FTX Collapse: Can Blockchain Data Really Prevent This?

• Blockchain analytics firms cannot track illicit activity on centralized exchanges (CEXs) as the way these services store and manage funds deposited by users inherently makes further tracing inaccurate.
• Even if it were possible to trace funds through a CEX, on-chain analysis alone cannot reveal fraudulent intent behind transactions.
• Alameda’s leaked off-chain balance sheet was needed to uncover FTX’s collapse, suggesting that blockchain data can’t always be relied on to prevent similar scenarios.

The cryptocurrency industry has been striving for data transparency, however, the FTX fiasco has highlighted that centralized exchanges (CEXs) are still not providing enough transparency. Although Bitcoin (BTC) transactions are public on-chain, this doesn’t apply to interacting with CEXs. Cointelegraph spoke with executives at blockchain intelligence firms – including Chainalysis, Nansen and Whale Alert – to gain more insights into the tracking of illicit CEX transactions on-chain.

Chainalysis, a major blockchain data platform that works with many governments worldwide, said that there is currently no on-chain tracking tool that can trace funds through a CEX. A spokesperson for Chainalysis informed Cointelegraph that “even if you could trace through a centralized exchange, on-chain analysis alone cannot reveal fraudulent intent behind transactions.” They went on to stress that Alameda’s leaked off-chain balance sheet was needed to uncover FTX’s collapse, suggesting that blockchain data can’t always be relied on to prevent similar scenarios.

Whale Alert attempted to scan FTX’s historical balance checks to determine whether it was possible to spot the collapse sooner. However, the blockchain tracker was unable to uncover the scheme due to the lack of transparency.

CEXs are still vulnerable to illicit schemes, with no current tracking tool able to detect them. Although blockchain data is beneficial to the industry, it is not enough to prevent collapses like that of FTX. The only way to uncover such schemes is to look beyond the blockchain and analyze off-chain data. As such, CEXs need to provide more transparency to ensure the safety of crypto users.