Ethereum’s Shanghai upgrade made it easier to detect criminals

With its historic Merge event in September, Ethereum has become a proof-of-stake blockchain. The mechanism now used to confirm transactions relies on validators staking their Ether (ETH). Ethereum’s March upgrade, codenamed Shanghai, finally enabled stakers to withdraw their locked Ether. 

The Ethereum ecosystem’s “investment themes” have included a) decentralized finance (DeFi) b) stablecoins c) Bitcoin (via wrapped versions of BTC) and d) non-fungible tokens (NFTs). With the upgrade, the network also began providing fixed-income assets.

There are currently several ways people make money on or using Ethereum. Broadly, they can be grouped into “investment themes,” including: a) decentralized finance (DeFi); b) stablecoins; c) Bitcoin (BTC) (via wrapped versions of BTC); and d) nonfungible tokens (NFTs). Following Shanghai, the network began to offer fixed-income assets.

Risk-free rate

Yield is one of the core pillars of traditional finance (TradFi). A rise or fall in yield leads to an increase or decrease in the perceived risk of other financial assets. Thus, movements in the benchmark rate set by the United States Federal Reserve provide the rationale behind investment decisions, in general.

Related: Ethereum is going to transform investing

Accordingly, compliance professionals use trends in the risk-free rate to detect irrational movement of funds in capital markets, as such fund flows might be attempts to launder money. The reasoning here is that launderers of illicit funds do not actively chase financial gains like regular investors, as the sole purpose of money laundering is to obfuscate the trail of dirty money.

With Ethereum’s staking yield denoting the “risk-free rate” of the crypto ecosystem, the Shanghai upgrade may have enhanced the state of crypto forensics.

TradFi forensics focuses on activity — crypto forensics focuses on entities

Financial crime risk in TradFi is managed using automatic systems that alert institutions to probable illicit use of financial assets. While data scientists design and deploy models to raise red flags over suspicious transactions, investigation teams still must assess resultant leads and evaluate if Suspicious Activity Reports (SARs) need to be filed.

An interesting point of contrast between forensics for TradFi and crypto is that the latter focuses more on the criminal entity than the activity itself. In other words, investigators analyze networks of crypto wallets to identify transfers of criminal…