Chainalysis Shares Detailed Classification System for Cryptocurrency Services based on Level of Risk, Other Factors

Since Bitcoin’s (BTC) launch back in 2009, virtual currency has managed to drive new markets, while spurring advancements in modern financial infrastructure. It has also led to innovative thinking in how to address the global economic requirements, the Chainalysis team writes in a blog post.

Stakeholders like world governments, industry participants, and traditional financial institutions need to have a “shared understanding” of the key players in the crypto sector in order to drive ongoing growth and development, Chainalysis notes while adding that key to identifying and “safely” approaching new opportunities is a solid understanding of the entities carrying out digital currency transactions and the “level of risk” and illicit activity associated.

Chainalysis says it aims to “demystify” cryptocurrency. As one the industry’s major providers of blockchain analysis tools, investigations, and compliance solutions, the company aims to empower banking institutions, businesses, and governments across the globe so they can better understand which entities are transacting with virtual currency. This should help the industry keep growing safely and “sustainably,” Chainalysis notes.

The company has also shared how it uses its comprehensive, blockchain dataset along with “decades of combined investigative experience,” to break down the key players in crypto  transactions “according to the level of risk they present.”

According to Chainalysis, the easiest way to classify the entities transacting with digital currency is to “think about the ways cryptocurrency is used.”

Here are some of the ways cryptocurrencies may be used:

  • Mining
  • Storage of funds
  • Investing and exchanging
  • Buying and selling of legal goods and services
  • Obfuscating activity for privacy reasons or to conceal illegal activity
  • Buying and selling of illegal goods and services
  • Stealing or scamming

As explained by Chainalysis, the different entities associated with each of these individual use-cases “make up the services and organizations, described throughout this guide, which we have organized according to risk level.”

Services like hosted crypto wallets and merchant services, which are used “less often” for illicit activity and are “therefore lower risk,” Chainalysis claims while noting that entities like terrorist financing schemes, which are “illegal under any circumstances and therefore rated as severely risky.”

Some crypto-related services are not universally considered illegal, however, they’re often “linked to or used to aid in criminal activity,” Chainalysis added while noting that gambling “is perfectly legal in many jurisdictions, [but] it has also historically been used as a means of money laundering.”

According to Chainalysis, these risk levels “only represent the services themselves, and are not enough on their own to assess the risk level of a specific entity.” As noted by the blockhain analysis firm, the only way to do that is “to analyze that entity’s cryptocurrency transactions and counterparties in greater detail.”

As mentioned in the report from Chainalysis:

“Merchant services providers allow mainstream businesses to accept cryptocurrency as payment for everyday customer purchases, whether they’re happening online or in person. Think of them as regular payment processors, like Stripe or Square, except compatible with cryptocurrencies. Merchant services allow people to use cryptocurrency the same way they use fiat currency.”

Chainalysis added:

“Why would somebody — consumer or business — want to use cryptocurrency over fiat currency? There are lots of reasons, but the biggest is the reduction of fees. Conventional payment methods like credit cards carry a fee for each transaction, which means the business has to either absorb the cost or pass it on to the customers.”

Chainalysis further noted that crypto payments are “more direct” transactions, which means they can be processed “more cheaply” than credit card payments. The same goes for cross-border payments and remittances, Chainalys explained.

As crypto adoption keeps increasing, merchant services adoption is growing as well, the blockchain firm notes while pointing out that global firms such as Starbucks, Whole Foods, and others are now accepting crypto payments. As mentioned in the update from Chainalysis, “in aggregate, merchant services usage has trended upwards since 2020 after a nearly two-year lull, with some dramatic spikes and declines during and after the Bitcoin price boom in 2017.”

The report also noted:

“The merchant services category is generally a low-risk category. Users are typically traditional businesses and their customers. [But] … scammers sometimes integrate merchant services with malicious websites to accept cryptocurrency payments from their victims.‍”

You can access the complete report here.

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