Drug enforcement agency and tax authorities cause controversy by tracking illegal activities! Coinbase's blockchain data analysis raises concerns among users about privacy leaks.

The U.S. cryptocurrency exchange Coinbase recently faced a crisis of user exodus, first experiencing a temporary shutdown when Bitcoin broke through a crucial milestone of $10,000. The author of "The Black Swan" also publicly announced on Twitter that they had deleted their Coinbase account. However, what truly ignited public outrage was Coinbase's collaboration with regulatory agencies. It is reported that they will sell blockchain data analysis software to the government to assist in combating illicit activities, raising concerns among many about the potential privacy breaches.

Sale of On-Chain Analytics Software Comes Under Fire

According to media outlet The Block, both the U.S. Drug Enforcement Administration (DEA) and U.S. Internal Revenue Service (IRS) are planning to purchase services from Coinbase Analytics (CA), a blockchain analysis platform, as indicated in IRS documents:

With the proliferation of cryptocurrencies, criminals are using other types of cryptocurrencies, not just Bitcoin. Coinbase Analytics can analyze and track multiple blockchain systems used by criminals, a functionality not provided by other analysis tools on the market.

Although the documents do not mention user data, the crypto community still associates it with concerns, leading to continuous criticism of Coinbase's actions. Justin Mart, Coinbase's chief development officer, believes that the notion of selling user data is exaggerated and dismisses comments on Twitter:

Coinbase Analytics is entirely derived from publicly available data and does not contain any user data. It only provides law enforcement agencies with a window into publicly available data, and they cannot access any internal or user data from Coinbase at any time. Furthermore, any company can develop the same product using publicly available data.

Regardless of the explanations, the collaboration between Coinbase and government agencies continues to displease cryptocurrency enthusiasts, with many prominent influencers expressing their opposition to the exchange.

Crypto Community Shows Discontent

Crypto analyst Josh Rager initiated a Twitter poll, with a staggering 46% of 7,241 votes indicating they will no longer use Coinbase.

https://twitter.com/Josh_Rager/status/1269015162331119616

In addition to the ripple effect triggered by negotiations with regulatory agencies, author of "The Black Swan" Nassim Nicholas Taleb pointed out on Twitter on June 5 that he received no response after raising issues with Coinbase. Coinbase later responded to the post, stating that they would address the concerns, but it was too late, as Nassim later claimed to have deleted his Coinbase account.

@coinbase What is going on with you? Why don't you respond to errors?

— Nassim Nicholas Taleb (@nntaleb) June 4, 2020

The Block's research director Larry Cermak also expressed confusion as to why Coinbase would profit from this "government money," stating on Twitter:

I completely fail to understand why Coinbase thinks this deal is worth it. They make tens of millions of dollars a year just from trading fees. Coinbase has the ability to access all user KYC data, something Chainalysis cannot do.

In fact, while Coinbase claims not to have sold user data, users have no way of knowing if this is true, and lack of transparency is a characteristic and flaw of centralized exchanges. Furthermore, centralized exchanges must be built on compliance, so as the crypto industry continues to develop, cooperation with governments is likely to increase.

For users, while enjoying the convenience offered by centralized exchanges, balancing privacy is challenging. If privacy data is a concern, opting for decentralized exchanges (DEX) may be a better choice!

Further Tracking On-Chain: Chainalysis, Sygna

Well-known on-chain data analysis company Chainalysis in March this year provided tracking services for 81 Ethereum ERC-20 tokens, and on June 8 announced tracking support for privacy-focused cryptocurrencies Dash and Zcash. According to Chainalysis, their compliance and regulatory investigation tool (chainalysis-reactor) allows customers to understand 97% of the value activity in the Ethereum ERC-20 market.

In Taiwan, well-known blockchain company CoolBitX, which received investments from the National Development Fund and Japan's SBI Holdings, has established the "Sygna" cryptocurrency solution to address compliance transfer issues for cryptocurrency exchanges. According to their official description: "Sygna was born to address the compliance challenges posed by Recommendation 16 of the FATF for Virtual Asset Service Providers (VASPs) in 2020. Leveraging our alliance network of financial technology giants, we are committed to enhancing the transparency of digital asset transfers to meet global financial market and regulatory standards."

Related Reading

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• Blockchain Analysis Company Chainalysis Launches Real-Time Monitoring for 15 Major Stablecoins
• 【Overview】A Five-Minute Glance at The Block's Data Industry Report: The Absolute Necessity of Blockchain
• 【Observation】Can Tech Novices Commit Cybercrimes Too? Bloomberg's Experiment Shows the Severity of Cybersecurity Issues

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