analytics

What blockchain analysis can and can’t do to find FTX’s missing funds: Blockchain.com CEO

Peter Smith says the hardest thing to trace is the funds that enter the banking system.

Blockchain.com’s founder and CEO, Peter Smith, believes that on-chain analytics will play a significant role in locating the billions in missing FTX customer funds, though it will have its limitations.

On Dec. 20, Fox Business host Liz Claman said that blockchain’s selling point was that it makes crypto transactions transparent and traceable, and asked Smith what could be traced in the case of FTX’s missing customer funds.

Smith said that blockchain sleuths have already done a fair bit of work in chasing the money trail, adding that it could in fact be the banking system where the trail could turn cold:

“The most challenging thing for [blockchain analytics] firms working on this today is when money moves off chain and into the banking system because they’re no longer able to track it.”

He cited an example of when Sam Bankman-Fried or associates purchased real estate, as that would have originated from a bank. Those assets would be hard to trace back to FTX or a blockchain once they leave the crypto ecosystem, he said.

The interviewer also questioned whether shadow banking was used. This is a system of lenders, brokers, and other credit intermediaries operating outside the realm of traditional regulated banking, which can be used to mask transactions.

Smith explained that for funds still in the crypto ecosystem, on-chain analytics will be tremendously helpful to liquidators in their efforts to untangle the FTX mess, “since those are records that can’t be changed or altered.”

Things that can be traced on-chain include where FTX lost its customers’ money, such as in trading bets, liquidity farming or withdrawing it for real estate or venture investments. On-chain analytics can also be used to see how much crypto users deposited with FTX, he added.

“A lot of the money was lost in trading positions … real estate, venture capital investments … all of that occurs outside the on-chain ecosystem in crypto.”

In a related development, FTX’s new chief financial officer, Mary Cilia, told a procedural hearing on Dec. 20 that the firm has identified over $1 billion in assets.

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FTX reportedly located about $720 million in cash assets in U.S. financial institutions authorized to hold funds by the Department of Justice. Cilia stated that around $130 million was being held in Japan and $6 million was being kept for operational expenses. Most of the remaining $423 million are stored at unauthorized U.S. institutions — mainly at a single broker, she said, declining to elaborate.

Prosecutors and liquidators have been sifting through the FTX wreckage trying to claw back as much as $8 billion in missing customer funds.

Illicit cross-chain transfers expected to grow to $10B: Here’s how to prevent them

Forecasts predict cryptocurrency criminals laundering more than $10 billion through cross-chain bridges by 2025, leading to calls for holistic screening solutions.

Improved blockchain analytics will become increasingly important to combat the use of cross-chain bridges for illicit means, which are estimated to surpass $10 billion in value by 2025.

Blockchain analytics firm Elliptic forecasts a 60% rise in the value of illicit cryptocurrency laundered through cross-chain bridges from $4.1 billion in June 2022 to $6.5 billion next year. This figure is projected to double midway through the decade.

Cross-chain crime has been a major talking point in 2022 with over $2 billion fleeced in hacks targeting cross-chain bridges. Aside from these bridges and their contracts being targeted, these bridges have also become an avenue for criminals to launder cryptocurrency. A prime example is an unknown hacker moving stolen funds from the now bankrupt FTX using cross-chain bridges.

Cointelegraph unpacked the findings of research released by Elliptic in correspondence with senior cryptocurrency threat analyst Arda Akartuna. 

The Elliptic analyst explained that billions of dollars in assets have been transferred between Bitcoin, Ethereum and other blockchains using bridge services such as Portal, cBridge and Synapse. Decentralized cross-chain bridges offer an unregulated alternative to exchanges for transferring value between blockchains.

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While some bridges are used legitimately, Akartuna noted that the tools have emerged as a key facilitator in money laundering. ‘Chain-hopping’, or moving proceeds of crime between blockchains, has long been used to evade tracing efforts by exchanging cryptocurrency assets through decentralized or anonymous exchanges.

As blockchain surveillance, enforcement and regulatory efforts have improved, criminals have turned to cross-chains to continue laundering illicit funds:

“Decentralized cross-chain bridges provide unregulated alternatives that are being embraced by cybercriminals.”

