Privacy advocates are concerned that companies offering blockchain analysis used to track, gather and analyze cryptocurrency payments on distributed ledgers could be abused by governments and corporations for surveillance, destroying the integrity of digital currencies such as Bitcoin.

Blockchain analysis services threaten to create a conflict between those who see crypto as an investment asset that requires strong anti-money laundering controls and those who see it as a tool to fight surveillance and circumvent traditional financial models.

“If (blockchain analysis and financial surveillance companies are) going to try and make money off government and corporate contracts, de-anonymizing people unconstitutionally, then we should all describe that in an accurate way,” said Alex Gladstein, chief strategy officer at the Human Rights Foundation, in a CoinDesk report.

“And if they choose to pursue that line of work, they should have to wear the scarlet letter that goes with it,” Gladstein added.

3) Bitcoin's disastrous privacy is the "missing stair" of cryptocurrency. Every expert understands it's a problem, but—as experts—they themselves know how to compensate for the risk in their own personal interactions with Bitcoin, and therefore feel no urgency to actually fix it.

— Edward Snowden (@Snowden) May 8, 2021

These analytics are seen by some as a government-sponsored attempt to deanonymize Bitcoin transactions, that until now have remained off the radar of regulators whose hawk-eyed surveillance bedevils fiat currency.

Already, the U.K. government is able to collect transaction and investment data from regulated cryptocurrency exchanges operating in its territories. The U.S. Office of Foreign Assets Control (OFAC) is also looking to increase its blockchain analytics capabilities.

#Bitcoin is pseudonymous. It is now widely known that the Bitcoin blockchain is being data mined by blockchain analysis companies. These companies are able to de-anonymize Bitcoin transactions with a high degree of accuracy.

— cryptobot (@thecryptob0t) May 9, 2021

“The Department of the Treasury’s Office of Foreign Assets Control (OFAC) requires one or more commercial online blockchain tracing tools—depending on available funding,” OFAC said in a May 4 announcement. “These tool(s) will be used to prepare investigators in OFAC’s Office of Global Targeting group to analyze and track virtual currency transactions, e.g. Bitcoin, in order to gather attribution information on involved parties that OGT may put on the SDN List.”

Many of the 20-plus blockchain analytics companies already operating in the crypto market are contracted by governments, law enforcement agencies and companies such as cryptocurrency exchanges.

Chainalysis, one of the most prominent analytics firms, earned more than $10 million in five years from the U.S. government and stands to take in more than $14 million in total.