How to Use Link Analysis to Catch Cryptocurrency Fraud Faster

November 8, 2022

In the most basic sense, link analysis is a method of data analysis that involves examining relationships between nodes.

In the case of financial services, it involves analyzing connections between individuals and entities on your platform and using this information to identify (and prevent) fraud from occurring.

Link analysis helps financial institutions identify relationships between entities operating on their platform. It’s ideally suited for the crypto industry, as the digital walls used on the blockchain are semi-anonymous (and draw the eye of fraudsters looking to exploit this anonymity).

Because of the anonymity that comes with crypto wallets and transactions, monitoring how entities interact in the financial ecosystem can provide great insight into fraud occurring on the platform and help you more easily detect and prevent it.

Below, we look at why link analysis is a great fit for cryptocurrency and how to catch crypto fraud using this key fraud prevention feature.

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Link analysis and crypto go hand-in-hand. Cryptocurrency wallets are pseudonymous (pseudo-anonymous), making them an ideal medium for fraudsters looking to exploit financial services.

Digital-first business models in the crypto industry mean that account verification at creation is performed virtually, opening up possibilities for insufficiently vetted users to create crypto wallets and potentially expose the entire network of crypto users. To mitigate these concerns, more due diligence is required to ensure a person is who they say they are.

The immutable ledger of the blockchain ensures that transactions - and the wallets connected to these transactions - can be examined and analyzed by any querying member. Transaction records will always exist and can’t be altered, making it an optimum platform for transaction monitoring and analysis.

Let’s look at how link analysis can be used to detect and prevent fraud on crypto exchanges and platforms.

1. Streamline the Investigation Process

When reviewing suspicious alerts, link analysis tools allow risk and compliance teams to easily analyze what other individuals or entities the potential fraudster is interacting with. First and foremost, this can be an easy way to rule out fraud when a user’s actions are, in fact, legitimate.

In the event an action is fraudulent, link analysis drastically speeds up the detection process by identifying any other individuals or entities that could be involved. Now, you no longer need to identify the other participants and can immediately start to prevent them from carrying out fraudulent actions.

You now know the problem is much bigger than the entity that was originally alerted. With just a single query, you move from detecting fraud to preventing it. With this information, teams can also go back and write rules that help identify this type of fraud network in the future.

Overall, link analysis streamlines the investigation process by providing a holistic view of activities across ‘connected’ users - be it through PII, transactional activity, or shared device properties.

2. More Robust Investigations with Newer Tech

Previously, companies had to analyze each entity individually, performing SQL queries to see if other entities shared similar characteristics and behavior or had interactions with the company under investigation.

Link analysis offers all this information from a unified dashboard, saving risk management teams time switching between screens and windows to perform their analysis.

More information in one spot makes it easier to perform the analysis necessary to identify relationships and root out fraud. Investigations can be done faster, more efficiently, and with better results.

From a business perspective, link analysis allows companies to cut costs on detection and investigation operations. Partly because they can be carried out faster and more efficiently at scale, but also because they can be carried out by non-technical staff.

Link analysis tools eliminate the need for extremely experienced (and expensive) staff, as systems make investigations much easier to carry out than manually querying data.

Previously, fraud analysts needed to have adequate technical knowledge to perform SQL queries. With modern technology, link analysis allows companies to bring in professionals that know the business and industry well.

They no longer require the technical expertise, as fraud and AML tools like link analysis give professionals the ability to perform these investigations more effectively than ever before. Instead, as long as team members are trained to use link analysis, they can investigate fraud.

This empowers fraud teams to step up their game and bring more to the table than they could without link analysis.

3. Develop Rules for Repeat Offenses in the Future

Another big mistake teams make is not leveraging the data they have to make improvements that save time and effort in the future.

After identifying fraud patterns based on link analysis, risk and compliance teams can take this information and design and develop rules to handle the same cases in the future automatically. This streamlines fraud detection and prevention efforts, saving the team from manually investigating future cases that match the same patterns.

If malicious behavior only needs to be detected once, teams can develop rules that address these threats in the future, saving teams significant time finding, investigating, and preventing fraud.

Link Analysis is Ideally Suited for Crypto Platforms

Link analysis is not new; it’s been used in traditional banking for years.

It simply became more important in the Fintech space, as virtual banking presents greater challenges than traditional banking when it comes to identity verification. Customers (and criminals) never visit a branch in person, and documents are often verified online, which gives bad actors a greater opportunity to commit fraud.

The perceived anonymity that comes with digital wallets entices criminals to exploit the crypto industry. This makes crypto platforms the perfect use case for link analysis, as they need enhanced tools to root out fraud.

Link analysis is a great tool for this. It not only helps companies cut through the anonymity that comes with the crypto space but also allows teams to improve efficiency by streamlining a single instance of fraud detection into multiple instances of fraud prevention.

Crypto and blockchain, while popular, are still nascent and knowledge around the inner functioning of related products such as consensus algorithms, DeFi, etc., is still not widespread.

With that said, the knowledge base of crypto fraud vectors, fraud rings, hackers, and the like. is smaller still. Graphical and visual analysis tools make it significantly easier to construct easily digestible yet comprehensive narratives that speak in depth about fraud in the world of Web3.

Crafting a database of known fraud vectors and typologies will help not only individual businesses but the entire ecosystem of crypto companies move from a status quo of ‘fraud detection’ to ‘fraud prevention.’ This enables them to accelerate the growth of the products and services the industry is eagerly waiting for.

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Unit21 is designed to make it extremely easy to perform link analysis for crypto, Fintech, and traditional banking. Schedule a demo and learn how we can help today!

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