Deloitte recently released a report, The Banking Industry Outlook, which estimates that blockchain-based payment systems could equal the volume of the U.S. Automated Clearing House (ACH ) financial transactions network by 2020.
Despite this promising outlook for the growing blockchain industry, regulatory bodies fear that digital currencies attract illicit uses. This narrative was driven by the infamous Silk Road marketplace, which propelled bitcoin into the regulatory spotlight.
In October 2013, federal agents stormed a San Francisco library and arrested Ross Ulbricht. His unencrypted laptop gave former FBI special agent Ilhwan Yum the opportunity to trace the bitcoin transactions.
During Ulbricht's trial, Yum testified that he followed over 700,000 bitcoins across Bitcoin’s public ledger, from the marketplace to what appeared to be Ross Ulbricht’s personal wallet. Ulbricht was later jailed for running the illicit marketplace.
The investigation put misconceptions of the anonymous nature of bitcoin to rest. However, it is a large task to track and trace the movement of every bitcoin. A blockchain startup, called SABR, claimed that its software could have completed the task in a matter of days.
SABR describes its product as a “Palantir” for the blockchain, a name used by revered author J. R. R. Tolkien. The author gave the name to crystal balls used for communication, and as a means of seeing events around of the world.
“We believe that the only way to sustain and grow the usefulness and adoption of the Blockchain is to ensure it is used within the bounds of the law.”
SABR’s mission is to provide law enforcement with a view beneath the surface of multiple blockchains, to ensure digital currencies are not being used for illicit purposes, and to bring legitimacy to digital currencies. The surveillance team explained that blockchain technology, in conjunction with a distributed and aligned transaction confirmation network, has the potential to be the most useful innovation of the 3rd millennium.
The New york based startup raised US$1m in seed funding for its patented technology, and said it will use the investment to develop its blockchain monitoring and identification system.
Another startup which intends to identify illicit activity, United Kingdom based Elliptic, is also tackling the situation. Having already raised US$2m, from Octopus Investments during 2014, the company recently announced an additional US$5m had been secured for development.
Elliptic’s bitcoin transaction identification software implements an artificial intelligence-based technology, which can explore the Bitcoin blockchain. Elliptic will use the technology to expose patterns in the network which may be suspicious transactions or activities.
“We identify illicit activity on the Bitcoin blockchain and provide our services to the leading Bitcoin companies and law enforcement agencies globally.”
The recent funding round was lead by Paladin capital’s managing director and former director of the US National Security Agency, Kenneth Minihan: “Elliptic is a game-changer for blockchain and is already trusted by some of the smartest minds in law enforcement and compliance. The firm’s monitoring capability will be an essential component of any blockchain in the future and we will help Elliptic to expand in the US, via our contacts and knowledge of US law enforcement and government agencies.”
The European Cybercrime Centre (EC3) has also taken an interest in taming the Wild West of bitcoin transactions. EC3 has partnered with blockchain company Chainalysis, an official investigator for the creditors of the collapsed bitcoin exchange, Mt Gox. Chainalysis will provide the law enforcement agency with access to software which detects suspicious activity in real-time, alongside other investigation tools.
“We built Chainalysis to spot connections between digital identities. Our products allow financial institutions to develop trust lines between them as well as identify malicious actors. Our mission is to create tools that respect user privacy and prevent abuse of our financial system.”
Steven Wilson, the Head of EC3, welcomed the partnership: "Chainalysis brings a level of expertise that will be of significant benefit to our Europe-wide investigations. I look forward to developing a rewarding partnership that will make the people and businesses of Europe safer online."
Chainalysis raised US$1.6m in seed funding last month. The funding round was led by Point Nine Capital, with Techstars, Digital Currency Group, Funders Club and Converge VP. The new technology will be put to use by EC3 following a recent Memorandum of Understanding.
As bitcoin is an agnostic tool for transferring value, its merits will no doubt continue to attract criminal users. However, with these sophisticated tools and blockchain explorers, government agencies and law enforcement will always be hot on their heels.