Akartuna also notes that the sanctioning of cryptocurrency mixing service Tornado Cash has seen a shift in the way criminals launder money. Decentralized exchanges, cross-chain bridges and coin swap services are becoming a new means of moving illicit funds:

“Although the use of these platforms is overwhelmingly legitimate, they facilitate cross-chain money laundering and terrorist financing due to their lack of identity checks and anti-money laundering controls.”

An example of increased use of a cross-chain avenue for illicit means is RenBridge, which Elliptic research found to have laundered around $540 million of criminal proceeds as of August 2022. Meanwhile centralized exchanges, which also facilitate cross-chain or cross-asset swaps, are less popular for illicit actors given the push for AML and identity screening/KYC solutions.

The growing prevalence of cross-chain bridge usage for illicit means highlights the need for solutions or efforts to minimize criminal usage. Akartuna suggested users conduct due diligence on the services used to hop between blockchains and tokens and be wary of platforms associated with illicit activity.

Businesses should make use of blockchain analytics tools to screen addresses and transactions and set clear risk rules for their cryptocurrency usage. Nevertheless, there are some circumstances that simply cannot be predicted or avoided, as Akartuna explained:

“The sanctions against Tornado Cash is a prime example of how legitimate wallets may be inadvertently tainted due to sudden enforcement actions, as you now have ‘pre-sanctions activity’ which doesn’t carry the same risk as post-sanctions activity.”

Existing single blockchain analytics solutions have done a lot to combat money laundering in the cryptocurrency space but fall short of capabilities to trace, screen or forensically investigate transactions across blockchains or tokens.

As the Elliptic threat analyst highlighted, once an asset ‘hops’ to a different blockchain, investigations become significantly more complex and resource intensive.

“The risk here is that a wallet can hold any number of different assets, and legacy blockchain solutions are not able to automatically trace the activities of the same entity across separate chains.”

Screening the movement of funds on separate blockchains may see some assets flagged as sanctioned while others may show no risk. In theory, this could lead to an exchange or wallet user unwittingly transacting with a sanctioned entity.

Elliptic, for example, makes use of a proprietary analytics tool with ‘holistic screening’ capabilities which merges existing blockchains into an interconnected system. This allows for visualization and screening across chains to better detect the movement of illicit funds.

FTX debacle sees Nansen take stock of major exchange on-chain holdings

Blockchain analytics firm Nansen has released an overview of major cryptocurrency exchanges’ on-chain asset holdings and portfolios in the wake of FTX’s collapse.

The collapse of cryptocurrency exchange FTX has put industry peers under the microscope with calls for transparent accounts of token holdings and assets under management.

Major cryptocurrency exchanges like Binance, Huobi, OKX and Crypto.com have made efforts to share details of their assets and portfolios to assuage the wider space. This comes after investor confidence has been shaken, with users across the ecosystem moving Bitcoin (BTC) and other tokens off exchanges to avoid potential contagion from the FTX fallout.

Blockchain analytics platform Nansen provides industry insights and is known for its wallet-labeling features that track addresses across multiple blockchains. In a series of tweets posted on Nov. 15, Nansen listed seven major exchanges, their relevant portfolios and explanatory statements of accounts.

Related: Bitfinex CTO releases proof of reserves amid FTX bankruptcy fiasco

The assets and net worth of the exchanges are the sum of holdings in wallet addresses provided by the firms on blockchains that Nansen monitors. The analytics platform also notes that the figures are not an “exhaustive or complete statement of the actual assets/reserves held.”

The exchanges accounted for include Binance, Crypto.com, OKX, KuCoin, Deribit, Bitfinex and Huobi.

Binance, widely regarded as the largest global exchange by transaction volume, holds around $64.3 billion worth of assets across the Bitcoin, Ethereum, Tron and BNB Chain blockchains. This eclipses the other exchanges by a substantial amount.

Bitfinex has the second-largest asset holdings in reserve of the seven exchanges, according to data provided by the company. $8.23 billion of assets are held across the Bitcoin, Ethereum, Polygon, Tron, Solana, Acala, Avalanche, Cosmos, Fantom, Near, Terra and Terra Classic blockchains.

Huobi’s assets amount to a traced $3.3 billion across eight different chains. OKX reportedly holds $5.84 billion in cryptocurrency assets across the Bitcoin, Ethereum, Polygon, Arbitrum, Tron and Avalanche blockchains. 

