Blockchain Forensics Firm Chainalysis Offering "Suspicious Transaction" Alerts For 15 Cryptocurrencies, Compromising Anonymity And Freedom
The blockchain forensics firm Chainalysis has announced that they are offering “suspicious transaction” alerts for 15 different cryptocurrencies, including Bitcoin, Ethereum, Bitcoin Cash, Litecoin, top stable coins, and some ERC-20 tokens. What this essentially means is that after Bitcoins are purchased on a regulated platform like Coinbase or a Bitcoin ATM, they are then tracked to see if they are being used on the Darknet or for other illegal things like money laundering and tax evasion.
Indeed, government agencies are pouring tens of millions of dollars into blockchain forensics firms such as Chainalysis, Elliptic, Coinfirm, Blockchain Intelligence Group, CipherTrace, and Scorechain. These government agencies include U.S. Immigrations and Customs Enforcement (ICE), Internal Revenue Service (IRS), Federal Bureau of Investigations (FBI), Drug Enforcement Agency (DEA), Bureau of the Fiscal Service, Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC).
Breaking this down, the IRS is tracking cryptocurrency activity in order to increase the taxation of cryptocurrency users. The cryptocurrency tax code in the United States is quite complex, time consuming, and expensive, and it seems a large fraction of cryptocurrency users have not paid taxes at all due to that. The IRS uses blockchain forensics in order to make a case to audit cryptocurrency users, and this may be connected to the 10,000 warning letters recently sent out to cryptocurrency users across the country. Apparently Coinbase, the biggest retail crypto exchange in the United States, handed over all user data from 2013-2017 to the IRS.
The ICE, DEA, and FBI are all involved in trying to bust the Darknet, so it is no surprise that they are using blockchain forensics to track down cryptocurrency transactions that are being sent to the Darknet, since that can provide evidence to take down criminals that are otherwise highly anonymous.
The SEC and CFTC are involved in regulating the cryptocurrency markets, so they use blockchain forensics to track any unregulated cryptocurrency trading and investment, continuing their efforts to completely centralize the cryptocurrency market into the hands of a few big players that are fully know your customer (KYC) and anti-money laundering (AML) compliant.
Zooming out, the rise of blockchain forensics is another step in the government’s attack on the cryptocurrency economy. It perhaps started when peer to peer Bitcoin trading, like on Localbitcoins, was outlawed. This led to Bitcoin trading only being legal on major exchanges like Coinbase where the full identity of users is collected, from which point user identitification data and their transaction activity is accessible to any government agency that wants it. Now blockchain forensics are making it so any Bitcoins which originate from regulated venues can be easily tracked, compromising the pseudo-anonymity of the Bitcoin network.
In fewer words, the government has worked to ensure that people can only obtain Bitcoin at fully regulated venues, and now blockchain forensics is being used to track Bitcoins and other major cryptocurrencies originating on those regulated venues, and this comprises a large fraction of the cryptocurrency in circulation.
Cryptocurrency users should be aware that a significant amount of Bitcoin originates on Coinbase or other regulated exchanges, so even if Bitcoin is obtained in a peer to peer deal it may still be tracked by blockchain forensics firms working for the exchanges and government. There are options available to increase anonymity, like using a mixer which sends the Bitcoin between numerous addresses, mining the Bitcoin yourself, or using a fully stealth cryptocurrency like Monero.
Cypherpunk Labs does not advocate the use of cryptocurrency for illegal activity, but privacy and anonymity is a basic human right, and cryptocurrency users should be aware that cryptocurrency lacks anonymity nowadays due to the rise of blockchain forensics, if proper steps are not taken.