It’s Not Personal: How Chainalysis Collects and Uses Service-Level Data

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Blockchains make cryptocurrency transaction data public and permanently available. They record when a transaction happened, the amounts transacted, and which addresses were involved. However, they do not contain information about the real-world service behind a transaction.

Cryptocurrency businesses and financial institutions need more context beyond just transaction amounts to comply with anti-money laundering (AML) regulations. These regulations require them to identify and report user activity that is indicative of money laundering. To do that effectively with cryptocurrency transactions, they need to know what services their customers send cryptocurrency to and receive cryptocurrency from.

As these businesses scale, they need to potentially monitor thousands of transactions across millions of customers. This is why businesses require an automated transaction monitoring solution that constantly updates a large dataset linking transactions to real-world entities.

That’s where Chainalysis comes in. We put cryptocurrency transaction data in context for our customers by labeling addresses with the real-world entities that control them. We identify services and do not label individual users’ wallets.

For example, here’s a historical transaction on the Bitcoin blockchain:

Here’s how Chainalysis labels that transaction in our software:

This helps make sense of a blockchain’s alphanumeric strings and lets exchanges know whether they are sending funds to another exchange or sending them to a darknet market.

How exchanges use our product

Exchanges that use Chainalysis KYT (Know Your Transaction) for AML compliance submit their transaction data—not personally identifiable customer data—to Chainalysis to automate the process of transaction monitoring. The alternative—manually checking every possible transaction for counterparty risk—would simply be unmanageable.

Any link from a transaction back to the person or people involved in that transaction must be made outside of Chainalysis because we do not collect any personally identifiable information from exchanges. Chainalysis only knows that a particular address belongs to a customer at that exchange, not who the customer is.

Chainalysis will flag a transaction based on indicators of risky behavior. For example, we will flag a transaction if we identify the counterparty as an illicit service, such as a darknet market or terrorist financing organization. Our customers can customize which entities they consider to be high and low risk. Their risk appetite and investigations are the exchange’s own responsibility.

In short, Chainalysis provides service-level identification, not individual-level identification.  

We can’t speak for all other vendors. It’s possible other vendors may ask for more information. But Chainalysis is concerned only with service-level transaction data.

How we share information among our customers

We do not share any personally identifiable information about cryptocurrency users with exchanges. When we screen a transaction in KYT for an exchange customer, we add it to our list of transactions made by that service. This complements our own research that maps out the transactions conducted by each service. This helps all of our customers understand the services their users transact with and make risk determinations based on the most accurate information.

As such, our customers can establish comprehensive compliance programs and disrupt criminal networks that take advantage of cryptocurrency to traffic drugs and other illicit products, fund terrorist organizations, hack businesses, scam consumers, and more.

Ultimately, compliance and investigations solutions like ours build trust in cryptocurrency as a safe way to move value across the world.

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Learn more about KYT for Stablecoins & Token Issuers

Monitor transactions across the token’s full lifecycle, from issuance to redemption—and any transaction in between.

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How Transaction Monitoring Works at Chainalysis

One of the reasons Chainalysis KYT is so popular is that it uses global anti-money laundering (AML) standards common across regulatory bodies. We apply these standards when each transaction is screened.

Cryptocurrency businesses also need to understand the aggregate risk profile of each of their users. That’s why Chainalysis KYT provides a view of risk profiles at the user level, which reflects all of a user’s screened transactions. For example, if an organization has a user who receives funds from a darknet market, our software automatically flags that transaction as high risk. If the user sends funds to a regulated exchange, our software marks that transaction as low risk. And so on. Every screened transaction feeds into a user’s risk profile. Chainalysis KYT displays all user profiles, sortable by high, medium or low risk (using traffic light colors) for easy scanning.

We apply our risk methodology in real time to all users within an organization’s user base. This saves compliance teams from laborious, manual screening work. They can instead focus on developing comprehensive compliance programs. Organizations that work with us tell us this has enabled them to meet regulatory expectations and launch or grow their businesses.

Customizable risk level

We’re now giving our customers the ability to adjust the risk level of a category or a service. For example, not all jurisdictions around the world treat gambling the same way. In some countries, gambling is not considered a legitimate business activity and thus online gambling sites would be treated as high risk. In other countries, gambling is not considered illicit, which means properly licensed online gambling sites would be treated as low risk.

The ability to customize the risk level of categories and specific services means our customers can automate even more of their compliance workflows.

Organization-wide dashboard

One of the most useful facets of Chainalysis KYT is having a view of all users and their risk profiles directly accessible upon first logging in. It provides a visual alert of which users have high risk profiles and therefore require the most immediate attention. In keeping with the spirit of simplified visual cues, we have now launched a dashboard that summarizes key indicators at the total organization level. For example, organizations can now see what percentage of their user base is falling under high, medium or low risk. They will soon be able to see things like total exposure by category, or total transaction volume per day. These and other metrics will provide our customers additional understanding of their organization’s total exposure trends over time.

In-app chat

At Chainalysis, we strive to provide as much support to our customers as we can. To make it easier to interact with us, we added in-app chat to Chainalysis KYT. This allows our customers to send us questions or feedback without having to leave the environment. Our team typically responds within minutes.

Looking ahead

We know software is most valuable when it makes the lives of our customers easier and more productive. This means we’ll continue to add intuitive capabilities to our compliance products while increasing versatility for ongoing transaction monitoring. In the coming months, we will improve how transaction information is displayed. We will also boost our monitoring capabilities for other cryptocurrencies beyond Bitcoin. And we will deepen the integration with Chainalysis Reactor, which is used for enhanced due diligence and investigations.

The momentum around cryptocurrency compliance is only just starting and we look forward to continuing to offer software that builds trust in blockchains.

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