Blockchain Analysis Providers’ Data Reveals Dramatic Variations on Details About P2P Crypto Transactions: Report

Leading blockchain analysis firm Chainalysis has released an update titled, “Not All Blockchain Analysis Providers Are the Same and Other Insights from FATF’s Second 12-Month Review.”

The Financial Action Task Force (FATF) is the inter-governmental entity that’s responsible for establishing international standards relating to anti-money laundering (AML) and combating the financing of terrorism (CFT), the Chainalysis team notes in a blog post.

They also mentioned that earlier this month, FATF published its second 12-month review of the revised FATF standards on virtual assets and virtual asset service providers (VASPs), which has come around two years after the FATF finalized AML/CFT requirements on VAs and VASPs, including digital currency exchanges.

As mentioned in the update from Chainalysis, FATF’s latest release aims to evaluate the progress that jurisdictions and the private sector have made when it comes to adopting the requirements since the initial 12-month review, along with monitoring for “any changes in the typologies, risks and the market structure of the virtual assets sector.”

There are key takeaways from the report that Chainalysis has decided to cover, however, the one section that is particularly notable: “a comparison of data on peer-to-peer (P2P) transactions – transactions that do not involve a VASP – provided by seven different blockchain analysis providers.”

Based on the charts FATF has offered, the data provided by the blockchain analytics firms varied considerably. So significantly, that FATF noted it was “difficult to draw clear conclusions from the graphs.”

Chainalysis added:

“For context, FATF’s Standards do not currently apply to P2P transactions. The body reached out to Chainalysis and other blockchain analysis providers for data to better understand the extent to which virtual asset transfers occur with a VASP or without (i.e. P2P transactions), whether this has changed since the FATF revised its Standards in June 2019, and the ML/TF risk associated with P2P transactions. FATF ultimately concluded that they did not see a clear shift towards P2P transactions.”

Chainalysis also noted that as far as they know, this is the very first public instance in which data from blockchain analytics firms have actually been compared directly. Although FATF reportedly declined to attribute certain or specific metrics to their providers, the takeaway is that there is “dramatic variation among the providers.”

As FATF states, “each company has its own methodology, analytical tools, techniques, proprietary data and expertise.”

Although FATF might not intend to apply their Standards to P2P transactions for now, VASPs should be “aware of the potential risks associated with them, and take steps to mitigate those risks, including through the use of blockchain analytics,” Chainalysis noted.

The company’s update further noted:

“As this exercise brings to light, VASPs should take into consideration the quality of data when selecting a blockchain analytics provider for their AML/CFT purposes. It is important to have complete and accurate data in order to meet AML/CFT regulatory compliance requirements and file accurate reports. The quality of data is crucial in allowing VASPs to meet their obligations and avoiding fines or other regulatory actions.”

Chainalysis reveals that it has managed to find more entities that are currently operating on the blockchain (more than anyone else, the company claims). With that information, the firm can offer “the most effective AML/CFT transaction monitoring capability available for cryptocurrency,” the company claims.

They also mentioned that if you are not presently using Chainalysis, they’ll help you benchmark your transactions and “uncover what you’ve been missing.” You may reach out today “to turn our data advantage into your unique edge.”

As noted in the blog post from Chainalysis:

“58 jurisdictions reported that they introduced the necessary legislation to implement the revised FATF Standards. 52 of these jurisdictions have a regulatory regime permitting VASPs, while 6 of these jurisdictions prohibited VASPs. 26 of the other 70 reporting jurisdictions that have not yet implemented the standards are in the process of implementing regulations for VASPs by legislation or rule-making.”

Having supervision of crypto firms promotes “consumer confidence” in the sector, while enabling VASPs to operate with the security “knowing what they are and are not permitted to do and what their regulatory obligations are, and allows for the safe growth of the cryptocurrency ecosystem,” the blockchain analysis firm added.

It also noted that there are still major gaps in implementation of FATF Standards that need to be addressed.

Chainalysis pointed out:

“Of particular concern to FATF is the implementation of Recommendation 16, more commonly referred to as ‘the Travel Rule.’ The Travel Rule dictates that VASPs must identify the originators and beneficiaries of cryptocurrency transactions initiated by their users above a certain size. In cases where the counterparty of those transactions is also a VASP, the original VASP must then transmit that user information to the second VASP. Many jurisdictions have struggled to implement this particular Recommendation.”

Chainalysis acknowledged that some progress on the Travel Rule was made during the last year, with 10 jurisdictions now implementing and “enforcing the Travel Rule, and another 14 jurisdictions having introduced requirements, but not yet enforcing them.”

As FATF states, one of the key challenges in implementing the Travel Rule is “technological solutions, which did not exist when it issued its Standards.” But now, there are “various technologies and tools available that could enable VASPs to comply with the travel rule, including Chainalysis’ integration with Notabene, which allows cryptocurrency businesses to automate transactions with trusted counterparties, while providing them with the data they need to detect suspicious activity and meet their regulatory requirements.”

The update also noted:

“FATF is right to be concerned about the alarming increase in ransomware attacks. In a recent report, Chainalysis noted that no other category of cryptocurrency-based crime had a higher growth rate in 2020 and that this trend has continued in 2021.”

Although there have been a few law enforcement “successes” in recovering ransomware payments, like the Colonial Pipeline attack, this is “not always the case,” Chainalysis clarified.

To address the issue of ransomware, firms need to enhance their cybersecurity protocols and related measures in order to prevent such attacks from taking place (in advance), Chainalysis recommended. It also mentioned that the public and private sectors need to work cooperatively in order to detect attacks “when they do occur and share information in a timely manner, and investigators must have the resources they need, such as blockchain analytics, which will allow them to trace ill-gotten cryptocurrency proceeds to their cash out points and garner other important information about the ransomware supply chain.”

Chainalysis pointed out that FATF has outlined steps in the process of establishing clear standards for crypto regulation.

In October 2021, FATF intends to release its updated Guidance on Virtual Assets and VASPs for the Public and Private Sectors. This Guidance will reportedly consist of updates on “the definition of virtual asset and VASP, so-called stablecoins, P2P transactions, registration and licensing of VASPs, the travel rule and international co-operation amongst VASP supervisors, which will aid with implementation.”

By November 2021, FATF intends to share Principles for Information-Sharing and Co-Operation amongst VASP Supervisors.

FATF is currently in the process of creating online training for its membership and the broader Global Network on virtual assets and VASPs to “inform policy makers, competent authorities and assessors about…FATF Guidance and best practice documents and the results of mutual evaluation reports.” They will reportedly introduce this training during H1 2021.

As noted by Chainalysis:

“This review emphasizes that FATF is serious about mitigating the AML/CFT risks associated with cryptocurrencies. After October, when FATF finalizes the next guidance on cryptocurrencies, we will likely see an increase in FATF jurisdictions engaged in rulemaking or legislative processes in order to implement the new guidance.”

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