Analytics On The Blockchain Can’t Stop FTX-level Illegal Schemes




The crypto industry has placed a lot of emphasis on data openness, but the FTX scandal has revealed that centralised exchanges (CEX) fall short in this regard. It appears that crypto analytics companies are now unable to monitor transactions to stop collapses like FTX.

Since all Bitcoin transactions are visible to the public on-chain, it is possible to follow them while transmitting cryptocurrency from one address to another. However, this is not the case when working with a centralised crypto exchange.

There is presently no on-chain tracking technology that can follow funds through a CEX, according to Chainalysis. This powerful blockchain data platform collaborates with several governments across the world.

“Chainalysis — or any other blockchain research tool — cannot track money through a centralised service, as the manner that these services hold and manage cash placed by users inherently renders further tracing unreliable,” a spokesman for Chainalysis said.

“On-chain analysis alone cannot identify malicious intent behind transactions,” the representative of Chainalysis said. “Even if you could track through a centralised exchange.” 

The representative emphasised that the first indication that something was amiss was Alameda’s off-chain financial sheet, which had been disclosed.

Even though blockchain analysis can trace deposits on CEXs, there is no way to access their liabilities, according to Andrew Thurman of Nansen. 

“FTX ceased withdrawals while they still had more than a billion in different types of digital assets, but we now know they had a significantly bigger sum in liabilities,” he added.

Some monitoring services continue to argue that the industry can someday stop problems like the FTX crash. However, blockchain research has so far had minimal success in tracing illegal transactions by CEXs.

Frank van Weert, co-founder and CEO of Whale Alert, said to Cointelegraph in November, “We are running historical balance checks on our known FTX addresses—deposit and other associated addresses—to investigate if this may have been identified earlier.”

As a result of the platform’s lack of resources to adequately scan almost two years’ worth of data, Whale Alert was forced to stop the project. The CEO explained, “It needs quite a bit of computational power, which we did not have available.

Weert added that while “it is feasible to trace exchanges,” sites like Coinbase and FTX make it slightly more difficult to track incoming currencies because they don’t employ hot wallets. Exchanges, he continued, are “very hesitant to participate,” and several of them have declined to comment on Whale Alert’s findings for the sake of “security.”

The CEO of Whale Alert stressed that the whole cryptocurrency sector is to blame for the demise of FTX, saying:

“The industry has placed more emphasis on making money than building a sound infrastructure. Gaining the public’s trust once more based on appropriate transparency—which does not result from Merkle Tree audits—is the only way to move past the disaster.”

About the author, Awais Rasheed

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