Data transparency has been a significant concern within the cryptocurrency industry, but recent incidents involving FTX have shed light on the limitations of centralized exchanges (CEX) in terms of transparency. Despite efforts by crypto analytics firms, it appears that preventing situations like the collapse of FTX remains a challenge.
While all Bitcoin (BTC) transactions are publicly available on the blockchain, making it possible to track transactions between addresses, the same level of transparency is not present when dealing with centralized exchanges.
In a conversation with executives from blockchain intelligence firms such as Chainalysis, Nansen, and Whale Alert, insights were shared on the challenges of tracking illicit transactions on centralized exchanges through on-chain analysis.
Chainalysis, a prominent blockchain data platform collaborating with governments worldwide, stated that currently, no on-chain tracking tool can effectively trace funds through a CEX. The storage and handling of user funds by these centralized services inherently complicate further tracking accuracy.
Even if it were possible to trace through a centralized exchange, on-chain analysis alone cannot always reveal fraudulent intent behind transactions, as emphasized by Chainalysis. The recent exposure of Alameda’s off-chain balance sheet was instrumental in signaling potential issues.
While blockchain analysis can track deposits on CEXs, accessing their liabilities is a different matter, according to Nansen analyst Andrew Thurman. FTX’s suspension of withdrawals despite holding significant digital assets highlighted the challenge in determining overall liabilities.
Thurman highlighted the value of models like proof-of-reserves (PoR) in enhancing transparency among CEXs. However, he noted that such measures represent only a partial solution to the issue.
Despite limitations in tracking illicit transactions by CEXs, some monitoring services are committed to identifying potential risks to prevent incidents like the FTX crash. Whale Alert, for instance, attempted historical balance checks on known FTX addresses but faced resource limitations in analyzing a significant volume of data.
While it remains possible to track exchanges like Coinbase and FTX, regulatory hurdles and limited cooperation from these platforms pose challenges. Some industry voices underscore the need for enhanced transparency and accountability across the crypto sector to regain public trust and prevent future crises.
In the view of some industry insiders, blockchain analysis platforms may not prioritize catching illicit actors at the exchange level. Concerns have been raised regarding the alignment of interests between these platforms and exchanges, with a focus on customer needs potentially influencing their approach to detecting fraud and suspicious activities on-chain.
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