Crypto Auditing: A Compromise Between Enterprises and Regulators

Capital markets have adopted cryptocurrencies with increasing frequency, challenging financial policymakers as they manage this new asset class. The auditable nature of cryptocurrencies is the solution to this disconnect.

By the team at Crystal™ analytics

When cryptocurrencies first entered the market, the digital asset industry and traditional regulators were at odds over the rights and responsibilities each had in the emerging industry. Today, there is a stronger compromise between these groups, as both recognize the economic benefits of the technology and the incredible potential for improved transparency.

The transparency of cryptocurrencies and blockchain is a benefit to both the regulators and companies — it simplifies and improves the auditing process for enterprises and provides a permanent record of all transactions (which is ideal for auditors and regulators seeking to verify the actions of these enterprises.)

While in practice auditors and governmental agencies can access all transactional data from a blockchain-based system, they do often require more information to complete a thorough audit, especially when the nature of transactions is a concern. A record of transactions is not enough — more information is needed to mitigate risk.

More detailed crypto transaction auditing

Cryptocurrency is now a widely available asset, and businesses transact with digital currencies daily. But because this is a newer form of currency, it comes with a certain challenges — both reputationally and financially — so regulation is necessary to ensure that operations are legally enforcable and consumer protection rights are upheld.

A record of transactions on a blockchain provides clear evidence of the occurrence of the transaction, but that is just one aspect of an audit. An auditor must also verify all counterparties in that particular transaction, the ownership of the private keys in question, and the legal nature of those transactions on the blockchain.

Changing transaction methods requires changing verification tools

Usually, auditors and governmental agencies rely on information obtained from banks to verify the accounts and balances of their clients. In the decentralized era, records of public blockchain transactions and balances can now be accessed immediately with a blockchain explorer, removing unnecessary intermediaries and the associated costs. While an improvement in some ways, this also has its own set of challenges for an auditor.

For example, many auditors need to prove ownership of currency or validation of a bank balance. To prove ownership of private keys, an entity can make a transfer from its wallet to show the auditor. But this is an inefficient and costly way to verify ownership, as every transaction on the blockchain incurs fees. Auditors also can have trouble identifying who the entity even is, given the pseudonymous nature of bitcoin and other popular cryptocurrencies.

Auditors need a way to easily verify identities and audit balances, and free blockchain explorers only solve part of the problem. Analytical tools — like the Crystal analytics platform, released in early 2018 by the Bitfury Group — provide deeper insights into these crypto transactions (including identities, risk scores, and transaction history), thus enabling auditors to tackle these new challenges head-on.

Challenging bad actors and their illicit schemes on blockchains

Basic issues such as transactional risk-management need to be addressed by enterprises and auditors before significant adoption can occur. Tools like Crystal analytics platform can help solve those problems by assisting regulators in detecting illegal transactions and identifying bad actors within the blockchain ecosystem. A growing area of concern for both businesses and regulators is the illicit use of cryptocurrencies. A thorough and intuitive auditing system is needed to prevent various schemes from entering the market, including:

Inflating volumes: A company might claim that a transaction on a blockchain represents a sale from one party to another but could actually be just a transfer to another wallet of the same company. The Crystal analytics platform detects intercompany transactions where the sending and receiving addresses belong to the same entity. This can help expose any fictitious transactions.

The Block recently reported on companies like Token Boost that provide services to “boost” tokens or inflate token volumes. According to the article, and research by the Blockchain Transparency Institute, wash trading “impacts more than 67% of the cryptocurrency market.”

Illegal transactions and money laundering: There are different schemes to conceal the source of funds such as aggregating funds with other addresses, or peeling small amounts off the main chain, and sending funds to a mixer. Using the Crystal analytics platform, one can follow the trail, see the entire chain of interactions with blockchain entities (including illegal services), and discover suspicious transaction patterns.

A Coindesk article reported on money laundering, and the considerable increase in suspicious crypto transactions being reported — particularly in Japan — in 2018. The NPA has “released data indicating that cryptocurrency exchanges reported 7,096 cases of suspicious transactions.”

Failing to disclose transactions: The Crystal analytics platform can cluster all addresses that belong to the same owner into an entity, providing transactional data that can be reconciled against the company’s statements, in order to detect any potential disclosure fraud.

Crypto analyst and investor, Joseph Young, recently wrote about the threat of cryptocurrency companies who fail to disclose transactions, highlighting the case of social promoters Floyd Mayweather and DJ Khaled, who are now being investigated for ICO promo fraud by the SEC.

All these schemes can be easily investigated with the Crystal analytics platform, making it an ideal choice for regulatory and law enforcement agencies.

Market Adoption by the Big 4

If there is any doubt about the power of blockchain to improve the auditing process, just look to the Big 4 auditing firms — Deloitte, PwC, EY, and KPMG — all of whom are building internal tools and acquiring crypto startups, to position themselves for success in the crypto regulatory space. Their clients now range from cryptocurrency exchanges to digital asset funds, bringing new due diligence and auditing challenges.

One recent example of this can be found in the Quadriga exchange case from early 2019. The key issue of the missing funds (once held by Quadriga) illustrates the difficulties facing regulators when it comes to blockchain auditing. Even though the wife of the Quadriga exchange’s founder claimed the funds were in cold wallets, EY and many other stakeholders couldn’t locate the wallets with the missing funds anywhere.

Blockchain analytical tools like the Crystal platform can cluster such wallet addresses and link them to real-world companies, which could provide improved insights into transactional activity. The Crystal analytics platform can also automatically monitor wallets, informing auditors of any new activity.

Why Crystal Blockchain Analytics

Cryptocurrencies pose new opportunities and challenges to both enterprises and regulators — but with the right tools, both parties can operate effectively in this new ecosystem. The Crystal analytics platform turns the inherent transparent and auditable nature of cryptocurrencies into a powerful crypto asset auditing engine. Its automated tools — backed by complex and tested algorithms — easily assess cryptocurrency transactions, enabling enterprises and regulators to practice due diligence and inform smarter crypto compliance processes.


Crystal analytics platform is available now, and we are accepting requests for custom cryptocurrency investigations. You can find further details and contact information on our website.