Regulation Guides


What is Chainalysis – the cryptocurrency crime detector?

Everything you need to know about how Chainalysis is fighting hard to eliminate crime and bring trust and transparency to the cryptocurrency industry

Since their debut more than a decade ago, cryptocurrencies have provided the financial sector with limitless potential. Sadly, every disruptive technology has a dark side, and cryptocurrency is no exception, with criminals exploiting its anonymity infrastructure to carry out illegal practices.

In reality, the majority of the factors preventing widespread acceptance of the numerous digital assets may be ascribed to the technology’s dark side. In some situations, a massive governmental crackdown is stifling cryptocurrency growth in some countries, while others are just terrified of the unknown. 

Remarkably, things have improved recently with solutions like blockchain analysis, which according to Wikipedia is a process of inspecting, identifying, clustering, modeling, and visually representing data on a cryptographic distributed-ledger known as a blockchain.

Notably, most cryptocurrencies are built on the blockchain and with this kind of analysis, it is easy to discover useful information about the different players transacting within a crypto network. 

It’s also worth noting that private firms are typically involved in research on public blockchains like Bitcoin, the original cryptocurrency, and Ethereum, as well as a variety of other altcoins. Interestingly, one of those companies to have constantly made its way to the headlines in this regard is Chainalysis. So, what is chainalysis?

What is Chainalysis? Understanding the blockchain data platform

Founded in 2014, by co-founders, Michael Gronager, and Jonathan Levin, Chainalysis is a blockchain-based data platform that helps government and private sectors detect and prevent the illicit use of cryptocurrency

With a presence across 60 countries, the New-York based company delivers services ranging from data management, software services, and research to government agencies, exchanges, financial institutions, and insurance and cybersecurity companies.

The crypto firm believes that by building trust between the key players – law enforcement, regulators, cryptocurrency businesses, and financial institutions – it can foster growth in the industry. 

Furthermore, being a data custodian, it can facilitate investigations, compliance, and market intelligence software capable of detecting and preventing illicit activities on the blockchain such as money laundering, terrorist funding, child exploitation, ransomware, and more.

The company is also prominent for solving some of the world’s most high-profile criminal cases, owing to its diverse product line that caters to various needs. In one of its biggest crackdowns, Chainalysis helped track down $1 billion worth of bitcoin linked to a darknet marketplace dubbed Silk Road, which was later confiscated by the US authorities.

How does Chainalysis solve cryptocurrency-related crimes?

Undeniably, cryptocurrency requires a high level of trust and transparency to reach its full potential. Chainalysis’ mission, however, is to achieve these fundamentals by developing clearer regulations, establishing standard audit practices, and implementing powerful compliance controls for cryptocurrency to maintain its current growth while properly fitting into the global financial infrastructure.

To achieve this, Chainalysis makes use of four different approaches including “Chainalysis Know Your Transaction (KYT),” “Chainalysis Reactor,” “Chainalysis Kryptos,” “Chainalysis Data,” all of which also makes up the company’s core features. So, how exactly does each of these features work?

Chainalysis Know Your Transaction (KYT):

Chainalysis KYT is an integrative API which if installed on a blockchain project enables the company to comply with local and global regulations.

By combining leading blockchain intelligence, an easy-to-use interface, and a real-time API, KYT can detect trends of dangerous activity such as frauds, darknet marketplaces, sanctioned addresses, and deviating transactions on a blockchain network. 

Additionally, KYT ensures that money withdrawals from blacklisted addresses and freeze deposits from hacks, scams, and ransomware are impossible. However, this ultimately depends on the anti-money laundry (AML) policy applied by the company. 

More specifically, KYT is more embedded in the compliance framework, and because every step leading to a compliance decision is documented, it is feasible to export the full audit trail and share it with the appropriate institutions.

Chainalysis Reactor:

This is by far the most popular function among the Chainalysis product list as it is employed to investigate, analyse, and link cryptocurrency transactions in the blockchain to real entities, as well as for monitoring.

Specifically, Reactor makes searches based on IDs. It can identify a wallet user by simply inputting a cryptocurrency address and automatically searches through hundreds of social media forums as well as darknets. In the event that a suspicious entity needs to be watched, Chainalysis uses its Reactor function to notify the appropriate authorities whenever a transaction is taking place.

Chainalysis Kryptos:

Because of the rising popularity of cryptocurrencies, the market is experiencing a surge in the number of new crypto projects, posing a greater danger to investors. However, the Chainalysis Krptos feature helps users to navigate the dangers of cryptocurrencies, ensuring that potential investors can reduce this risk.

This program accomplishes this by providing comprehensive profiles of bitcoin firms based on KYC (Know Your Customer) information as well as other industry-recognised and trusted blockchain data. 

Another unique feature of Chainalysis Kryptos is the ability to alert clients when the service provider(s) engages in suspicious behavior, allowing them to quantify the risk of transacting with them.

Chainalysis Data:

With more than 100 new services added to the crypto space every week, the risk of falling victim to scams is quite very high. According to Chainalysis, one-third of these new services are scams, most of which are either traced to the darknet market or other illegal services. 

Thanks to its extensive database, Chainalysis has been able to identify over 2000 unique services which collectively manage hundreds of cryptocurrency addresses worth more than $1 trillion. 

In addition, the platform also supports over 100 digital assets comprising approximately 90% of daily market volume, including Bitcoin, Ethereum, Litecoin, XRP, and some of the most popular ERC-20 tokens and stable coins. 

Notably, for any blockchain or token to be added to the chainalysis database, it must first, meet the platform’s strict requirement and standard for quality and coverage. With this in place, the platform’s innovative technology automatically connects each address to its authorised counterparties and keeps track of where money is exchanged.

Giving the availability of this database, chainalysis acts as a common ground for crypto businesses, banks, and law enforcement organisations around the world to access a pool of industry-wide data.  As a result, each member has a common and unrestricted knowledge as well as a full understanding of the industry’s broader scope.

Ultimately, Chainalsis is introducing transparency to a global economy based on blockchains, allowing stakeholders such as banks, businesses, and governments to have a shared understanding of how people utilise cryptocurrencies.

Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.