Crypto.com holds an estimated $2.36 billion in assets across seven chains. KuCoin addresses account for $2.65 billion in assets on eight different blockchains, and Deribit holds around $1.46 billion worth of assets on the Bitcoin, Ethereum and Solana blockchains.

Nansen co-founder and CEO Alex Svanevik told Cointelegraph that the firm is planning to publish preliminary findings on the FTX situation this week. Nansen previously unpacked on-chain findings after the cataclysmic collapse of the Terra ecosystem in May 2022.

Man and machine: Nansen’s analytics slowly labeling worldwide wallets

Nansen CEO Alex Svanevik sat down with Cointelegraph for an exclusive interview during Token2049.

Public blockchains can be accessed and read by anyone, but creating meaningful insights from this data is no easy feat. Millions of transactions are recorded across a variety of chains and layer-2 protocols, creating petabytes of data daily.

Services like Google transformed the early internet, accomplishing a significant engineering task by structuring and curating millions of websites to serve simple user queries. A handful of blockchain analytics platforms are looking to do the same, with Nansen distinguishing itself by processing on-chain data into a growing database of wallet labels.

Cointelegraph visited the Singapore office of the growing firm during Token2049 for a one-on-one conversation with co-founder and CEO Alex Svanevik. Occupying a dedicated space in a co-working environment, the office was abuzz with employees in town from the company’s hubs in Lisbon, Miami, London and Bangkok.

Svanevik’s background is rooted in artificial intelligence. Graduating from the University of Edinburgh in 2010, the Norwegian’s dissertation focused on building models based on how children learn mathematics. His first foray into the world of work involved the establishment of a business-focused AI consultancy before moving into management consulting.

Nansen CEO and co-founder Alex Svanevik chats with Cointelegraph at Nansen’s office in Singapore during Token2049 in September 2022.

A stint as a data scientist for a media company preceded his eventual move into the world of cryptocurrencies, with Svanevik introduced to Ethereum in 2017. His first job for a cryptocurrency firm bankrolled by a $15 million initial coin offering lasted about a year, as the company became one of many to boom and bust post-2017.

Svanevik, Lars Krogvig and Evgeny Medvedev then teamed up to create Nansen AI, eyeing a gap in the market for an on-chain analytics tool aimed at investors:

“On the one hand, you had the free tools that all crypto investors had access to, like CoinMarketCap and Etherscan. And then on the other extreme, you had very expensive tools that were used exclusively by enterprises, like Chainalysis.”

Nansen was formed in late 2019 to provide high-caliber analytics tools to investors delivering blockchain data and insights in real time. Svanevik admitted that the platform originally attracted sophisticated cryptocurrency traders with large holdings but has since evolved to have a 50/50 split of retail and institutional users:

“We started with what you might call the ‘degens’ right before DeFi summer. A lot of them were using Nansen to navigate DeFi summer — which DeFi pools should you allocate your capital to, which tokens should you buy, and so on.”

The ongoing cryptocurrency bear market, which is mirrored by traditional stock markets, leads Svanevik to believe that Nansen’s sector will trend toward greater institutional use over the next two years. Individual investors may take a break from crypto and cut back on analytics services, but continued institutional investment efforts will demand data-driven insights:

“There are a lot of companies, funds, operators, and blockchain and crypto projects where the businesses that raise money are doing fine from a financial perspective. They’re not just going to wind down their operations because crypto tanks 70%. They still need to have really high-quality analytics and information.”

Labeling wallets 

Nansen has slowly garnered a reputation for its wallet labeling efforts across the cryptocurrency ecosystem. Again, this hardware and labor-intensive endeavor is a testament to the platform’s joint AI and human efforts.

Svanevik estimated that Nansen scans nearly a petabyte of data daily from the variety of chains it keeps tabs on. This also accounts for nearly 20% of the company’s running costs. Svanevik described Nansen as a “Google Cloud maximalist,” with the computing service being its infrastructure platform of choice since its inception.

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This speaks to the fact that despite public blockchains being available to all and sundry, there is inherent value in bringing order to data and gleaning valuable information from it. This is where Svanevik drew parallels to the platform and what Google did with the wider internet:

“If you think about Google as a search engine, every website is public, right? But this is a huge engineering task to actually structure, curate and serve up the relevant websites for your query. I think Nansen is somewhat analogous to that. But, we also have proprietary data that we enrich the public data with, which is kind of one of the things we’re known for.”

