Mt. Gox collapse saw birth of Chainalysis – Cointelegraph Magazine

It’s been more than a decade since Mt. Gox went missing with 850,000 BTC, but the former exchange’s collapse remains one of the most notorious black swan events in the cryptocurrency ecosystem.

While creditors of the defunct exchange are closing in on some form of compensation, Mt. Gox’s collapse ultimately played a major role in developing tools for identifying, tracking, and addressing illicit flows of funds within the broader cryptocurrency industry.

Co-founder Michael Gronager explains that the search for answers and funding played a key role in the birth of Chainaanalysis, the most prominent blockchain analysis and tracking company in the cryptocurrency space.

Nearly a decade later, Chainaanalysis’ analytical tools are used by countless private and public businesses and institutions. From data analytics to pure law enforcement use cases, the company’s services continue to prove influential and sometimes controversial across the industry.

Kraken Mt Gox case

Gronager is a crypto OG who previously co-founded cryptocurrency exchange Kraken. He became involved in blockchain analytics after Kraken was looking for a stable banking partner and became wary of the cryptocurrency ecosystem’s lack of visibility and KYC and money laundering concerns.

“These conversations with banks all end the same way. How do you do transaction monitoring? How do you track funds received from people onboarded online?” Gronager told the magazine.

Around the same time, the collapse of Mt. Gox posed another unique challenge for Gronager, who was tasked with figuring out where Kraken and some of its clients’ funds on the defunct exchange went.

As discussed in the book Tracker in the DarkDuring this time, Gronager developed the tools that laid the foundation for Chainaanalysis, the fledgling company that was eventually appointed to the investigative team by the Mt. Gox bankruptcy trustee in 2014. From that point on, Gronager and his team worked immediately to put together well-known information to track down the missing funds.

Jonathan Levin, the second of the three co-founders of Chainaanalysis, was also interviewed by the magazine at the Corporate Links conference in the Netherlands earlier this year. The Oxford University master’s degree in economics graduate emphasized that this survey is the starting point for Chainaanalysis’s wider services.

“We took on the Mt. Gox investigation, which was the largest bankruptcy in the history of cryptocurrencies, and it was really about tracking the funds. If it was all on the blockchain, how could no one find it? So, you know, we solved it problem and solved the case.”

Two Russian nationals will eventually be accused In June 2023, the U.S. Department of Justice was indicted for allegedly hacking and laundering approximately 647,000 Bitcoins from Mt. Gox. The IRS Criminal Investigation Division is utilizing Chainaanalysis’ tools to assist with the ongoing investigation.

Helping track the movement of Bitcoin held by Mt. Gox demonstrates that Chainalis has the tools to solve complex cryptocurrency movement problems. Gronager also realized that this was a service that the world’s top crime-fighting agency desperately needed.

“In talking to other people in the industry who work in law enforcement, I realized they don’t know anything about this. They don’t know how to solve these problems.”

The customer base grew rapidly as private and public sector users, including exchanges and law enforcement agencies, came on board. As of September 2023, Chainaanalysis has 1,200 clients from the private sector and over 250 clients from public sector institutions.

The preferred service for law enforcement agencies

Chainaanalysis has become the tracking solution of choice for some of the world’s most prominent law enforcement organizations and has helped the IRS seize an estimated $10 billion worth of cryptocurrency in connection with criminal investigations. Jim Lee, special agent in charge of IRS-Criminal Investigation (IRS-CI), said the tools it provides are invaluable for tracking cryptocurrencies and interrogating data in a variety of environments, from blockchain to darknet markets. .

“Think about all the data I have working for the IRS. It may not be the most, but it’s the richest. Now I can get all the other data we have and match it against the records I have. I mean Yes, it’s very powerful, but it takes time, effort and money.”

Lee also attended Links conferences, participating in public and closed conversations with various government agencies and businesses in Amsterdam.

Gronager wouldn’t single out a remarkable investigation enabled by Chainaanalysis’ blockchain analysis, as the company’s services have helped solve a host of high-profile cases — from tracking cryptocurrencies that helped crack down on a South Korean child abuse material ring. Take advantage of tools that help solve compelling Twitter hacks in 2020 This resulted in nearly $1 million being stolen.

In that high-profile case, Chainaanalysis tools helped investigators link a Bitcoin scam spread by various hacked Twitter accounts to three perpetrators accused of masterminding the scheme. The mastermind of the scheme is a teenager whose identity has not yet been revealed.

