The U.S. Department of Justice has taken $3.6 billion of Bitcoin (BTC), which was stolen during Bitfinex’s 2016 hack of its cryptocurrency exchange. This has all the ingredients of a Hollywood movie — big budgets, bright protagonists, and crypto cloak and dagger. Netflix has already ordered a series.
Who are these unsung heroes of this thrilling thriller? Multiple federal investigators, including the National Cryptocurrency Enforcement Team, have meticulously tracked the money trail to build the case. Last year, the Feds also took ransoms in crypto from Colonial Pipeline. This made headlines. According to Chainalysis’s cryptocrime 2022 report, the Internal Revenue Service (IRS), confiscated $3.5 billion in crypto in non-tax investigations in 2021.
These trends indicate that terrorists and criminals are less likely to use cryptocurrency as a safe haven to hide their illicit profits, ill-gotten gains, and donations from law enforcement officers. Bitfinex hackers may have transferred a small amount of Bitcoin to Alphabay, and then to regular crypto exchanges. This was one of the leads the Feds used in capturing the defendants.
Related: How will the new crypto enforcement unit at DOJ change the game for all industry players, both good and bad?
The investigation of crypto-crimes is improving for law enforcement agencies
A select few countries have raised the bar on blockchain forensics by law enforcement agencies and regulators. Although they were initially at sea, G-men have refined the process of searching for and seizing assets, prosecuting in court and disposing of any seized digital currency once the case is resolved. This is a demonstration of a deep understanding about this disruptive technology.
There are many things to consider during an investigation. All require knowledge of blockchain space. Although the blockchains are transparent, it is important to understand and analyze various techniques, such as tumblers and mixers, chain-hopping, chain hopping, structuring (doing small transfers to avoid scrutiny), and chain hopping. While the suspects can be physically arrested, law enforcement officials must ensure that digital assets are not removed from the hands of defendants or their alleged accomplices. During the case, all seized crypto assets should be kept safe.
Related: Crypto sector under scrutiny: US regulators examine cryptocurrency
While the case is being investigated, the financial police will not allow the theft of crypto assets. Most confiscated crypto assets go up for auction and the proceeds are transferred to designated government accounts. For trust to exist in the judiciary system, it is important that innocent victims are restitution occurs.
Blockchain forensics are a part the larger domain of digital forensics.
Blockchain analysis and forensics are not two separate entities. To bring wrongdoers to justice, there are many layers to collaboration. First, law enforcement has been able to track crypto crimes more effectively due to tightening Know Your Customer (KYC), norms for entities that convert fiat to cryptocurrency and fiat currency to crypto. There are also other digital forensic technologies involved such as the gathering of data and evidence from seized computers and mobile phones.
There are also private sector partners who support crypto monitoring, enforcement actions, and cases. Many companies now offer tools to assist with blockchain intelligence, such as the identification of tainted accounts, assigning risk scores for wallet addresses, and using analytics and artificial Intelligence techniques to flag suspicious patterns. Investigative agencies are able to be more efficient with such tools and techniques. With KYC information, as required by Anti-Money Laundering laws, prosecutors and colleagues from regulatory agencies dealing with securities, commodities, and currency issues pursue inquiries in the real off-chain.
Related: Lost Bitcoin could be considered a “donation”, but does it hamper adoption?
International collaboration is crucial. Criminals would prefer to keep their assets hidden from the eyes of the law. Partner agencies from other countries are needed to work with law enforcement agencies. Important inter-governmental policymaking body, the Financial Action Task Force (FATF), helps to harmonize rules, prosecute money laundering, and stems the financing of terrorism. Although it has made recommendations about virtual assets (e.g. the Travel Rule), different countries are still working to implement them. These are the complexities of sovereignty and statehood in a transitional financial world. The rules of engagement are still being developed.
Expertise in blockchain forensics is not evenly distributed
It may seem that all law enforcement agencies are up to speed with blockchain forensics, given the recent successes of U.S. agencies and others. Specialist teams equipped with the most advanced blockchain analysis tools are the exception. This area is still a very underdeveloped area for many national agencies.
More than 50 countries have implemented either an implicit or absolute ban on cryptocurrency as of 2022. Even countries that ban cryptocurrency or treat them with suspicion will have to learn blockchain analysis, as digital assets can easily cross border borders. Look out for more White Hat hackers and blockchain experts to be hired by law enforcement agencies.
They might even be friends, as evidenced by the intricate dance they performed in investigating Bitfinex’s hack. Financial crimes are a common theme for law enforcement agencies. It is important to “follow the money.” Blockchain transactions make it much easier to trace criminal activity and track them down. It is easier to work with technologists who are experts in their field.
Although crypto libertarians might not like the increased involvement by investigative agencies within the space, the message is clear: These guardrails are better both for consumers and companies. Regulators cannot see the industry if it is not worth trillions of dollar.
James Cooper and Kashyap Kompella co-authored this article.
This article is not intended to provide investment advice. Every trade and investment involves risk. Readers should do their research before making any decision.
These views, thoughts, and opinions are solely those of the authors and do not necessarily reflect the views or opinions of Cointelegraph.
Kashyap Kopella, CFA is a technology industry analyst and CEO of RPA2AI. RPA2AI is a global advisory firm for artificial intelligence. Kashyap holds a bachelor’s (with honors) degree in electrical engineering, a master’s in business law and an MBA. He is also a CFA Charter holder. Kashyap co-authored Practical Artificial Intelligence. An Enterprise Playbook. James Cooper is a professor of law at the California Western School of Law. He is also a research fellow at Singapore University of Social Sciences. For more than two decades, he has provided advice to governments throughout Asia, Latin America, and North America on legal reforms and disruptive technologies. Former contractor for the U.S. He advises companies in the blockchain and other technologies at the Departments of Justice and State.
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