Chaga grows as a black cankerous mass on birch, dead or living. It may rarely be found on beech, elm, ash or hornbeam as well.
Eurasians have used it for centuries to treat tuberculosis, digestion, and cancers of the heart and liver. 
The black “skin” was removed and the lighter inside boiled as tea. Being such a compact natural medicine made it a valuable, portable remedy for healers of old.
Modern research on chaga has mainly focused on its potential application as an anti-cancer remedy. In Russia, this usage was already approved as early as 1955 to treat lung, stomach, breast and cervical cancers. 
A modern study conducted in 1998 showed that chaga extract does indeed inhibit the growth of cervical cancer cells under laboratory conditions.  Another study from the mid-90’s found the active compound betulin to cause growth inhibition and death of melanoma cells, also in lab. [124, 25]
Further research has confirmed that some of the active compounds of Siberian chaga do decrease cancer cell growth. [125, 126]
Although traditional healers used to peel off the black outside (probably because it looked unappetizing), the skin actually contains 30% betulin, a highly prized medicinal compound,  while the inside is rich in fungal lanostanes. So both parts would be valuable in preparing the tea.
Even better are chaga extracts that are made with not only the whole mushroom but also the mycelium, because the mycelium contains higher levels of medicinal proteins than the fruit body of the mushroom.
Other research has found chaga to possess powerful anti-viral properties. In 1996, two studies published results of inhibitory effects on both influenza virus  and HIV.  Considering the nature of viruses, the most likely scenario is that chaga works on viruses by enhancing the body’s own immune system, a theory confirmed by a paper published in 2002 and another in 2005. [25, 129] The same mechanism may explain the reported anti-inflammatory effect of chaga. 
Furthermore, alcohol extract of chaga mushroom has been found to lower blood sugar levels.  Chaga also demonstrates significant antioxidant properties that help protect the genetic integrity of the cells. [132, 133]
As an interesting aside unrelated to human health, a Quebec arborist uses a chaga poultice to cure chestnut blight. The trees later even become immune to the blight and resistant to future infections. 
Finally, in the book Mycelium Running, Paul Stamets lists the following additional areas of research on chaga with positive results: Bacteria; uterine cancer; liver conditions. 
Note: The statements on this page have not been evaluated by the Food and Drug Administration. This article is not intended to diagnose, treat, cure or prevent any disease. Never use any herb (or mushroom) except as advised by a licensed medical practitioner.
Credits: Thank you, Paul Stamets, for research references.