Data transparency has been a focal point for the crypto industry, but the FTX fiasco has shown that centralized exchanges (CEXs) are not transparent enough. So far, cryptanalysis firms are apparently not capable of tracking transactions to prevent crashes like FTX.
All Bitcoin (BTC) transactions are publicly available on-chain, making it possible to trace those transactions when sending crypto from one address to another. However, this is not the case when it comes to interacting with a centralized crypto exchange.
Cointelegraph spoke with executives from blockchain intelligence firms, including Chainalysis, Nansen, and Whale Alert, to learn more about tracking illicit on-chain CEX transactions.
According to Chainalysis, a major blockchain data platform that cooperates with many governments around the world, there is currently no on-chain tracking tool that can track funds through a CEX.
โChainalysis, or any other blockchain analytics tool, cannot track funds through a centralized service, because the way these services store and manage funds deposited by users inherently makes tracking inaccurate,โ one said. Chainalysis spokesperson told Cointelegraph.
โEven if you could trace through a centralized exchange, on-chain analysis alone cannot reveal the fraudulent intent behind transactions,โ the Chainalysis representative noted. The spokesperson emphasized that Leaked off-chain balance sheet from Alameda It was the first thing that revealed that something was wrong.
While blockchain analytics can track CEX deposits, there is no chance of accessing their liabilities, according to Nansen analyst Andrew Thurman. โFTX stopped withdrawals when they still had over a billion in various digital assets; now we know that they had a much larger sum in liabilities,โ he said.
Thurman also argued that a Proof of Reserves (PoR) model, the increasingly popular CEX effort to demonstrate transparency, it's "only a half measure, but it's a good one."
Even though blockchain analytics has limited opportunities in tracking illicit transactions by CEX so far, some monitoring services are still trying to prove that the industry has a chance of avoiding problems like the FTX crash one day.
โWe are currently doing historical balance checks on our known FTX addresses (depository and other related addresses) to determine if this could have been detected earlier,โ Whale Alert co-founder and CEO Frank van Weert told Cointelegraph in November.
Whale Alert has since had to abandon the project because the platform did not have enough resources to successfully scan approximately two years of data. โIt takes a lot of computing power that we didn't have available,โ the CEO said.
Weert also noted that โit is possible to track trades,โ but platforms like Coinbase and FTX make it a bit more complex to track incoming coins since they don't use active wallets. He added that the exchanges are โextremely reluctant to cooperate,โ with many of them refusing to comment on the Whale Alert findings for โsecurityโ reasons.
Related: What Blockchain Analytics Can and Can't Do to Find FTX's Missing Funds: Blockchain.com CEO
The CEO of Whale Alert emphasized that the entire crypto industry is responsible for the collapse of FTX, stating:
โUntil now, the industry's focus has been on profit rather than the right infrastructure. The only way to recover from the mess is to win back the public trust on the basis of proper transparency, which does not come from Merkle Tree audits.โ
According to some industry executives, blockchain analytics platforms are not interested in catching illicit players on the chain in the first place.
โFirst, blockchain analysis doesn't really do anything, and second, they don't focus on fraud and suspicious transactions at the exchange level. Your clients are the exchanges and you don't bite the hand that feeds you,โ Bitcoin advocate Samson Mow told Cointelegraph.
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