Nansen has over 130 million addresses that it has labeled with additional information directly accessible from blockchains. This allows the average user to find out which addresses are held by notable entities such as Binance, Alameda, Celsius and Hodlnaut, Svanevik highlighted.

When asked if the labeling feature was a focal point from the outset of Nansen’s existence, Svanevik noted that the first iteration of the platform was a database in which a user could look up addresses and get wallet labels:

“We realized that that alone is not very helpful. You need to combine it with the transactional data, and you need to have some kind of user interface, something that’s valuable.”

The evolution of Nansen’s platform was a result of combining “man and machine” into processes and an architecture to compile the information. A network effect led to compounding returns, as identified wallets that have been labeled often lead to the identification of other wallets interacting with them. Ninety-nine percent of this work is still done by AI, while Nansen’s research team plays a role in connecting the dots for the remaining 1%.

The labeling of wallets and individuals has also been a point of much debate in the wider cryptocurrency ecosystem. Privacy is an inherent value touted by blockchain technology, but the transparency of public blockchains means that analytics tools can now identify who is in control of specific assets and wallets.

Svanevik said that Nansen is mainly focused on labeling projects and corporations rather than individuals, save for those deemed to be notable public figures:

“We don’t really put a lot of effort into tagging individuals. If we do, it’s typically because they’re noteworthy. They’re founders of projects — imagine, you know, Do Kwon or Vitalik. These are notable public figures. And we think it’s in the public interest to have them labeled.”

The Nansen co-founder also believes that the labeling of wallets belonging to major exchanges, institutions and individuals has led to people becoming more privacy-aware. Curating, compiling and serving up information in a convenient way is the goal, which in itself raises some ideological considerations:

“There is a fundamental dilemma with transparency and privacy in blockchain, and something that people should think about and be mindful of.”

“Bad labels” vs “good labels”

Nansen is one of a handful of well-known analytics firms bringing sense and order to blockchain data. Distinguishing the product offering of these similar firms, Svanevik highlighted platforms such as Chainalysis and its focus on tracking the illicit use of cryptocurrency as a key difference from what Nansen focuses on:

“Chainalysis tends to focus on the illicit use of funds, what you might consider ‘bad labels.’ This is sanctioned, this is a scam, and so on. Whereas Nansen tends to focus on ‘good labels.’ This is a smart money address that you might want to follow because they made good investment decisions in the past, that this is a fund you might want to know about, and so on.”

Given that 99% of cryptocurrency transactions are above board, Nansen chose to focus on crypto-native investors and operators while market participants such as Chainalysis, Elliptic and PRM Labs cater more toward public institutions and government agencies.

Nevertheless, Nansen has played its part in analyzing major cryptocurrency events, including its role in tracing token movements linked to major firms during the infamous Terra crash in April 2022:

“LUNA is one example, where we had the labeled Terra data and we had Ethereum data to complement it because of the wrapping of LUNA and the curve pools that actually triggered the collapse of TerraUSD. But also things like Hodlnaut and their involvement in it and our ability to look into that.”

Nansen’s tools and its recently launched research department helped journalists at Tech in Asia piece together questionable practices by Hodlnaut, one of a number of cryptocurrency lending firms that shuttered in the wake of the Terra collapse in 2022.

Settled in Singapore

Cointelegraph’s in-depth conversation with Svanevik concluded with his take on Singapore as a cryptocurrency hub of Asia. Token2049 attracted thousands of attendees and certainly left the impression that the island nation, with its towering skyscrapers and futuristic buildings, is a center for the ecosystem.

Svanevik believes Singapore is in a unique position to be one of the world’s crypto hubs for a few different reasons. First and foremost, the country is “a place where finance meets tech,” which is in contrast to its closest Asian contender, Hong Kong, which Svanevik described as more finance-oriented.

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Regulators in Singapore are also aware of this fact. Having participated as a panelist at a recent Monetary Authority of Singapore event, Svanevik highlighted tight controls having both positive and negative effects:

“In the time I’ve lived here, they have become more strict. They are not with open arms, inviting in everyone who does anything with crypto. So, it is quite difficult to get a license here. There’s a long queue, and they’ve received quite a fair amount of criticism for that.”

While it’s a tough environment to set up shop, the Nansen CEO believes it puts the country in a good position to be a respected jurisdiction to operate out of.