The perils of blockchain analysis

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Jun 30, 2022 View in browser   By Ben Schreckinger Presented by Ericsson These are subway tokens because nobody has taken a picture of a blockchain token. | Stephen Chernin/Getty Images With help from Sam Sutton In recent weeks I've written about "on-chain analysis" of cryptocurrency, and what it can and can't tell regulators about the mechanics of crypto's financial crisis. Analysis is an important part of the crypto industry. In theory, the shared public blockchain behind each cryptocurrency should give the system more transparency than traditional finance, and firms scour its data for important information about how currencies flow. In practice, however, that data can only tell you so much, and even experts are often forced to rely on guesswork to fill in their understanding of what really happened. Now, the courts are in for a crash course in the limits of on-chain analysis, courtesy of DFinity Foundation, a Swiss nonprofit that works on a blockchain network called the Internet Computer. Last week, Dfinity sued the New York Times and Arkham Intelligence, a crypto research firm, in the Southern District of New York, alleging defamation and unfair trade practices related to a June 2021 Times article about a crash in the price of the blockchain's tokens. The complaint alleges a plot — aided behind the scenes by an unnamed "uber-wealthy" party — to orchestrate misleading coverage of the Internet Computer project. The alleged goal was to suggest that insiders profited as the price of the tokens plummeted, while average investors were left holding the bag. According to the complaint, the Times article relied on Arkham's misleading analysis of the project's blockchain records. Among the arresting details, the complaint alleges that the authors of the offending Arkham report have fled from Austin to London, where they "reside—frat boy style—in a huge mansion." It also cites a website called "CryptoLeaks.Info" that purports to show people affiliated with Arkham making incriminating confessions in undercover video stings. The Times is standing by its story. "We're confident in the accuracy of our reporting and plan to defend against this suit vigorously," said Times spokeswoman Danielle Rhoades Ha. Arkham did not respond to a request for comment. Corporate intrigue and private intelligence set-ups are nothing new in the financial world. But at the crux of the complaint is the allegation that the defendants misinterpreted public on-chain data in a way that was harmful to Dfinity. Both sides seem to agree on the bare facts of what the analysis showed: That tokens distributed by Dfinity to a small group of addresses were then quickly moved to addresses associated with crypto exchanges. The question is what that meant. According to the complaint, defendants falsely insinuated that these movements implied large-scale selling of tokens by insiders. The complaint offers an alternative explanation: that tokens were moved to wallets at exchanges for safekeeping. (Also in dispute is whether or not the Internet Computer token qualifies as a security, an area of regulatory ambiguity for many blockchain tokens.)   A message from Ericsson: Ericsson helps the U.S. build 5G infrastructure. Ericsson is the leading provider of 5G equipment in the U.S. From our 5G smart factory in Lewisville, Texas, we are able to supply equipment directly to leading nationwide service providers. Learn more at ericsson.com/us.   Whether or not this particular case proceeds to trial, it's a sign that courts are going to have to start grappling with the new discipline of on-chain analysis, as well as what can and cannot be fairly surmised from it. Yesterday, we linked to an essay by University of Chicago Prof. Anthony Lee Zhang about the ways in which blockchains usurp the role of contract enforcement from the state. The good news for the courts is that, if this suit is any indication, there will be enough second-order bickering about what exactly happened on-chain to keep them in business for a long time to come.   Industry Leaders at One-Day Tech Event on July 21: The American dream is a MerITocracy – powered by policy and technology as they relate to education and workforce, global competitiveness, security and privacy, and citizen services. On July 21, join tech industry visionaries from Dell, Google Cloud, DocuSign, and Consumer Technology Association, in addition to Hill and Biden Administration leaders as they discuss the future of tech innovation, regulation, and outcomes for America at MeriTalk's MerITocracy 2022: American Innovation Forum. Sign up here.     TRACK AND TRACE Cryptocurrency exchange Coinbase has been quietly selling blockchain analytics and geotracking tools to the Immigration and Customs Enforcement agency, throwing even more cold water on libertarian claims about crypto's utility for avoiding governmental oversight. While Coinbase's push to build relationships with federal law enforcement has been widely covered, the crypto exchange's 63-page contract provides ICE with "historical geo tracking data" in addition to software tools that help pick through the labyrinth of blockchain-based transactions that can be used by criminals to hide illicit payments. The existence of the contract was first reported by The Intercept. Coinbase CEO Brian Armstrong has been a vocal critic of government-led attempts to monitor and restrict crypto transactions in the past. In February, at the height of a trucker protest that clogged downtown Ottawa and crippled US-Canada trade, Armstrong urged people to transfer their crypto assets to self-hosted digital wallets if they were concerned about the Canadian government freezing their accounts. Coinbase spokesperson Caryn Leahy said in an email that the firm provides law enforcement and financial institutions "streamlined access to publicly-available data" but does not share "internal or customer data" and that Coinbase is "committed to protecting our customers' information in the decentralized spirit in which crypto was founded." - Sam Sutton   A message from Ericsson:   The FUTURE IN 5 LINKS How to build a better internet. What is 'cybernetic capitalism'? Just can't quit Chinese lithium. New ways to build faster and better robot AIs. Why Europe should celebrate Web3 reluctance.   A message from Ericsson: Ericsson. 5G Made for US. 5G will be a platform for a new economy, driven by cutting edge use cases that take advantage of 5G's speed, low latency and reliability. Ericsson's 120 year history in the U.S. and recent investments, like the $100 million factory in Texas, make the company the right partner to build the open and secure networks that will be the backbone of the 5G economy. Learn more.     Follow us on Twitter Ben Schreckinger @SchreckReports Derek Robertson @afternoondelete Konstantin Kakaes @kkakaes Heidi Vogt @HeidiVogt   Follow us

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