Crypto analytics firm Chainalysis proposes standards for blockchain tracing

Tracking funds on a blockchain has typically required specialized tools, and the process can sometimes be opaque, but crypto analytics firm Chainalysis is taking a swing at solving that problem.

The company rolled out an ontology outlining how investigators can trace funds to wallet clusters and identify which wallets might be under the control of the same entity, in the hopes of creating a standard that law enforcement entities can use in investigations, it said in a blog post published Monday.

Jacob Illum, Chainalysis' chief scientist, told CoinDesk on a call that the ontology is aimed at establishing standards for blockchain analytics to reassure investigators or prosecutors about the usefulness of the data they might use in a case.

"If I was the one who needed this information to actually either convict on or prosecute or investigate, what would I want a tool to do?" Illum said of how he approached the proposal. "… what's supported by the data? That's my job, to tell an investigator as much as possible what you can do with what the data tells us."

Chainalysis used its experience in the U.S. Department of Justice's case against Roman Sterlingov, the co-founder of crypto mixing service Bitcoin Fog, who was convicted on money laundering charges in 2024, to shape its ontology.

During the trial, the judge overseeing the case held what's known as a Daubert hearing to determine whether Chainalysis' Reactor tool was rigorous enough to be used as a prosecutorial tool. Ultimately, Judge Randolph Moss ruled that "substantial evidence supports the government's submission that the software is highly reliable."

The company is leaning on the fact that its software has already been tested in a trial to argue that it has a strong foundation for its methodology.

Illum said multiple times that Chainalysis was publishing its proposal to "start that conversation" with the broader crypto industry about what standards could look like, but hasn't actively solicited much feedback yet, beyond some initial discussions with law enforcement groups.

Clusters

The ontology itself starts with the idea that current blockchain analytics tools rely on the concept of a "cluster," and this term "does not have a universal meaning across the industry," according to a copy of the document viewed by CoinDesk.

Chainalysis breaks down the concept into different components, starting with wallet segments, which in turn might be used as a deposit address, change address or a number of other functions.

The ontology lays out how Chainalysis views the role of attribution to these clusters, presenting a two-tier structure; the first tier "defines the structural graph," while the second assesses how confident the analysis is in that graph.

"What does it mean that these addresses belong together, right? It's clearly because somebody believes that they are under the control of the same entity, right?" Illum said. "Maybe it's an exchange, or maybe it's a darknet market, or maybe it's a mixer, or whatever. But what are the grounds to establish that these things actually belong together?"

Investigators likely won't have private keys, which would be the easiest way to tell if a cluster of addresses is all being controlled by the same entity, so they would then have to look at onchain data.

Illum was also clear about the limitations of this type of analysis: While Chainalysis could conduct research into transactions and clusters, it cannot, on its own, identify the actual end user without additional information.

Chainalysis could track funds to a crypto exchange, for example, or another entity managing wallets on behalf of customers, but investigators might need to issue a subpoena to identify who the customer is.

In other words, who controls a wallet or what entity is associated with the wallet are separate questions from the actual tracing aspect.

"Those two things really have nothing to do with each other, because the science of the wallet has to stand on its own, because it's supported by the blockchain," he said.

Ilum said the company expects feedback from the industry on the proposed ontology.

"When people start stepping away from independent scrutiny about their methodologies, like independent testing, that's a clear danger sign," Illum said. "It's the only way to validate that people are doing it right … there's no other way to test these things."