Blockchain analysis firm Chainalysis notes that its Reactor tools lets researchers and investigators track and analyze the movement of virtual currencies between different crypto addresses.
The Reactor tool is also used to identify transactions that may involve stolen or otherwise illicit digital currency. Cybercriminals might quickly move funds by using several different blockchain addresses so that they can make it difficult or impossible for investigators to figure out what they’re doing.
Chainalysis claims that following the funds between different crypto wallets is not difficult. The company’s tools and technology may be used to trace the movement of funds so that it’s easier for investigators to understand why a particular set of transactions were conducted.
“The reason blockchain analysis is possible is that transactions in most cryptocurrencies are recorded on public, permanent blockchains that act as ledgers, allowing anyone to view them. Blockchains display transactions by showing the amount that has moved between cryptocurrency addresses, which are pseudonymous by default. Blockchain analysis tools like Reactor make these transactions readable by attributing addresses to the services or entities that control them, and showing the transactions in a more visually coherent way, as you see in the screenshots above.”
Chainalysis further notes that blockchain analysis tools strictly reflect the movements of funds between discrete or unique crypto addresses, as registered on blockchains themselves.
Chainalysis also mentions that following cryptocurrency transactions becomes more difficult when the sender moves funds to a crypto address that’s hosted at a service such as an exchange. Chainalysis explains that when someone sends funds to their deposit address at a service, the virtual currency doesn’t “just sit at that address.”
The service actually moves the funds around “internally as needed, pooling and co-mingling it with the funds of other users as needed.” For example, many crypto-asset exchanges might decide to keep a certain amount of deposited digital currency in cold or offline wallets so that they’re more secure, the blockchain analysis firm notes. It explains that “this idea holds true in the fiat world as well — if you deposit a $20 bill at an ATM and then withdraw $20 one week later, you’re not going to receive the exact same bill you originally had.”
“Only the exchange itself knows which deposits and withdrawals are associated with specific customers, and that information is kept in the exchange’s order books, which aren’t visible on blockchains or in analysis tools like Reactor. In order to prevent investigators from mistakenly following funds after they’ve been deposited at a service, Reactor doesn’t show the outgoing transaction history for individual service deposit addresses.”