- Blockchain surveillance firms deem Bitcoin (BTC) blockchain as a medium risk entity.
- They use proprietary algorithms to aggregate on-chain data and flag suspicious activities
Blockchain technology has given a new definition to transparency. Surveillance companies have become important in this sector. Governments also use on-chain data to look for any potential financial crime. An article published by think tank Mises Institute and written by Andrea Togni, a history and philosophy teacher, discusses risks linked with this association.
Blockchain Surveillance Taking People’s Privacy Away
The article describes a blow to user privacy when the authorities, coupled with blockchain surveillance (BS) companies, access this transaction data. Furthermore, it prevents people from transacting independently. These companies assist the government to implement the Financial Action Task Force’s (FATF) Risk Based Approach (RBA).
According to this approach, entities are categorized based on their vulnerability and associated risk. To this, cryptocurrency exchanges are on top of this risk chain. While terrorism funding falls under the high level risk category associated with an entity, using decentralized exchanges and smart contracts poses low risk.
These surveillance firms deem Bitcoin (BTC) blockchain as a medium risk entity, principally due to CoinJoin, a trustless method to coalesce multiple BTC transactions. The article also mentions blockchain surveillance companies flags blockchain transactions in spite of them being legitimately interpretable.
Unsubstantiated Data Can do Great Harm
Andrea Togni compares FATF’s travel rule to BS companies’ know your transaction (KYT). The former asks for transaction details from intermediaries like crypto exchanges. A user’s privacy is affected here, however, there is “no room for discretion,” the author notes.
BS companies develop KYT software for ministration of crypto organizations to meet regulatory compliance and law enforcement to track criminals. They use proprietary algorithms to aggregate on-chain data and flag suspicious activities. Unlike the travel rule, development of these algorithms happens privately. Users cannot see the “heuristic assumptions” they adopt.
Moreover, they are sold for profits while the arbitrary heuristic rules they use can function as means to charge users for criminal activities. As per Togni, “unsubstantiated data can do great harm.” Citing a case of Roman Sterlingov, an individual whom the government charged for operating a cryptocurrency mixer, the author says, “This case shows how easy it is for an advanced legal system to ruin people’s lives using spurious blockchain surveillance tools.”
The author concludes in the article, “For their part, these new governmentalities are happy to profit from the exploitation of the judicial system in favor of the state. BS companies present financial privacy in the domain of cryptocurrency as suspicious by default, and they profit by helping the state gain more control over white “markets” and reduce the scope of black (free) markets. This is a remarkable convergence of scheming interests.”
Cryptocurrencies operate on blockchains. Given its decentralized nature, regulators are still evaluating digital assets to lay down a proper regulatory framework for the crypto sector. While authorities are skeptical, PayPal, a major payments company, launched its native blockchain-based currency PYUSD on August 7, 2023.