“The case was resolved 12 days later, which once again shows that you can actually do things very, very quickly by tracking crypto funds.”

Another highlight is the assistance US$30 million recovered In 2022, Axie Infinity suffered a $650 million hack, which Gronager believes sent a statement to North Korea-linked hackers that cryptocurrency-related theft may no longer be the cash cow it once was.

Bitcoin fog case sparks controversy

The ability to link a cryptocurrency wallet or funds to a specific person can be extremely valuable in criminal investigations.

But the company is not without its critics, who argue that reliance on heuristics or assumptions that fail to identify wallets could lead to inaccurate tracking and unlawful arrests.

Quite a few Bitcoin enthusiasts on the Internet believe that this situation exists on the Internet. legal battle It involves the U.S. government and 35-year-old Roman Sterlingov, who is accused of running Bitcoin mixer Bitcoin Fog.

Chainaanalysis’ tools were used to identify Stringoff as the so-called coordinator The Justice Department claims that a notorious and now-shuttered cryptocurrency mixer moved more than 1.2 million Bitcoins worth $335 million over a decade.

Critics argue that the Justice Department case makes certain assumptions about wallets and credentials allegedly linked to early Bitcoin adopters and the eventual registration of Bitcoin fog domains linked to Stringoff.

Stringoff’s attorney, Thor Ekland claim The company’s Reactor software was unscientific and unreliable, and flawed assumptions wrongly implicated Stringoff. He believes that Chainaanalysis cannot determine its error rate. “This is junk science and does not belong in the federal courts,” Ekland said during a Sept. 7 court hearing.

According to reports, Elizabeth Bisbee, director of investigations at Chainaanalysis Government Solutions Tell In court, she was not aware of any peer-reviewed scientific papers proving the accuracy of Chainaanalysis Reactor.

The court will ultimately decide whether there is enough reasonable doubt about Chainaanalysis’s methods in this case to warrant a conviction. Chainaanalysis would not comment on any ongoing investigations or cases during our interview.

90% of surveys focus on public blockchains

Despite the controversy, Chainaanalysis has many satisfied customers and has been instrumental in recovering stolen funds. Erin Plante is Vice President of Investigations at Chainaanalysis, where she manages a growing team of more than 120 investigators from 11 countries.

Plant, who has extensive experience in cybercrime and financial investigations as a U.S. government contractor, said 90% of investigators are tasked with investigating incidents involving public blockchains such as Bitcoin and Ethereum.

Ronin Bridge’s investigation was a major impetus for her team, highlighting the importance of allocating human capital tracking funds immediately after major hacks.

“It’s important to get involved early and track the money, and getting law enforcement involved early is the way you’re most likely to have a successful recovery.”

The topics of the investigations also changed, Plant recalled, with a large number of dark web investigations conducted around 2019 requiring a lot of their attention. Investigations are now more focused on cybercrime involving ransomware, national security threats from entities linked to North Korea and sanctions screening of entities involved in Russia’s invasion of Ukraine.

A key theme in the Amsterdam conversation was the inherent traceability of blockchain-based cryptocurrencies, despite the emergence of token mixing protocols (such as the sanctioned Tornado Cash).

Plante pointed out that tracing stolen funds through cross-chain bridges is fairly simple, with criminals typically converting the tokens to ETH and then to BTC before sending them to mixers to obfuscate the funds.

Mixers require large amounts of liquidity to properly mix funds, she said, making Bitcoin mixers a prime choice for criminals to launder money.

Chainaanalysis has a dedicated data intelligence team that uses specific tools to identify mixers and algorithms to cluster wallets associated with mixer services. One example of the algorithm is helping to cluster the approximately 50,000 addresses linked to the now-approved Sinbad mixer.

Between December 2022 and January 2023, hackers linked to North Korea sent 1,429 Bitcoins worth $24.2 million to mixers.

Plante revealed that Chainaanalysis’s clustering algorithm was independently confirmed by a separate undercover FBI investigation, which has been using dust removal technology to track how funds were obfuscated by Chipmixer, another operation widely believed to be responsible for Sinbad and Services of its direct predecessor of funding. Chipmixer shut down in March 2023 after allegedly helping to launder $3 billion in money.

“We didn’t know the FBI was doing this, but it was discovered in our cluster, which verified the cluster. This verification, it’s so cool. That person will probably go to court, which is why we don’t talk about it.”

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Gareth Jenkinson

Gareth is a journalist and radio host based in Durban, South Africa. When he’s not on the air talking about sports, he can be found focusing on the cryptocurrency market.