Dangers of blockchain analysis – POLITICO

With the help of Sam Sutton

In recent weeks I’ve been writing about “on-chain analysis cryptocurrencies, and what he can and cannot say to regulators about the mechanics of the cryptocurrency financial crisis.

Analysis is an important part of the crypto industry. In theory, a shared public blockchain is behind every cryptocurrency. must make the system more transparent than traditional finance, and firms are looking at their data for important insights into how currencies are moving. In practice, however, this data can tell you very little, and even experts are often forced to rely on guesswork to supplement their understanding of what really happened.

The courts are now taking a crash course in chain analysis, courtesy of the DFinity Foundation, a Swiss non-profit organization that operates on a blockchain network called Internet Computer.

Last week, Dfinity sued the New York Times and Arkham Intelligence, a crypto research firm, in the Southern District of New York alleging defamation and unfair trading practices related to a Times article in June 2021 about falling blockchain token prices.

The complaint alleges a conspiracy assisted behind the scenes by an unnamed “super-rich” party to stage misleading coverage of the Internet Computer project. The intended purpose was to suggest that insiders made a profit as the price of the tokens plummeted while average investors were left holding the bag.

According to the complaint, the Times article was based on Arkham’s misleading analysis of the project’s blockchain records.

Among the details of the arrest, the complaint alleges that the authors of the offending Arkham Report fled Austin for London, where they “reside – fraternity style – in a huge mansion.” He also links to a website called “CryptoLeaks.Info” that allegedly shows people associated with Arkham making incriminating confessions in undercover videotapes.

The Times stands by its story. “We are confident in the accuracy of our reporting and plan to vigorously defend against this lawsuit,” Times spokeswoman Danielle Rhodes Ha said in a statement. Arkham did not respond to a request for comment.

Corporate intrigues and private intelligence installations are nothing new. in the financial world. But at the heart of the complaint is the allegation that the defendants misinterpreted public opinion. on-chain data in a way that was detrimental to Dfinity.

Both sides seem to agree on the bare facts of what the analysis has shown: What the tokens distributed by Dfinity to a small group of addresses were then quickly moved to addresses associated with crypto exchanges. The question is what meant. According to the complaint, the defendants falsely implied that these moves implied a large-scale sale of tokens by insiders. The complaint offers an alternative explanation: the tokens were moved to wallets on exchanges for storage.

(Also debatable is whether an Internet computer token qualifies as a security, an area normative ambiguity for many blockchain tokens.)

Whether or not this particular case goes to court is a sign that the courts will have to start grappling with the new discipline of network analysis and what can and cannot be made of it.

Yesterday we contacted essay University of Chicago Prof. Anthony Li Zhang on how blockchains are usurping the government’s role in enforcing contracts. The good news for the courts is that, if this lawsuit is any indication, there will be enough minor disputes about what exactly happened online to keep them running for a long time to come.

Cryptocurrency exchange Coinbase is quietly selling blockchain analytics and geo-tracking tools to the Immigration and Customs Enforcement Agency, throwing even more cold water at libertarian claims about the usefulness of cryptocurrencies to evade government surveillance.

While Coinbase’s efforts to build relationships with federal law enforcement have been widely publicized, the cryptocurrency exchange 63 page contract provides ICE with “historical geo-tracking data” in addition to software tools that help sort through the maze of blockchain-based transactions that can be used by criminals to hide illegal payments. The existence of the contract was first reported Interception.

Coinbase CEO Brian Armstrong has been a vocal critic of government attempts to track and restrict crypto transactions in the past. In February, in the midst of trucker protests blockading downtown Ottawa and damaging U.S.-Canada trade, Armstrong urged people to transfer their crypto assets to their own digital wallets if they are concerned that the Canadian government will freeze their accounts.

Coinbase spokesperson Karin Leahy said in an email that the firm provides law enforcement and financial institutions with “facilitated access to public data” but does not share “internal or customer data” and that Coinbase is “committed to protecting our customers’ information in a decentralized spirit in which Cryptocurrency was founded.

— Sam Sutton

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