agencies can look to industry to support them with the best, most current tools as they seek to operationalize blockchain analytics on a scale needed to impact mission outcomes.