Beyond Bitcoin: Tracking the Flow of Funds Across Ether, Litecoin, Bitcoin Cash, Tether, and Other Top Cryptocurrencies

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Bitcoin is not the only game in town

Demand for cryptocurrencies beyond Bitcoin is growing rapidly. Ether, Litecoin, Tether, and Bitcoin Cash combined make up an astounding 42% of today’s total trading volumes among the top 10 cryptocurrencies. Many different types of currencies are filling different types of demand. The appeal of stablecoins, for instance, is their one-for-one stability. Utility tokens hold the promise of future valuable goods or services. The increasing adoption of multiple cryptocurrencies is a testament to their potential in reaching more people and their wide range of unmet needs.

But with increased adoption comes increased risk. Businesses that offer services for multiple cryptocurrencies need to understand their exposure to high risk activity accordingly if they are to meet compliance obligations. Investigators both in the private and public sectors also need to understand the threat of illicit actors behind more than just Bitcoin.

Below we outline the opportunities and risks associated with multiple cryptocurrencies, along with tips for evaluating multi-currency investigation and compliance solutions.

A growing market means increased risky activity and bad actors

Among the top 10 cryptocurrencies by trading volume in 2015, Bitcoin dominated with 86% share (according to data). That dropped to 41% in 2018 as other cryptocurrencies emerged. In fact, nearly $10 billion is traded daily across top cryptocurrencies other than Bitcoin. Businesses in this industry (such as exchanges) are continuously adding more cryptocurrencies to their offerings to meet growing demand.

To stay within regulatory guidelines, businesses must monitor for illicit activity across top cryptocurrencies. For example, scammers stole $36 million of Ether in 2018, double the previous year’s amount. An exchange should be able to identify whether these scams impacted their users while law enforcement needs the ability to track Ether activity to build a case against these scammers.

Though stablecoins are often seen as a less risky entry into cryptocurrencies, they are not immune to risky activity. For example, one of the first large stablecoins to emerge was Tether. During the 2017-2018 market rally, Tether’s ease of use for trading between cryptocurrencies also made it susceptible to activity such as “pump and dump” price manipulation schemes.

Regulatory oversight is expanding to multiple cryptocurrencies

Regulators across jurisdictions have been paying close attention to the role of multiple cryptocurrencies in emerging business models. In the US state of New York, for instance, businesses that want to offer services for a new cryptocurrency must get approval from the New York Department of Financial Services (NYDFS), the regulator that oversees cryptocurrency (or virtual currency) businesses.

Enforcement action against illicit activity involving multiple cryptocurrencies is also on the rise. For example, the US Commodities and Futures Trading Commission (CFTC) charged a New York-based investor with fraud in early 2018 for misappropriating customers’ Bitcoin and Litecoin funds. Months later, the same regulatory body went after another fraudster in Illinois for a similar $1.1 million Bitcoin and Litecoin scheme.

Cryptocurrency businesses or investigators that don’t have the necessary software to monitor exposure or track the flow of funds across multiple cryptocurrencies will fall behind their peers.

What you should look for in a solution

Leading businesses and investigators have consistently cited the following criteria when looking for the best software to monitor activity across multiple cryptocurrencies.

A comprehensive dataset for analytics

Successfully tracking activity across multiple cryptocurrencies requires really good data that maps transactions to services (i.e. exchanges, merchant services, darknet markets, terrorism financing groups, etc). This includes:

  • Total number of large services that have been “mapped” to the most addresses
  • Whether a counterparty can be identified in a large percentage of transactions
  • How long the company has been identifying patterns in the data
  • How many dedicated technical staff are employed

Real-time updates

Real-time updates help businesses better understand activity that impacts their customer base and investigators stay up-to-date on what is most relevant to their cases. Every time a user’s transaction is recorded on the blockchain, the software should update within seconds.

Extensive support

The software should be supported by a dedicated training team whose deep cryptocurrency expertise is combined with ongoing support, training for every user type, and expert investigation services for custom needs.

Recognized thought leadership

One way to validate the quality of a multi-currency software solution is to assess their published research. Research should go beyond just topline reporting and instead provide deeper insights about patterns and anomalies from the data.

A proven, trusted solution

A trusted and widely used investigation and compliance software will go a long way in building trust with regulators and solving cases. Choose a solution considered by leading institutions and government agencies to have the best accuracy, expertise, and reputation for mapping cryptocurrency activity to services.

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To see our full research on this topic, sign up to receive access to the complete Chainalysis Crypto Crime Report: Decoding hacks, darknet markets, and scams.

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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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