Blockchain forensics is the trusted informant in crypto crime scene investigations


The US Department of Justice’s seizure of $3.6 billion worth of bitcoin (BTC) lost in the 2016 hack of cryptocurrency exchange Bitfinex has all the makings of a Hollywood movie – jaw-dropping sums , colorful protagonists, and a crypto cloak and dagger — so much so that Netflix has already ordered a docuseries.

But who are the unsung heroes in this action-packed thriller? Federal investigators from multiple agencies, including the new National Cryptocurrency Enforcement Team, painstakingly followed the money trail to build the case. Federal authorities also seized Colonial Pipeline ransoms paid in crypto, making headlines last year. The Internal Revenue Service (IRS) seized $3.5 billion worth of crypto in 2021 in non-tax investigations, according to the recently released Chainalysis cryptocrime 2022 report.

Trends indicate the diminishing ability of criminals and nefarious terrorists to use cryptocurrencies as safe havens to hide their ill-gotten gains, illicit profits, donations, and funding away from law enforcement. For example, Bitfinex hackers allegedly moved a small portion of Bitcoin to the darknet exchange Alphabay and from there to regular crypto exchanges. This is one of the leads the feds used to apprehend the defendants.

Related: How will the DOJ’s new crypto enforcement team be a game-changer for industry players, good and bad?

Law enforcement is getting better at investigating crypto crimes

Regulators and law enforcement agencies in a select few countries have really upped the ante when it comes to blockchain forensics. Although initially lost at sea, some G-men and women have refined the playbook of finding and seizing assets, taking them to court, and disposing of seized digital currency after winning the case. . Each of these specific steps demonstrates a deep understanding of this disruptive technology.

There are several considerations during the investigation process, and all require intimate knowledge of the blockchain space. Blockchains can be transparent but various techniques such as goblets, mixers, chain skipping, and structuring (making multiple small transfers to avoid scrutiny) need to be understood and analyzed. Suspects can be physically apprehended, but law enforcement officials must also ensure that digital assets are not moved beyond the reach of defendants or their alleged accomplices. Seized crypto assets must be kept safe during the ongoing case.

Related: Crypto in the crosshairs: US regulators eyeing the cryptocurrency sector

The financial cops certainly don’t want the crypto assets stolen while the case is being prosecuted. Usually, confiscated crypto assets are auctioned and the proceeds go into designated government accounts. But, when there are innocent victims, a process of restitution is essential for there to be confidence in the justice system.

Blockchain forensics is part of the larger field of digital forensics

Blockchain analytics and forensics do not live alone on a desert island. Several levels of collaboration are needed to bring wrongdoers to justice. First, the increasing success of law enforcement in tracking crypto crimes is due to the tightening Know Your Customer (KYC) standards of entities that handle fiat-to-crypto and crypto-to-fiat currency conversions. Then other digital forensic technologies are involved, for example the collection of data and evidence from seized cell phones and computers.

Then there are private sector partners who support crypto monitoring, enforcement actions, and cases. There are now several companies that provide blockchain intelligence tools such as identifying contaminated wallets, assigning risk scores to wallet addresses, using analytics and artificial intelligence techniques to flag suspicious models and much more. With such tools and techniques, investigative agencies can be more efficient. Armed with KYC information in accordance with anti-money laundering (AML) laws, prosecutors and their colleagues from regulatory agencies involved in securities, commodities, tax, and foreign exchange matters pursue real-world investigations off chain.

Related: Lost Bitcoin may be a ‘gift’, but is it hindering adoption?

International collaboration is also essential. Criminal actors would like to keep their assets out of reach of the long arm of the law. Law enforcement agencies should work with partner agencies in other countries. The Financial Action Task Force (FATF), which helps harmonize rules and helps prosecute money launderers and stem the financing of terrorism, is an important intergovernmental decision-making body. It has made recommendations regarding virtual assets, for example, the Travel Rule case, but countries are still at different stages of implementation. Such are the vagaries of sovereignty and the state in a financial world in transition, whose rules of engagement are still being worked out.

Blockchain forensic expertise is unevenly distributed

The recent success of agencies in the United States and a few other countries may give the impression that law enforcement agencies around the world have mastered blockchain forensics. In reality, specialized teams armed with state-of-the-art blockchain analysis tools are the exception. Many national agencies have not yet started building their capacity in this area.

Related: FATF Guidance on Virtual Assets: NFTs win, DeFi loses, the rest stays the same

In 2022, more than 50 countries have instituted absolute or implied prohibitions on cryptocurrencies. Ironically, even countries that ban crypto or look askance at it will need to master blockchain analysis because digital assets easily cross borders. Watch law enforcement agencies to hire more blockchain specialists and white hat hackers.

The intricate dance involved in the investigation into the Bitfinex hack shows that they might even become best friends. With financial crimes, the mantra of legal authorities has always been to “follow the money”. The public nature of blockchain transactions actually makes it easier to track and trace criminal activity. Working with technologists who know what they are doing makes things even easier.

Crypto libertarians may not like the increased involvement of investigative agencies in the space, but the writing on the wall is clear: such guardrails are better for everyone involved, consumers and crypto companies. The industry cannot be worth trillions of dollars and not attract the attention of regulators.

This article was co-authored by Kashyap Kompella and James Cooper.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed herein are those of the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Kashyap Kompella, CFA, a technology industry analyst, is CEO of RPA2AI, a global artificial intelligence consulting firm. Kashyap holds a bachelor’s degree (with distinction) in electrical engineering, an MBA and a master’s degree in business law. He also holds the CFA Charter. Kashyap is the co-author of Practical Artificial Intelligence: A Business Handbook.

James Cooper is a professor of law at the California Western School of Law in San Diego and a research fellow at the Singapore University of Social Sciences. He has advised governments in Asia, Latin America and North America for more than two and a half decades on legal reform and disruptive technologies. A former contractor for the US Departments of Justice and State, he advises blockchain and other technology companies.


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